for DR.SAUELSON ONLY!

Accounting Horizons American Accounting Association Vol. 28, No. 2 DOI: 10.2308/acch-50713 2014 pp. 353–364

COMMENTARY

Costing Practices in Healthcare

Christopher Chapman, Anja Kern, and Aziza Laguecir

SYNOPSIS: The rising cost of healthcare is a globally pressing concern. This makes detailed attention to the way in which costing is carried out of central importance. This article

offersaframeworkforconsideringtheinterdependenciesbetweenadominantelementofthe

contemporary healthcare context, i.e., Diagnosis Related Group (DRG) systems, and

costing practices. DRG-based payment systems strongly influence costing practices in

multipleways.Inparticular,settingDRGtariffsrequireshighlystandardizedcostingpractices

linked with specific skill sets from management accountants and brings other jurisdictions

(e.g., clinical coding) to bear on costing practice. These factors contribute to the

fragmentation of the jurisdiction of management accounting.

Keywords: costing practices; DRG systems; healthcare.

INTRODUCTION

T he rising cost of both public and private healthcare has become a global concern in

contemporary political discussions. This is particularly salient in the U.S., where healthcare

spending 1

and prices 2

are the highest of developed countries (International Federation of

Christopher Chapman is a Professor at the Imperial College London Business School, Anja Kern is a Visiting Researcher at the Imperial College London Business School and an Affiliated Researcher at Copenhagen Business School, and Aziza Laguecir is an Assistant Professor at Laval University and an Affiliated Researcher at Kedge Business School.

We gratefully acknowledge the insight and suggestions of Joan Luft and two anonymous reviewers in their comments on earlier versions of this paper. Additionally, we thank the participants of a seminar at the Healthcare Management Group of the Imperial College London Business School, and a seminar sponsored by HMFA and Monitor for their helpful comments, questions, and suggestions. We are grateful to the various organizations that participated in various fieldwork projects that informed the ideas discussed in this paper. This work was supported by HaCIRIC (an EPSRC sponsored research center at Imperial College), a Marie Curie reintegration grant (Grant Agreement PERG06-GA-2009-2565620), a grant from the French Accounting Association (AFC), and research funding from Laval University.

Submitted: January 2014 Accepted: January 2014

Published Online: January 2014 Corresponding author: Christopher Chapman Email: [email protected]

1 Eighteen percent of the U.S. GDP, which is roughly twice as much as other developed countries (Congressional Budget Office 2013).

2 For instance, the average price of a hip replacement in the U.S. is $40,364, when the second highest price for developed countries is $27,810 in Australia (International Federation of Health Plans 2012).

353

Health Plans 2012). Further, as recently underlined in The New York Times (Rosenthal 2013a, 2013b), U.S. prices for the same medical procedures vary widely across states, cities, and even for

the same clinician. This price variation is often explained by U.S. healthcare market failures and,

more specifically, by its lack of transparency. To remedy the latter, it is crucial for public and

private insurers, and patients, to understand healthcare procedure price-setting and, notably, which

resources a specific procedure actually utilizes.

Following the U.S. lead, many countries base healthcare prices on DRG (Diagnostic Related

Group) systems and the related cost data. Beyond pricing, DRG cost data are also employed in the

performance evaluation and related incentives for a wide range of healthcare providers. Given cost

data’s importance, it is surprising that many jurisdictions question its reliability (e.g., Triplett 2011;

PwC 2012; National Audit Office 2010; Busse, Schreyögg, and Smith 2008; Lipscomb, Barnett,

Brown, Lawrence, and Yabroff 2009).

This reliability problem is due, in part, to the difficulties of calculating accurate costs in

healthcare, especially the non-proportionality of costs (Noreen and Soderstrom 1994), joint costs

(MacArthur and Stranahan 1998), and demand uncertainty (Gaynor and Anderson 1995). To

address these challenges, health providers use different costing methods, leading to costing practice

variation. Costs differences between providers arise, then, not only from different resource

consumption patterns, but also from costing practices variation (Malcomson 2007; Tan et al. 2011).

Governments often collect cost data to set prices and to provide benchmarks. Therefore, the costing

practice variation among providers is problematic from the perspective of policy-makers, because it

questions the fairness of DRG-payment systems and the comparisons between providers.

