Qualitative Research in Accounting & Management

Time-driven activity-based costing to improve transparency and decision making in

healthcare: A case study
Cristina Campanale Lino Cinquini Andrea Tenucci
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To cite this document:
Cristina Campanale Lino Cinquini Andrea Tenucci , (2014),"Time-driven activity-based costing to improve
transparency and decision making in healthcare", Qualitative Research in Accounting & Management, Vol.
11 Iss 2 pp. 165 - 186
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Time-driven
Time-driven activity-based activity-based
costing to improve transparency costing
and decision making in healthcare
165
A case study
Cristina Campanale, Lino Cinquini and Andrea Tenucci
Institute of Management, Scuola Superiore Sant’Anna, Pisa, Italy

Abstract
Purpose – The purpose of this paper is to discuss the potentialities of innovative accounting tools
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in supporting “transparency” and “resource allocation” in public hospitals, by describing the

implementation of a pilot project of time-driven activity-based costing (TDABC).
Design/methodology/approach – An interventionist research (IR) approach has been adopted:
two medical doctors, three financial controllers and three researchers were involved. Collection of data
used to implement the accounting model is based on hospital databases and interviews.
Findings – The information produced may allow a higher coherence between resources and
activities. TDABC may enhance transparency and support decisions toward a better organization of
work and an informed allocation of resources.
Research limitations/implications – Further studies are required to analyze decisions following
the implementation of the TDABC model.
Originality/value – The accounting literature lacks case studies describing the application of
TDABC in hospital settings, despite its good informative potentialities and the limited investment
required to introduce TDABC. Moreover, the use of the IR approach and the involvement of medical
doctors may help to get coherence between accounting data and clinical work and may support the
further diffusion and development of this costing model in hospitals.
Keywords Hospitals, Process analysis, Interventionist research, Time-driven activity-based costing
Paper type Case study

1. Introduction
In recent years the global economic and financial crisis in Europe has heavily affected
the public health sector, with the consequence of increasing pressure on cost control
and budget constraints. In Italy since the 1990s the health care system has faced
several reforms (first in 1992 and then in 1999), with the aim to increase accountability
for results (Coppola et al., 2008), to encourage a more efficient use of resources
(Marcon and Panozzo, 1998) and to support the sustainability of the system.
At the same time, the logic of the financing system has changed, moving from a
system based on an historical prospective to a system based on the population needs,
represented by the typology of population and the value of the services provided
(Cantù and Jommi, 2001). This system has transferred the risk of loss from the central Qualitative Research in Accounting &
government to the local healthcare providers (Evans et al., 1997) and hence required an Management
Vol. 11 No. 2, 2014
improvement in the management of resources. Since 2011 the pressure on healthcare pp. 165-186
organizations has been further increased by a series of actions (called “spending q Emerald Group Publishing Limited
1176-6093
review”) aimed at rationalizing resource consumption in many fields such as drugs, DOI 10.1108/QRAM-04-2014-0036
 QRAM personnel and beds. Despite the budget constraints, the demand for healthcare services
is rising because the elderly population and chronic diseases are increasing.
11,2 In this context, traditional accounting tools need to be adequately re-designed to
provide a transparent representation of the reasons for cost and to support healthcare
organizations in managing efficiently limited resources despite the increasing demand.
Many authors have found that:
166 (a) the approach to the (re)design and implementation of new costing tools; and
(b) the characteristics of costing tools determine the effectiveness of accounting
change, i.e. they affect the capacity of accounting tools to represent reality
and manage resources.

