Cost analysis for private hospitals in palestine

Bachelor Thesis, 2013

45 Pages, Grade: 78%


Table of Content



1. Introduction

2. Background

3. General Framework
3.1 Research Problem
3.2 Research Objectives
3.3 Research Importance
3.4 Methodology
3.5 Research hypothesis
3.6 Keyword Definitions

4. Literature Review
4.1 Foreign Studies
4.2 Arab and Palestinian Studies
4.3 What Distinguishing this Study of Others

5. Hospitals and Costing Systems
5.1 Cost Accounting
5.2 Traditional Costing System

6. Implementing the VBC on Arab Care Hospital, Palestine
6.1 Research Results
6.2 Recommendations

7. References

8. Annexes
8.1 Annex 1; Partial Income Statement of ArabCare Hospitals for Cost Analysis for Private Hospital in Palestine, April 2013 Qais J. Sbaih
8.2 Annex 2; Number of patients entered the hospitals Wards during
8.3 Annex 3; Code of Hospital Prices of all Wards- all Operations Cost Analysis for Private Hospital in Palestine, April 2013 Qais J. Sbaih


Using the Volume Based Costing (VBC), which is a traditional costing system in hospitals especially if it used to accounting for surgical wards is not efficient and effective. However, prices for medical surgeries calculated using traditional costing system as VBC will not recover the costs incurred by the hospital for these surgeries, if the hospital uses VBC will suffer deficit because the revenues, represented by charged prices, collected for specific medical services will not recover the costs incurred. The reason is, however, the VBC is allocates all the costs into one cost driver, this would give all costs objects unfair share of incurred costs not according to real usage of these costs.

To solve that problem, and to set fair prices for patients and hospitals, a hospital should use an advanced costing system as Activity Based Costing (ABC), which is uses more than one costs driver and incur costs objects according to usage.

For ArabCare Hospital, Palestine, the prices currently charged which is supposed to be calculated by used ABC is more accurate and fair for both the hospital and patients. However, if the hospital used the volume based costing (VBC) will not recover its costs and expenses. Then, prices charged currently in the operation prices code of ArabCare hospital is able to recover costs but it is needed to be updated periodically because the changes of market prices of medical supplies.

1. Introduction

H ospitals are one of the most important health facilities around the world, as well as in Palestine the private health care sector is one of the serious sectors in the country. With no doubt, these facilities need to be managed well. However a good management for any institution or facility requires a deep look at the Cost Analysis for these facilities. For the private Palestinian hospitals in particular, there are especially need to study and analysis its costs to determine whether hospitals are fairly charge the price of its medical services and operations. While the government of Palestine is responsible for managing the public hospitals and sit it prices, the private hospitals are managed separately from the government. However, the Palestinian ministry of health has conducted its studies to implement cost instruments on public hospitals. These instruments are providing computerized cost- price system for medical provided services which shows the real cost for that service in order to price It (Palestinian Ministry of health, 2011: p7). Hence a study that clarifies the prices charged by private hospitals in Palestine is needed.

The application of cost accounting in hospitals is particularly important for hospital administration, where they must know the cost of services they provide in order to provided a realistic base for budget estimation (Shafqa, 2007: p97).From an accounting point of view cost analysis for primary health care is important for managers and planners of the health care industry. By better understanding the costs of various activates, managers can improve the efficiency of hospital departments, as well as hospital system as a whole (Shepard, Hodgkin, & Anthiny, 2000: Pvii).

When hospitals set their prices charged against several provided medical services, i.e. medical operations such as surgeries, outpatient’s clinic visits and laboratories’ tests, they look at different aspects such economic conditions, market prices of other hospitals domestically and internationally and governmental regulations and measures which determine the price ceiling of theses medical services such as MOH “ Ministry of Health”. However, hospitals also need to do some cost calculations in order to set the medical prices. These referred to as costs system for services industries which also can be applied on health industry such as hospitals. Managers and officials of the hospitals are responsible for choosing which system or costing procedure to be used upon the pricing process of the medical services and procedures. However, the problem in costs is not directs costs -costs traced directly to product or final service, but it’s the allocation problem of the indirect costs, which is a significant problem of cost accounting (Alhuseeni, 2006: p198).

One of these costing systems for allocation of indirect costs is VBC “Volume Based Costing” which is traditional costing system that depends on one cost center, other like ABC “Activity Based System” which is more exclusive costing system and more complicated but more accurate. However, the trend today to apply the ABC on services industry especially on healthcare as hospitals. Since the ABC is complex and costly to be applied, still a debate between using the traditional and the ABC in hospitals. However, a special cost-benefit analysis should be done between the two approaches in order to understand the ability to apply one of these systems.

2. Background

ArabCare Hospital

Originally, the ArabCare hospital, located in Ramallah-Palestine, has been established as publicly held corporation in 1996, which were and still held by a corporation called “Zein” to provide medical services. At that time, there were only few departments the hospital were consists of with limited capabilities.