This article analyzes, in detail, how policy-makers influence costing practices at the provider

level. We argue that this influence is exercised mainly through DRG systems. DRG systems

embody the interests of various external and internal players in the healthcare sector (e.g., quality of

patient care, population health, cost control) (Denis, Lise, and Langley 2001). Creating the major

category for economic analysis and acting as a unit of currency for the payment of providers, DRG

strongly shapes costing practices. To analyze the interdependence between DRG systems and

costing practices, we propose a framework that distinguishes different healthcare costing elements,

including costing practice, costing guidance, 3

DRG systems, and clinical practice. Analyzing the

interdependencies between these elements allows a better understanding of how costs for patient

treatments are calculated at the healthcare provider level. In particular, it provides insights on which

elements such calculations include and on the impact of including those elements and setting aside

others.

The second section of this paper describes the role played by DRG systems in the healthcare

sector. The third examines the interdependencies between the DRG system and costing practice,

costing guidance, and clinical practice. The fourth discusses the impact of these interdependencies

on the management accounting profession. The paper concludes with implications and suggestions

for future research on healthcare costing.

DRG SYSTEMS IN THE HEALTHCARE CONTEXT

Since the 1970s, institutional context changes have marked healthcare sectors. In particular,

DRG system development has marked many countries’ healthcare funding mechanisms (Kimberly,

de Pouvourville, and D’Aunno 2008; Fetter and Freeman 1986). These systems play a central role

3 By costing guidance, we mean here the formal support for cost system design provided by health authorities or regulators to support accountants at provider level in the construction of cost systems, i.e., how costs are calculated.

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in managing healthcare, as they are often used as a basis for paying healthcare providers. In this

section, we discuss DRG systems as a key element of the healthcare context.

DRG systems seek to classify patients into homogenous patient groups according to certain

criteria such as procedures, diagnosis, and age. Therefore, they classify patients into groups that

require similar resource consumption patterns. DRG patient grouping is based on a predefined

algorithm performed by specific software, commonly called a grouper. The grouper merges two

data sets—clinical data and cost data—to calculate costs per DRG. The clinical data stem from

coding patients at the clinical unit level in certain categories, while cost data stem from cost systems

that are usually managed at the provider level by accountants. The DRG systems are also usually

managed at the provider level by experts that have acquired specific DRG expertise.

Adoption of DRG systems had different motivations (Kimberly et al. 2008; Busse, Geissler,

Quentin, and Wiley 2011; Chapman et al. 2013). DRG systems were expected to increase

efficiency, transparency, and competition between hospitals to improve their performance, and

increase activity volume to reduce waiting times for healthcare services (Busse et al. 2011). While

many countries use DRG systems primarily as a currency for provider payment (among them

Portugal, England, France, and Germany), other countries, such as Sweden and Finland, use DRG

systems primarily to support planning and management of hospital services (Busse et al. 2011).

Nevertheless, even if DRG systems have achieved some of the expected outcomes, they are

contested on many fronts (e.g., Klauber, Geraedts, Friedrich, and Wasem 2013; Davies and Dixon

2012). In particular, studies find that using DRG systems to decrease costs can reduce the quality of

healthcare services (Chua and Preston 1995; Covaleski, Dirsmith, and Michelman 1993; Preston

1992; Preston, Chua, and Neu 1997; Chua and Degeling 1993; Or and Häkkinen 2011). Despite

that, countries continue to adopt these systems (e.g., Switzerland introduced the German DRG

system in 2012).

While DRG systems are similar in that they classify patients into groups with similar resource

consumption, they vary across countries in how they are defined and regulated (Kimberly et al.

2008; Busse et al. 2011; Busse et al. 2008). Such DRG systems variations make it difficult to

compare specific DRGs across countries. Even if the DRG label is similar, e.g., hip replacement,

patient group definitions and the way costs and prices are calculated vary greatly. For example, in

Germany and France, prices are based on average costs across a sample of hospitals. In contrast, the

U.K. recently introduced, for some procedures, a best practice tariff, meaning that the price is based

on the lowest costs produced by a certain hospital. Furthermore, France and Germany exclude

infrastructure costs and profit margins from DRG prices, as their DRG systems are designed as

payment systems to reimburse operating costs. In some countries, providers and buyers negotiate

prices, meaning that prices are not strictly based on average costs, e.g., in the U.K. for part of

services and Finland for all services. The different institutional ways of calculating prices obviously

cause wide variation when comparing prices among different countries, providing one example of

price differences for specific procedures.