With respect to point (a), the approach to the (re)design and implementation of new
costing tools, there are two elements impacting on the effectiveness of accounting
change:
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(1) the involvement of organizational actors; and

(2) top management commitment.
First, the involvement of the organizational actors in designing and implementing costing
tools facilitates a common organizational vision based on shared values (Dunphy and
Stace, 1988) and sustains accounting change, particularly when there is a collaboration
between financial controllers and clinicians (Arnaboldi and Lapsley, 2004; Nyland and
Pettersen, 2004; Cinquini and Campanale, 2010). On the other side there is the risk that
clinicians, being the dominant coalition with the strongest ideologies, impede accounting
change if their involvement is limited (Burns and Scapens, 2001; Broadbent et al., 2001;
Hassan, 2005).
Second, top management commitment has been identified as another important
driver of accounting change (Greenwood et al., 1988), because this support for new
investments (in terms of technologies and personnel) is required in securing
sustainable change.
With respect to point (b), i.e. the features of costing tools and costing information, it
has been noted that detailed and clinical-oriented cost information leads to a positive
attitude amongst clinicians towards accounting tools (Coombs, 1987; Hill, 2000;
Pizzini, 2006; Jacobs et al., 2004; Abernethy and Vagnoni, 2004), while traditional
accounting information, for instance cost centres based costing, tends to be resisted by
professionals (Kurunmaki et al., 2003; Mintzberg, 1983; Jacobs, 1995; Abernethy and
Stoelwinder, 1990, 1995; Comerford and Abernethy, 1999).
Time-driven activity-based costing (TDABC), as recently proposed by Kaplan and
Anderson (2007), addresses the need of detailed and clinical oriented cost information
and overcomes the complexity of applying the traditional ABC approach. In this sense
more recently Kaplan and Porter (2011) have also outlined the use of TDABC to
evaluate the cost and value delivered to patients. Furthermore, Demeere et al. (2009)
applied TDABC in an outpatient clinic and recognized the flexibility and accuracy of
TDABC. They also demonstrated that TDABC is able to identify the activities that
drove the overhead and to support the identification of improvement opportunities.
In this vein, the paper aims to discuss the potentialities of implementing TDABC,
using an interventionist research (IR) approach (Jönsson and Lukka, 2005, 2006)
to support healthcare organizations in managing limited resources despite
 increasing demand. In fact TDABC, providing very detailed cost information and the Time-driven
linkage between costs and activities, may be addressed as a “clinical oriented costing activity-based
tool” able to overcome the resistance of professionals toward traditional accounting
tools and to provide a transparent representation of the reason for costs (activities) to costing
better support the distribution of available resources (according to the health needs and
activities and a clearer identification of responsibilities). Furthermore, IR may avoid
professionals’ resistance that arises when they are not involved in the design and 167
implementation of accounting tools.
The paper presents and discusses an IR project that involved all the 16 hospitals of
an Italian region (Tuscany) in the designs of new accounting tools (TDABC). It also
includes the implementation of the TDABC model in one hospital and confirms its
practical applicability. The findings highlight that TDABC may:
(1) support “transparency”, which means clarity about the processes performed
and the associated costs; and
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(2) informed resource distribution according to activities performed or required.

In this respect, the results show the extent to which TDABC, providing support to (1)
and (2), may help healthcare organizations to face the new challenge of managing
available limited resources in order to satisfy a growing citizens’ service demand.
In this sense, this paper contributes to the literature on accounting change in
healthcare: strengthens and weaknesses of this research underline the conditions
required to favour effective accounting change, thus providing also recommendations
for an effective approach to innovation in costing in hospitals.
The paper is organized as follows: Section 2 describes the adopted methodological
approach, Section 3 describes the construction of the TDABC model in Hospital Alfa
and the reports produced providing also a detailed description of Hospital Alfa and
source of data for the implementation of TDABC, Section 4 provides some evidences on
the impact of TDABC and IR in hospitals and finally Section 5 concludes the paper
discussing the potentialities of TDABC in facing the new challenges of public
healthcare organizations.