In 2003 a number of hospital’s physicians warranted the hospital, which was a new intelligent procedure to be implemented on hospitals. 7 physicians have warranted the hospital by investing in equipments or cash; they then became the owners of the hospitals. However ArabCare hospital is profitable organization but there is no net profit allocated into owners, the owners or the physicians got salaries or wages from surgeries they made or from visits by patients to their outpatient clinics, which separated accountability from the hospital administration.

It’s worthily mentioned that ArabCare Corporation approached the bankruptcy, but after the physicians’ warranty of the hospital saved it from insolvency.

In 2000 the investment in hospital by the physicians has grew, some invested in essential medical equipments. After four years ArabCare hospital is became more realistic hospital with more capabilities and developed medical equipments.

In 2010 the radium ward of the hospital restructured and renewed by 2.5 million dollars. Now the hospital is success story after it has been closed to insolvency.

The hospital is a four major parts (radium ward, laboratory ward, outpatient wards and surgeries ward), each one of these major hospitals’ parts is separated financially from the other part, and each one has its own accounts and is responsible for its expenses and revenues.

This case study is conducted on the surgeries ward due to simplicity and the separation of this ward from the outpatient clinic. However some inpatients entered to a surgery and it’s required a medical radiation therapy or some laboratory tests from the other wards, the surgery ward then should make a clear transaction (internal reconciliation) between the wards.

The wards and number of beds in ArabCare hospital; Number of beds in all wards is 32 beds, allocated between the internal-surgical ward which is 8 beds, ICU 3 years and other wards. Today thr ArabCare hospital with its competence team physicians is developed enough with to compete with other Palestinian hospitals. Its emblem is PATIENTS FIRST.

(Source: interview with E. AbdelRa’ouf Afaneh , HR and administrative manager, ACH)

3. General Framework

3.1 Research Problem

Generally, there is especially need to account for private hospitals in Palestine, to know whether price charged by private hospitals is fair for patient and to answer the usual patient’s question “why they charged me too much for that surgery of that medical services?!”.

The problem of pricing system for medical services is the way of allocation of indirect costs using the current method of cost allocation which is not resulting in clear price charged against the medical services.

The research problems are divided into two main problems:

1. Is the applying of the traditional costing system on the hospital in Palestine effective? Or do we need another costing system which is more effective and accurate?
2. To what extent the current pricing system is closed to real cost-based system? In other words, does the current pricing system of various medical services is closed to real prices which should be charged against them.

3.2 Study objectives

The study objectives are divided in two; main objectives and sub objectives:

The study main objectives are related to the case study conducted on ArabCare hospital on which to determine which allocation base is appropriate for hospitals, Provide the hospital’s management a brief overview about the cost-pricing system, Summaries & classifies the hospital costs and expenses according to cost terms (MOH, 2011), Study the ability whether hospitals are able to provide detailed bill for patient of having medical treatment and to Determine the real cost of having medical service per patient.

This aims first to give the hospital’s management information about their cost-pricing system that is the results of the study should guide the management either to modify their prices charged to the hospital’s services in way that satisfy the patients, or it might disagree with the patient’s claims about the unfairness of the charged prices or maybe their claim about the corruption of the hospitals management. However, the study also aims to summaries and classifies the hospital costs into various costs terms as direct costs, indirect costs, variable and fixed costs and administrative and operation costs ( non-administrative costs) in order to study the proportion of these costs in the health care system. On the other hand, this research also studies if the hospitals’ management is able to issue a detailed bill for patients immediately after they have a medical service or make a surgery; this bill is containing detailed information about costs charged the hospital during giving the medical services to patients.

The study also has sub- objectives as Apply the Cost Accounting on service industries - which is hospitals, allocate the costs into cost driver and choose allocation base, to determine the price of each medical services and Study the VBC and its characteristics.

That is, one of the objectives of this research is to apply the cost accounting into services industries, especially the hospitals, since student of financial accounting, during taking the course of managerial and cost accounting, never hit on practical examples applied on healthcare industries. This study offers me and my colleagues’ students of my field to touch and apply the cost accounting methods on healthcare industries. However, the study also allocates the hospital indirect costs into cost centers belong to hospitals by choosing appropriate cost allocation base.

Finally, this research also study the VBC (Volume Based Costing) method with its positives and negatives and conclude whether hospitals can use VBC which is a traditional costing system.

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3.3 Research Importance

This research is important for six parties; hospital management, health organizations, government bodies as MOH (Ministry of Health),patients, students of accounting and student of medical science.

For hospitals management- in this case the ArabCare hospital’s management, this research highlights the costpricing system of the hospital and clarifies whether it operates effectively so all costs are allocated correctly or not. However, the result of this research would guide the hospital’s management and provide some information about the costing system performance, the research results would give the management of their current costing system is allocates the cost fairly and, as a result, the price charged are fair enough for hospital and patients. Or it should be amended and reconsider the costing system by using another costing systems.

Health organization as WHO (World Health Organization) and other medical Organization can also benefited from this research by let them look deeply at medical system of third world countries as Palestine, which would play rule on designing a special rulings for private health organizations in Palestine. However the WHO already has issued its manuals for hospitals conducted on some Arab countries which is called (analysis for hospitals costs, a manual for management, WHO).