DRG systems have a great influence on healthcare, including clinical and costing practices.

Primarily, DRGs form a dominant cost object for economic calculations, as providers are mandated

to calculate costs and other financial and operational data, including clinical data, for their DRGs.

By creating a major cost object, DRG systems influence not only costing practices, but healthcare

services themselves (Preston et al. 1997; O’Reilly et al. 2012).

In many countries, it is mandatory to calculate costs at the DRG level. Yet, for key

decision-making clinicians, DRGs as a unit of analysis can be problematic, because DRGs are often

very heterogeneous, grouping patients in one category that does not make sense from a clinical

point of view. For example, a clinician who treats patients for chronic heart failure would typically

follow up on the clinical outcomes of all patients treated in his unit. However, in terms of DRG

analysis, his patients are distributed across different DRGs, because many patients suffering from

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chronic heart failure are multi-pathology patients not necessarily classified in the chronic heart

failure DRG, but in other DRGs (in line with rules of many national DRG systems, multi-pathology

patients are classified under one particular DRG according to the main reason for their hospital

stay). Chronic heart failure patients treated by the cardiologist may be classified in the dialysis

DRG, where they are mixed with other dialysis patients. If the cost data are available only at the

DRG level and not the patient level, this makes it impossible for the clinician to link clinical

outcomes with costs in a meaningful way. When clinicians cannot accomplish this, in particular

with regard to quality of services, the DRG-based management processes hinder their engagement

with management.

In the next section, we analyze, in detail, the complex interdependencies between DRG

systems, costing practices, costing guidance, and clinical practice.

INTERDEPENDENCIES BETWEEN DRG SYSTEMS, COSTING PRACTICE, COSTING

GUIDANCE, AND CLINICAL PRACTICE

Recent research by Tan et al. (2011) points towards interdependencies between DRG systems

and cost accounting. We refine their analysis by proposing a framework that includes costing

guidance and clinical practice along with cost accounting, as illustrated in Figure 1. In this figure,

we attempted to separate out the complex interacting forces for the sake of a clearer exposition of

how they are related. We discuss each of the interdependencies in turn.

Relation 1 represents the link between DRG systems and costing guidance. More precisely,

DRG-based payment systems lead to costing guidance development, prescribing how to design cost

systems at the provider level, i.e., how to calculate costs, because DRG systems are often used as a

payment mechanism and base for price regulation, leading to certain requirements for the

underlying cost systems. From the policy-makers’ perspective, costs are supposed to account for

actual resource consumption at the provider level, and to be comparable and standardized across

providers. Indeed, these standardized costing practices are a condition for fair payment systems

FIGURE 1 Relationships between DRG, Costing Guidance, Costing Practices, and Clinical Practices

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(Busse et al. 2008; Schreyögg, Stargardt, Tiemann, and Busse 2006 ), as providers are supposed to

be paid what they spent for resource consumption.

To achieve standardization in costing practices, policy-makers and regulators use certain tools,

i.e., costing guidance, to inform provider cost reporting. Costing guidance directs cost-system

design at the provider level. In most countries, this costing guidance is mandatory for all providers,

therefore prescribing cost-system design. In some countries (e.g., Germany, France), external audits

check cost data compliance with guidance. If compliant, the cost data inform DRG tariff systems.

The DRG data are then reported to the government and regulators, usually annually. Some

countries, (e.g., Germany, France, and The Netherlands) calculate costs on the basis of only a

sample of providers that adhere to the costing guidance. Sampling enables some control over the

costs of producing and auditing cost data, but brings with it certain methodological questions

regarding representativeness (e.g., low-cost providers may decline to participate in the sample)

(Chapman et al. 2013).

DRG payment systems influence costing guidance in different ways. First, DRG systems

prescribe the cost calculation’s main cost object, the DRGs. This means that the guidance is,

second, structured around DRG’s influencing costing methods and, third, relevant cost categories.

The objective of most DRG systems is to produce costs per DRG that are close to actual resource

consumption. To achieve this, some countries, e.g., Germany, The Netherlands, and Denmark, have

introduced patient-level costing, following a predominantly bottom-up activity-based costing

approach. Other countries, e.g., England and Ireland, are currently considering a shift away from a

predominantly top-down volume-based costing approach towards bottom-up activity based costing

(Chapman et al. 2013).