2. Methods
Since 2005, the Scuola Superiore Sant’Anna of Pisa, the University of the authors of this
paper, has engaged an ongoing collaboration with Tuscany’s Regional Government and
hospitals, which allowed ready access to the research site and data. This long-term
collaboration has contributed to create trust and alliance between researchers and
hospitals. The researchers proposed the starting of the project with the dual aim of
helping hospitals to improve accounting tools and enriching the researchers’ knowledge
about how accounting tools are adopted in practice.
In the first phase of the project the researchers were “observers” and data were
collected from interviews with doctors and financial controllers. In the second phase
the researchers acted as “insiders” and adopted an IR approach (Jönsson and Lukka,
2005, 2006).
In the first phase – researchers as “observers” – semi-structured interviews were
carried out in the 16 hospitals of Tuscany Region with the aim to deepen the main
problems in collection and use of cost information for decision-making. In total,
11 doctors (from 11 different hospitals) and 16 financial controllers (one from
 QRAM each hospital) were interviewed. The doctors comprised six clinical heads of hospital
11,2 and five speciality heads (orthopaedics, gynaecology, internal medicine, etc.). Financial
controllers were interviewed as “providers” while doctors as “users” of accounting
information.
Each interview lasted from 40 minutes to one hour and 40 minutes and the average
length was around 50 minutes. All interviews were audio taped and transcribed. We
168 conducted interviews in our buildings (and not in their offices) and we listened to them
without pressure, if they strayed from the main topics of the interviews. When
conducting the interviews we were “neutral” and refrained expressing our opinion, in
order to avoid influences on interviewees. Two researchers conducted each interview
and both took some further notes, which were subsequently compared to guarantee a
sharing comprehension of the interview.
After the identification of key factors related to the accounting tools the next
research phase evolved through the IR approach. The aim was to discuss these key
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factors with financial controllers and doctors and identify accounting innovations that
would better support resource distribution and decision-making.
The IR approach, by bringing together hospital actors and researchers, helped to
clarify key problems and key aspects in the accounting change process. This shared
identification of problems is seen as the first step towards achieving solutions
(Baard, 2010). The involvement of organizational actors, helped by researchers, supports
the development of practical solutions that meet the organization’s informative
requirements and reduce resistance (Dunphy and Stace, 1988). First, the identification of
accounting tools able to provide a representation of the organization and its cost requires
the involvement of the actors who deeply know the organization (Malmi, 1997). Second,
as emphasized by several studies in the field of healthcare (Kurunmaki et al., 2003;
Mintzberg, 1983; Jacobs et al., 2004; Abernethy and Stoelwinder, 1990; Abernethy and
Vagnoni, 2004), a limited involvement of organizational actors in the development of
accounting tools may produce resistance.
In addition, the active participation of researchers in the change process permits the
collection of otherwise inaccessible data that provides a richer understanding of the
organizational context ( Jönsson and Lukka, 2006; Jönsson, 2010).
The IR approach evolved within two groups: a “follow-up group” and a “restricted
group”. Three researchers were members of both groups. The “follow-up group”,
including the same people involved in the first phase of interviews, shared experiences
and further discussed the key requirements and the basic structure of accounting tools.
The “restricted group”, including members of the “follow-up” group from one hospital
(Hospital Alfa) – and in particular three financial controllers ant two doctors – tested
the tool selected within the follow-up group in one of its department (Department A).
The selection of the hospital actors to be included in the group was an important
matter. According to Laughlin (1987) the organizational actors involved (defined as
“researched”, i.e. from the point of view of researchers they are the subjects under
researchers’ investigation) should be only those with the power to affect change in the
phenomena under investigation. For this reason, financial controllers were closely
involved. However, clinician involvement was also important because they have
knowledge about the phenomena (medical activities) to be represented and costed in the
accounting system.
 The intervention lasted 17 months (from January 2009 to May 2010). During this Time-driven
time, the “follow-up” group met monthly and the “restricted” group met three times a activity-based
month (sometimes via telephone conference call). Each meeting was prepared in
advance by the coordinator, a hospital financial controller and supported by the costing
researchers. The preparation consisted in a schedule of topics and a draft document to
discuss. At each meeting, the draft document was discussed and revised to produce a
final document approved by all participants. 169
The IR project design and process activated the interaction between these two
groups, and this resulted particularly effective in getting valid (relevant and
understandable) and useful information (Baard, 2010). In this case, information from
the IR clarifies factors contributing to problems in accounting tools and initiates the
learning process which can bring to the identification of better solutions. The interactive
discussion between the “follow-up” and the “restricted group”, involving several actors,
sheds further lights in tracing problems and individuating solutions, which a “closed
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discussion”, i.e. involving only actors from one hospitals (in this case actors from
Hospital Alfa included in the “restricted group”), had not the possibility to reach.
On the other side hospitals participating to the “follow-up” group learned from the
experience of Hospital Alfa and were facilitated in applying accounting innovations in
their own hospitals.
According to Baard (2010) a good IR requires the implementation of strategies
aiming at guarantee free choice and hence maintains researchers and researched
integrity. To this aim, precise roles and tasks were defined. The researchers’ role was
to support the group through the progressive understanding of the problems related to
accounting tools revisions and to propose options and informed proposals.
The role of hospitals actors of both groups (“follow-up” and “restricted”) was to
discuss our proposed options, choose among them and discuss about the accounting
model. The “restricted” group also collected information to feed the accounting model
and report problems. The free choice of the researched was preserved, and strengthens
and weakness of the proposed options were underlined, but we avoid expressing our
opinions or preferences.
Another requirement of IR is to have the commitment of actors involved to make
and implement the accounting model. With the aim to stimulate internal commitment
to the IR project, timing of the IR research project was defined by the researched, in
order to make feel them as leaders of the project and increased their motivation.
During the intervention period two workshops were also organized to present
intermediate results. At the workshop were invited and took part senior hospital
managers in order to make them aware of the project’s progress, since their commitment
would have enhanced the probability of a successful intervention that facilitated
accounting change (Baard, 2010; Greenwood et al., 1988). An additional meeting was
furthermore organized with the CEO of Hospital Alfa to present a detailed report on
intermediate results and decide on the continuation of the intervention.

