Financial performance measures in health care organisations

“Reaching agreement concerning the appropriate accounting entity is a challenge for those designing financial performance measures in health care organisations. Cost-benefit analysis provides a solution to this problem”. Discuss. “Accounting is possible only when there is an area of economic interest that can be defined… when a definable area of economic interest exists, it is possible to identify, accumulate, and report financial information about that entity as distinct from all other information.

Without such an entity, accounting is impossible”. This view as held by the American Accounting Association clearly states that it is impossible to make use of accounting in a particular setting unless we have a clearly defined and bounded entity. Of all the postulates set by accounting theory, agreement on the assumptions concerning the nature of the accounting entity and its environment has been depicted as the most fundamental.

A potential discrepancy between the views of policy makers and the views of physicians concerning the definition of an appropriate accounting entity thus represents a significant threat to the successful implementation of financial statements (and accrual accounting) within the healthcare setting. In this essay I will seek to examine the tensions and contradictions that arise between practitioners and policymakers in response to government’s actions to limit accountability to the individual hospital.

It will then be ascertained whether cost benefit analysis can provide a solution and unify the clinicians and the policymakers in a ‘shared belief’ in the legitimacy of the new accounting, which is essential to ensure the success of the reforms. The application of formal accounting procedures is a fairly recent phenomenon in the public sector and a direct result of the New Public Management reforms sweeping through Western economies.

Since the 1970s there has been a building up of public and political opinion as to the lack of accountability by the public sector which appeared to be ‘swallowing up’ public funds and thereby placing a further burden on the economy. This led to calls for greater accountability by public sector organisations in their use of resources particularly in the health sector (which consumed a significantly large fraction of public expenditure). This eventually led to calls for ‘management by accounting’ and the government gradually moved to implement competition in health care provision.

This required the greater use of accounting as responsibility centres were created within the NHS framework. It has been the case that government has sought to apply private sector best practices to rid the waste and inefficiencies of public sector provision. Hospitals are essentially being made responsible for generating increased revenues by providing the most efficient services (in a market based economy). These reforms have led to an increased role for financial information within public sector health provision as managers and clinicians are increasingly looking at the financial implications of their decisions.

A major concern about these reforms has been sounded by physicians in that the use of private sector tools may not be appropriate for public sector health provision due to the ‘public good’ nature of this service. Physicians feel that cost should not be their central concern but rather the welfare of the patient and they feel their responsibility to be to the wider society rather than the hospital. ‘Defining the hospital as the area of interest and confining the objects and activities in the new accounting reports to that entity, would thus effect a narrowing down of the objects of interest of those influenced by these reports.

Only those financial transactions having direct implications on hospital finances would be included in the report. ‘1Thus the definition of the hospital as the accounting entity actively seeks to narrow the physicians object of interest and pursue only activities that would further the performance goals of the hospital. This appears to be eroding the public mandate issued to doctors, as seeking to maximise the hospital’s benefit may contradict actions that would maximise patients well being (e. g. if physicians prevented from prescribing most-effective drug due to cost implications).

The medical profession’s sense of responsibility to the public has led them to frame their perception of society as the accounting entity (ie looking at costs and benefits from society’s point of view). For example, Kurunmaki (1999b) found that a chief physician’s investment decision in a new technology considered the economic implications of the reduced sick leave to society if the new technology were purchased. Another physician expressed his doubts as to whether ‘ hospital based accounting reports (would) capture in a single report the economic consequences of various health policy decisions’.

Resource allocation decisions in one area may have an effect in another and so it is argued that we need to take account of the wider health and social care environment. For example, hospitals are constrained in their ability to discharge patients to more appropriate settings if community or social services are underdeveloped. Yet under the new environment, the hospital would be treated as expensive and inefficient due to its higher costs (as a result of longer stays).

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