The DRG system influences the cost categories taken into account in the cost calculation.

Infrastructure costs provide an illuminating example. DRG systems in France and Germany, for

instance, are based on the intention to cover operating costs only (Busse et al. 2011). Therefore,

infrastructure costs are excluded from DRG systems and cost calculation. This exclusion can bias

decision-makers, since infrastructure and operating costs are frequently interrelated.

In Germany, the state traditionally paid for hospital infrastructure costs, and sickness funds

paid for operating costs. As a result, the German DRG system excludes infrastructure costs from

DRG tariffs and hence from the cost calculation. This is currently changing due to the financial

situation; as the German states increasingly have difficulties funding healthcare infrastructure, new

federal-level legislation was passed, allowing each state to decide whether to take infrastructure

costs into account in the DRG payment system. This new infrastructure-costs treatment, then, needs

to be integrated into the current costing guidance. Yet, calculating infrastructure costs within DRG

payment systems is a complex task, in particular when different schemes for financing infrastructure

are in place. For example, in the U.K., the situation has become even more complex with the

widespread adoption of the Private Finance Initiative scheme. Under this scheme, private sector

parties build the infrastructure for delivering public healthcare services. The private sector, then,

owns the infrastructure and leases it to the service provider. Sometimes such arrangements also

entail various ancillary services provisions as a way to help private sector companies recover their

upfront capital investment (Broadbent and Laughlin 2005; Broadbent, Gill, and Laughlin 2003).

Relation 2 is between costing guidance and costing practices at the provider level. In most

countries with DRG-based payment systems, costing guidance is mandatory (Chapman et al. 2013).

Provider-level accountants must comply with the costing guidance when designing cost systems.

The presence of this mandatory costing guidance means that governments and regulators influence

cost-system design at the local provider levels. In the case of mandatory guidance, compliance is

enforced through costing data audits. This jurisdictional enforcement of healthcare costing means

that the influence of players from the wider context is relatively high (Brignall and Modell 2000;

Modell 2001). The development of costing guidance is not only influenced by DRG systems, but

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must also rely on management accountants’ practices. For example, in the U.K. and Germany,

provider-level feedback given by management accountants on guidance use leads to further

guidance refinements and developments. This management accountant feedback often concerns

clarifying certain guidance aspects resulting in regular amendments and new guidance versions

(Department of Health 2009–2010; Monitor 2013).

Relation 3 highlights the fact that DRG systems influence costing practices not only via costing

guidance, but also directly. As DRG systems prescribe one of the main cost objects, the DRG, this

becomes the main unit of cost analysis for reporting practices (Tan et al. 2011). Further, DRG data

must be reported to the government in specific formats. This external mandatory reporting format is

the internal reporting template for many providers. In most countries, the regulator does not directly

support providers in developing internal reporting (a rare exception is the U.K., where regulators

give providers formal support for creating internal reporting tools). 4

As external reporting is

mandatory, skills and expertise have to be developed at the provider level to comply with this

requirement. The external reporting format, however, is not always adapted for internal

management.

Costing practices, in turn, influence DRG systems. Costs are one criteria used to form patient

categories. Over time, many countries have refined their DRG systems, creating new classifications

to split out patients of differing cost levels with the objective of a fairer payment system (Chapman

et al. 2013). For example, in Germany, the patient classification system started with about 600

patient groups 10 years ago and has doubled since then (Busse et al. 2011). Similarly, in Quebec,

DRGs increased from 328 to 1,530 over the same period (Chapman et al. 2013). Conversely, cost

analysis can also lead to decreasing the number of groups. In the Netherlands, for instance, cost

analysis grew to over 30,000 patient groups. The unwieldy and expensive nature of the costing

required to sustain this high number of patient groups caused regulators to dramatically decrease

that number (Busse et al. 2011).