3. The development of the model

As described in Section 2, the development of the model may be divided in two main
phases:
(1) Researchers as “observers”.
(2) Researchers as “insiders” – IR approach.
 QRAM 3.1 Researchers as “observers”
11,2 Interviews highlighted the main difficulties in managing costs with the accounting
tools currently used. The current accounting tools were not aligned with the
organization of hospitals per clinical pathways. In fact, hospitals had traditional
accountings system based on cost centres: the costs of resources already allocated to
units were allocated to clinical pathways using allocation drivers.
170 Their current accounting tools did not allow the direct allocation of fixed costs, such
as personnel and equipment, to clinical pathways; such costs were allocated to patients
using traditional cost drivers (e.g. the number of hospitalization days or the floor-space
in the ward where the patient stayed) or were traced to fictitious cost centre. The
consequence was a difficulty in managing the distribution of these resources according
to actual needs, i.e. activities performed for patients. This difficulty was aggravated by
budget constraints that did not allow additional investments. On the other side, other
costs such as drugs and devices were easily allocated to patients using clinical
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procedures or medical standards and hence were easily managed and distributed
across the organization according to patients’ needs.
The following quotation illustrates the perceived inadequacy of this lack of change
in hospital costing systems:
The budget for units includes only costs of drugs and exams, but not other costs, because the
actual cost accounting system is not aligned with the organizational structure based on
clinical pathways (Financial Controller, Hospital 3).
For this reason hospitals asked for a system which could provide information able to
trace the consumption of resources according to patient’s needs (activities) and support
a fair assignment of fixed available resources to units which means a distribution of
resources coherent with real needs and with activities performed.