The government of Palestine represented by MOH (Ministry of Health) which contribute of 38% GDP in health spending (Palestinian Ministry of health, 2011: p3). However, MOH would use this research in setting policies regarding the private hospitals of Palestine, control prices of medical services and control private hospitals, which would increase the accountability of the private hospitals of Palestine.

Patients need to know why they pay that amount for specific medical services, in this case study patients of ArabCare hospital, patient would know if the current charged prices are fair and the prices include all real costs incurred during getting that medical services. However, the results of this study would be with or against patients’ claims about the fairness of the prices sat by the hospital.

Since student of accounting in Birzeit University, never study the cost accounting applied on hospitals or healthcare services industry, this research is important for them by give them a simple overview or background about the hospital’s cost accounting system, student would be fitted also if one decided to make some similar studies.

However, this research is also important for student of medical and dental sciences; these students should understand the financial systems in the hospital they might work with. Some medical collage however, teach their student the principles of cost accounting conducted on medical industries as Niijata university graduate school of medical and dental science, Niijata, Japan.

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3.4 Methodology

3.4.1 Study type

The study was exploratory and analytical, estimating the average cost per operation by doing several subsequent calculation processes.

3.4.2 Study community and sample

The study community was the ArabCare hospital, Ramallah, Palestine. The financial data in the year of 2012 and the non-financial data of 2012 was the used of this study, the selection of this hospital was due to simplicity and the financially separation of wards of each others. However, the study sample was the operation wards and conducted into ten major surgeries, the selection was due to availability of the data regarding this ward.

3.4.3 Data source and collection

The study depended into two sources of data; secondary and primary data.

Secondary data, which include the reviewing of other studies and journals related to this subject, whether they are in the university libraries or WHO or MOH publications, or they are extracted from internet.

Primary data, which represented by a number of interviews with some officials, financial managers and accountants of ArabCare hospitals, whose jobs is related to the subject of the study. Table (1) describes these meetings and time needed for each one.

Table (1): Total meetings and visits to field work

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3.4.4 Procedures

Calculation the cost per patient using VBC system, After data was collected, a partial income statement for 2012 of ArabCare hospital including only the part of expenses, all costs for 2012 are allocated to number of patients entered the ward at the same year. Then each ward is given a weight which was the percentage of patients entered. The weight is calculated by using the nonfinancial data of 2012 which was the number of patients entered the wards.

The results for each ward divided into the number of patient for each ward in order to calculate cost per operation-patient, and then the cost resulted from the allocation process where to be compared with the Hospitals charged fees (annex 1). Note that only indirect costs were allocated because direct costs are clear for each operation.

3.5 research hypothesis

The study has one basic theory and two secondary theories the two theories are related to the cost system can be apply in healthcare industry, noting that the study either be with or inverse the basic theory.

The basic theory states that hospital can applying the Traditional costing system which is VBC (Volume Based Costing),and it would result in effective and efficient cost-pricing system.

The secondary theories are:

First theory: applying Traditional Costing System is not effective and efficient, ABC (Activity Based Costing) should be used, or

Second, the alternative theory; neither applying the VBC nor the ABC is appropriate for healthcare industry. Another costing system should be used which has a special characteristics.

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3.6 Keywords Definitions

1. Hospitals: says Shaqa that hospitals are facilities that provides healthcare services for communities and consists of these elements: patients, government, physicians’ team, hospitals managements.
2. Private Hospital: a hospital which is owned by persons other than governments.
3. Cost Accounting: is a kind of financial accounting used to collect and determine and explain cost data for activities or management or department in the entity, classify it according to cost centers and sort it according product output, which would result in assist management in planning and controlling and make decisions (Shafqa, 2007: P28)
4. VBC: (Volume Based Costing), which is a traditional cost accounting system, and the most popular one, allocates the indirect costs to each cost object using single indicator named cost driver (Pengyu Cao, 2006, p214).
5. Traditional Costing: the procedure on which allocates indirect costs according to cost centers of final product using allocation base as volume, which is not take into consideration the unrelated of indirect costs with volume, which results in inaccurate figures for cost elements (Shafqa, 2007: P28).
6. ABC: (Activity Based Costing) strategic instrument for entity assists it in getting more accurate data about the probability of operation, products and services which contribute in taking significant decisions, as pricing decisions, marketing, product or service designing and resources function decisions (Musa Dergham, 2007).
7. Average Cost per operation: divide the total cost of a specific year into the operations-ward depending on the number of patients entered during that year (weight).
8. Average Cost per operation-patient: divide the average cost per operation on the number of patients entered to specific ward -operation.
9. MOH: Ministry of Health.
10. WHO: World Health Organization.

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Excerpt out of 45 pages


Cost analysis for private hospitals in palestine
Birzeit University  (Business and Econimics school)
Seminar in Accounting
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ISBN (Book)
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know how hospitals should charges its services prices
Quote paper
Qais Sbaih (Author), 2013, Cost analysis for private hospitals in palestine, Munich, GRIN Verlag,


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