Relation 4 captures the direct influence of DRG systems on clinical practice. This arises as

DRG systems are expected to drive the standardization of clinical practice, by providing a

benchmark and identifying best practice in terms of both quality and efficiency. While identifying

best practice in terms of clinical quality has always been part of the development of the medical

discipline, DRG systems added an economic dimension to this process, inherently linking medical

practice with economic performance. In line with this, the U.K. has established a specific body—the

National Institute for Health and Care Excellence (NICE)—which defines (based on medical and

economic criteria) the treatments that the National Health Service will cover. Also, the U.K. has

implemented a best-practice pricing system in some areas, where payment to providers is based on

the highest-quality treatment with lowest-sector costs (Peskett et al. 2012). More than an average or

weighted tariff practiced by most countries, a best-practice pricing system is thought to drive

healthcare services towards more efficient and standardized practice (Peskett et al. 2012).

In turn, clinical practice influences DRG systems. The medical profession continuously

innovates and seeks new treatment methods for existing DRGs. These new treatment methods can

eventually lead to new DRGs. Nonetheless, there is a potential danger that DRG systems limit

innovations when no specific funds are available for treatment methods that are still being tested. To

overcome this, some countries have included specific funds for innovation and development in their

DRG systems (e.g., Germany).

Relation 5 closes the loop between clinical and costing practices. Clinical practices influence

cost-system design practices. Research supports the idea that cost-data usefulness for operational

staff, such as clinicians, requires cost systems be adapted to local users’ needs, notably by involving

4 e.g., Monitor (2006 ).

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non-accounting users in cost-system design and implementation (Eldenburg, Soderstrom, Willis,

and Wu 2010; Pizzini 2006 ). In a bottom-up design process, operational staff, such as clinicians,

influence the cost-system design choices. In turn, cost analysis influences clinical practice, as its

objective is to identify best practices in both clinical and economic terms. The cost comparison

between different clinicians performing the same procedure is one of the main cost-analysis

practices. However, research has underlined that relationships are complex. In one study, for

example, physician profiling to achieve a reduction in Length of Stay (LOS) achieved this, but also

resulted in an increasing number of procedures undertaken (Evans, Hwang, and Nagarajan 1995,

2001). This might have been good for productivity, but not for cost reduction.

In the last relation, we looked at how clinical practice benchmarking is widely based on DRGs.

This focus on DRGs, however, supports thinking in clinical disciplines and silos, making it

difficult, for example, to manage multi-pathology patients who require treatment from different

clinical disciplines. As mentioned earlier, multi-pathology patients are categorized in one DRG

depending on the illness considered the main reason for their stay. The majority of income from

those patients will go to the unit classified as treating the main reason for their stay. This often

lowers income for other units in which the patient may have consumed resources. A possible

unintended consequence here is that clinicians prefer the patient to be discharged after treatment in

the first unit and re-enter, if clinically possible, at a later time for treatment in other concerned units.

DRG payment system incentives do not favor cross-unit collaborations. This creates a more difficult

situation for chronic patients, who often require treatment from different units and providers over a

longer period of time.

IMPACT OF INTERDEPENDENCIES ON THE MANAGEMENT ACCOUNTING PROFESSION

Analyzing these various interdependencies between DRG systems and costing practice is key

to understanding healthcare costing practice. In this section, we detail how the influence of DRG

systems on costing practices impacts the management accounting profession.

Costing practices, in the context of DRG-based payment systems, require specific skill sets and

technical expertise. To meet this challenge, some countries, e.g., France and Germany, have

introduced a new occupation, i.e., the medical controller, who is in charge of DRG data (Busse et al.

2011). In Germany, the occupation is open to doctors, nurses, managers, and IT specialists, and

requires both the medical and economic skills and expertise. In France, only doctors may become

medical controllers. Indeed, it is considered a field of medical specialization. Medical controllers

are trained as doctors initially and subsequently specialize in medical controlling. Each hospital has

a medical control department with a number of medical controllers depending on hospital size.

The medical controller is formally part of the clinical staff, falling under the authority of both

the head of clinicians and hospital director. Thus, clinical data in France are controlled by

clinicians, with clinicians transmitting clinical unit data to the medical controller, who processes the

clinical and costing data and submits it to the government. With clinicians controlling DRG data,

managers must ask the medical controller for data access. Patient data confidentiality is cited as the

reason for this process, which restricts cost-data access and use for cost management at the

institutional level. In essence, medical controllers, who control data for internal reporting practices,

also take over the external reporting practice of costing. The medical controller occupation can be

seen as an institutionalized hybrid, having knowledge in the medical and management accounting

fields, but creating this new occupation threatens the management accountant’s jurisdictional

domain.