3.2 Researchers as “insiders” – IR approach

The main problems identified during interviews were shared via the IR approach
(Baard, 2010) in order to identify possible solutions.
The IR evolved through two main phases: in the first phase the group shared key
accounting needs, then discussed among alternative costing tools and finally came to
the choice of a model; in the second phase the group tested the identified model in
Teaching Hospital Alfa, in order to assess its practical applicability.
3.2.1 Identification of problems to face and key requirements of the revised
accounting tools. The first phase could be divided in two main steps: identification of
key accounting requirements and identification of alternative accounting tools.
In the first step, the group identified key facts and expectations which the
accounting system should deal with in order to be able to support decision making
regarding the distribution of the fixed resources across the organization:
.
different units perform different and interrelated activities of the clinical pathway;
.
the accounting system should be able to trace the total cost of fixed resources
consumed by each clinical pathway as well as the contribution, in terms of cost,
of each unit;
. the accounting system should represent the use of fixed resources by units,
according to clinical activities and hence the eventual need of increasing or
decreasing these resources; and
 .
the accounting system should support decisions towards a more efficient use of Time-driven
available fixed resources, while maintaining the same levels of the service activity-based
(quality and quantity).
costing
In the second step the group discussed about alternative accounting tools.
Considering the first phase, the research team proposed to analyze the cost of
activities and clinical pathways along with the units involved in providing such 171
activities. In this way there were the possibilities:
.
to get a higher coherence between performed activities and required resources
(fixed resources);
.
to calculate the total cost of fixed resources dedicated to each patient as well as
the contribution (in terms of cost) of each unit; and
.
to aggregate information about the cost of activities in order to develop cost
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analysis per unit.

The group decided to evaluate pros and cons linked to the above researchers’ proposal.
First, the group agreed that activity-based tools might provide the opportunity to
produce cost information coherent with the current workflow developed in hospital.
They also agreed that a system based on patient and clinical pathways could favour
a higher efficiency in the use of resources and a higher appropriateness, because it
provides a clear representation of the complexity of clinical pathways and the linkage
between activities and costs.
Furthermore, the group agreed that activity-based tools, by increasing the visibility
of action (Tuomela, 2005), might promote higher responsibility of individuals and
encourage a higher attention on costs, thus bringing to an expected higher efficiency.
Then the group discussed about the potentiality of activity-based tools with respect to
clinicians acceptance and use of cost information. In particular, they were aware that
the previous accounting system produced information unclear for clinicians and
unable to represent the workflow of the organization. In this respect building a new
system gave the opportunity to start the design from clinicians information
requirements and avoid criticalities of the previous system, as suggested by the
following quotations:
We should produce information more clinical oriented. These reports have to be used both to
evaluate results and for the taking decisions (Doctor, Hospital 2).
Clinicians feel that they can’t control these economic measures (with respect to data provided
by the current accounting tools) [. . .] clinicians must be involved in the identification of tools
(Financial Controller, Hospital 8).
At that point the research team presented three examples of “activity-based” costing
models along with their strengthens and weakness: the example of activity-based
costing as used in the Transfusion Service of the Healthcare Services of the UK
(Arnaboldi and Lapsley, 2005), the example of the “hybrid” ABC model which defines
activities within cost centres (Cinquini et al., 2009) and the example of TDABC, as used
in a Belgian outpatient clinic (Demeere et al., 2009). In this phase researches
emphasized advantages and disadvantages of alternative models, but left to the group
the freedom to decide. The group, after some discussions with researchers, agreed on
 QRAM the TDABC model. According to their choice it requires less additional investments in
11,2 informative systems and time than the other proposed models and has the potential to
produce cost information as useful as other models.
3.2.2 Experimenting the implementation of TDABC in the Department A of Hospital
Alfa. In the second phase the identified accounting tool was tested in Hospital Alfa in
order to verify its applicability. In this subsection we first provide some key
172 information about Hospital Alfa and data sources and then we describe the
implementation of the model.
The Teaching Hospital Alfa, where the TDABC was tested, is located in Tuscany
Region (Italy) and is characterized by the development of care, teaching and research
activities, in joint with the university. At the level of care it provides services for
hospitalization, outpatient specialist service and emergency and urgency activities.
In terms of key figures, in 2011, Hospital Alfa had about 1,549 beds (10 percent of
the total number of beds of the Tuscany System) and employed 5,746 people. In 2011
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the hospital had 56,559 ordinary hospitalizations (planned hospitalizations lasting