In all countries, however, cost-system design remains management accountants’ domain.

Given that in the context of DRG-based payment systems, the price-setting purpose of costing

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dominates, cost-system design and reporting practices are highly standardized across providers

(relative to traditional assumptions regarding management accounting as tailored to local

management needs) (Chapman et al. 2013). This requires management accountants to acquire a

certain skill set and technical expertise to comply with the mandatory guidance. This specific skill

set and expertise limits the capacity and interest of professionals in developing different skill sets,

for example to support costing use for cost management.

In practice, this means that management accountants at the healthcare-provider level face the

difficult task of integrating the price-setting purpose with the potentially conflicting cost-manage-

ment purpose. This conflict can be seen in the requirements of cost-reporting practice. The process

of presenting data in the format required by DRG reporting standards often takes several months of

work at the provider level. Cost management, however, requires more frequent data reporting (i.e.,

monthly to get closer to the actual events), so that decision-makers can draw on the data in the

day-to-day management process. Produced annually, the DRG data are not adapted for cost

management.

But even with DRG data produced more regularly, the way the costs are calculated for DRG

may stand in the way of cost management. For instance, if infrastructure costs are excluded from

the DRG costs, it may hinder management decision-making. Those costs have to be included when

seeking to understand the relationship between infrastructure, operating costs, and outcomes. In the

U.S., DRG systems exclude costs for physician services, although these constitute a considerable

part of the total treatment costs and are of great importance for cost-management purposes at the

service-line level. Calculating costs at this level conflicts with DRG requirements. To solve this

conflict between DRG reporting and internal reporting requirements, some hospitals create a second

costing system, requiring additional resources. We observed this in our own research in some

hospitals in the U.K. and Germany.

The focus on external cost reporting has led to a relative lack of expertise in internal costing

practices among providers’ management accountants. In some contexts, we observed reporting and

cost-system design practices outsourcing. In England, some hospitals have outsourced their internal

reporting, in particular clinical practice cost benchmarking, to consulting firms. This enables

hospitals to benchmark their performance with other hospitals contracting their reporting with the

same consulting firm. Similarly, in Quebec, several major hospitals outsourced cost-system design

to an external private company that calculates patient-level for the hospitals using their own costing

method. These examples further indicate the fragmentation of the management accounting

jurisdiction in public healthcare with external consulting firms taking over internal management

accounting practices.

The specific skills required for costing practice in the context of DRG systems impact how the

clinical profession engages with management accounting, i.e., costing. The specific skill set

required for complying with costing guidance and external cost reporting is a potential barrier for

non-accountant users, such as clinicians, to acquire costing expertise. Acquisition of such

management accounting, i.e., costing, expertise, termed hybridization (Kurunmäki 2004; Busse et

al. 2011), was observed for diverse management accounting techniques, including budget,

performance measurement, and costing (Kurunmäki 2004; Jacobs 2005; Jacobs, Marcon, and Witt

2004). Kurunmäki (2004) shows that, in Finland, clinicians acquired a set of techniques and skills

to manage costs. She found that hospitals implemented cost accounting without any support from

the finance and accounting unit, thus without management accountant involvement. The doctors

and nurses built the cost and pricing systems for the clinical units on their own. In light of the

present analysis, it is important to note that, in Finland, the DRG system is used mainly for planning

and management and not as a payment mechanism. Costing in Finland is not done primarily for

price-setting, but rather for cost management, which facilitates local adaption of costing practices

and non-accounting user involvement.

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In contrast, for several years in the U.K., price-setting has been the dominant purpose of

costing. It is also in the U.K. context that research observed barriers to hybridization (Kurunmäki

2004). Indeed, in this context, the clinical profession protects their jurisdiction against the

management accounting one (Fischer and Ferlie 2013) and is reluctant to engage with healthcare

costing. Costing is perceived as a rival practice, leading to the decoupling of costing from clinical

practice (Brignall and Modell 2000; Modell 2001; Kurunmäki 2004; Kurunmäki, Lapsley, and

Melia 2003). Thus, we argue that the focus on price-setting, mandatory reporting and costing

guidance makes local adaption and non-accounting user involvement in design more difficult.

In particular, price-setting may hinder user involvement at the service-line level. For example,

when price is lower than costs, the service line loses money. In this case, the clinician would seek to

understand the reasons for this loss. However, a cost system set up at the DRG level and calculated

annually may not allow for understanding the reasons for the higher costs and what to do about

them. The way DRG systems are constructed can hinder clinician engagement, because DRG codes

are often not meaningful for clinicians and cost-system guidance is too elaborate and difficult to

understand. Yet, if clinicians can set up a cost system themselves for the purpose of understanding

costs and outcomes of their service line, it may enhance clinician involvement in costing.

Finally, we observe that, in light of the fragmenting management accounting jurisdiction, the

management accounting profession seeks to defend and protect its territory. Notably, management

accountant standard-setters achieve this by using technical vocabulary for costing guidance that is

difficult for non-accountants to understand, thereby making non-accountants’ engagement in

costing difficult. For instance, hospital-costing guidance in the U.K. distinguishes between

overheads, indirect costs, and direct costs, distinctions difficult for clinicians to discern, especially

the overheads and indirect costs categories (Department of Health 2009–2010). Further, overheads,

defined as furthest away from clinical practice, are often bracketed out from cost management and

assumed to be fixed. Cost reporting and cost analysis are concentrated in clinical practice and not

applied to administrative functions, such as the accounting and finance function (Chapman and

Kern 2010). This also works the other way: doctors fortify themselves behind their own

terminology to make the point that management accountants and managers are too ignorant of

medicine to make decisions that affect clinical practice. For example, in the medical controller 5

system in France, mentioned earlier, a doctor is in charge of all DRG data and management

accountants and managers do not have direct access to DRG cost data.

CONCLUSION

Facing cost pressure in healthcare, costing practices are of increasing concern in many

countries. Our analysis highlights the struggles in practice arising from the interdependencies of the

wider context, i.e., DRG systems, and how they impact the technical and economic challenges of

costing practices.

A key characteristic of costing in healthcare lies in the specifics of the healthcare sector itself.

In this sector, key decisions on the long-term evolution of services are made outside provider

organizations, notably at government and professional institutional levels. These decision-makers

influence costing practices primarily through DRG-based payment systems. Resulting from a

co-production between multiple players, DRG-based systems strongly influence costing practice in

that they are linked with the definition of mandatory costing guidance and standardized external

reporting practices. DRG systems influence the definition of cost objects, the level of cost detail

required, the costing method, the cost categories included in the calculation, and the incentives

linked with payments. Further, DRG-based payment systems contribute to an erosion of

5 Originally called Medical Doctor in Charge of Clinical Data.

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management accounting jurisdiction and influence the way management accounting hybridizes with

clinical practice.

Future research could analyze, more closely, the relationships between the wider context and

costing practices and, more specifically, which cost or pricing data different healthcare system

players use (e.g., surgeons and other clinicians personnel, primary care physicians, nurses,

accountants, and other administrative personnel), and how this may influence costs and clinical

information systems, while taking the organizational and national context into account, including

DRG system and healthcare funding and reimbursement configurations.

Another research avenue is costing expertise in the healthcare sector, particularly when it is

outsourced (such as in Quebec). What are the consequences of outsourcing hospital-cost

management on the operational practices, DRG costs, and DRG-based payments? Accounting

scholars can investigate external costing practices and how these practices can resolve or worsen the

cost-related DRG comparison issues. An intriguing question is to what extent these external costing

practices allow users to understand how resources are used to treat patients, and provide

information on the outcomes. Further, studying the management accounting profession in

healthcare would be particularly interesting, in relation to their costing-practice expertise and

emergence of new occupations, such as the medical controller. Accounting researchers can carry

out field studies on the emergence of this new occupation, how it influences clinical and costing

practices, and how it impacts the tensions and conflicts among various healthcare system actors.

Worldwide, healthcare systems are facing constrained resources combined with increasing

activities, regulation, and outcome measurement, rendering comparison and efficiency necessary.

Costing expertise is of paramount importance, because it is a cornerstone for efficiency

measurement and economic comparisons. Accounting scholars can play a role in one of

healthcare’s most challenging issues: to help to improve cost relevance and quality of outcome data

for healthcare providers, and make information systems actionable for providers, i.e., to produce not

only data for external reporting, but to enable operational process and cost management. This

should support clinicians at engaging in managerial decision-making and thereby empower them in

the management process.

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