more than one day), 76,500 day hospital/day surgery hospitalizations, 135,723
emergency and urgency patients and 11,052,201 outpatients.
The current organizational model of care of Teaching Hospital Alfa is based on the
intensity of care required by patients: the patient clinical pathway is the basic unit of
analysis and the patient is recognised as the core of the processes and at the centre of the
organization.
In particular, the organizational model in Teaching Alfa is composed by
Dipartimenti ad attività integrata (DAI) (Departments of integrated activity), realized in
order to provide complete clinical pathways which include diagnostic-therapeutic and
rehabilitation activities. The hospital has 12 departments: orthopaedics, neuroscience,
laboratory, heart and vessels, specialty medical – surgical, maternal child, sense
organs, general and emergency medicine and surgery, biomedicine, imaging, oncology,
regional agency for the care of medulloleso.
In each department many Strutture Organizzative Dipartimentali (SODs) (Departmental
organisational structures) and Aree di Attività dipartimentale (AAs) (Areas of departmental
activities) (as operating theatre, wards, surgeries, etc.) jointly operate. SODs rely on
specialized medical team and manage all the patient’s clinical pathways (diagnosis,
treatment and rehabilitation), in close collaboration and integration with other health
professionals (other SODs and AAs). AAs rely on nurses who take care of patients during
the hospitalization and during surgeries. AAs can be classified in four levels of intensity of
care: low intensity, medium intensity, medium – high intensity and high intensity.
The organizational structure of the hospital is a matrix: the rows represent AAs and
the columns the SODs. AAs provide their services (assistance during the surgery and
hospitalizations) to SODs that manage the clinical pathways (diagnosis, treatment
and rehabilitation), according to the level of intensity of care required by patients.
Considering the great size of Hospital Alfa, in terms of departments and activities, the
revision of accounting tools started with a pilot project in the Department A. The
Department A is one of the largest Department of Hospital Alfa, with about 150 employees,
12 SODs and 20 AAs. Other 14 SODs and 12 AAs of other departments were also included
in the analysis when they were involved in clinical pathways together with the
Department A. The experimentation was based on data related to the first quarter of 2010.
Totally 2,880 patients, associated with 177 DRG code, were included in the analysis.
 Hospital Alpha has a significant data warehouse system able to provide a lot of Time-driven
information even if it is not well organized. Alfa has also quality manual that contains activity-based
detailed procedures and activities for each DRG. This manual, integrated and updated
using hospital databases and interviews, represented a good basis for the development costing
of the TDABC model.
The cost of available resources was gathered through the personnel and assets
databases of the hospital. The personnel database provides the cost of employees 173
assigned to each SOD and AA. This database is linked to the digital register of
attendance, which collects the actual amount of time personnel spent in the workplace
(absences due to holidays, sick leave, participation to conferences, etc. are not
included). The assets database provides, for each SOD or AA, the cost of medical
devices and their annual depreciation.
Activity data included activities related to each patient associated with a specific
DRG. The identification of activities for each patient (then associated to DRG), the
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SODs and the AAs involved was supported by the nosological database. In particular,
this database contains information regarding:
.
admission and discharge to hospital (date of admission and discharge and SOD
or AA involved);
.
surgery (date of the surgery and AAs and SODs involved);
.
patient’s hospitalization and transfers (AA which hospitalizes the patient, the
length of stay (days) for each AA involved, the SOD which cares the patient
during the hospitalization – usually the same SOD involved in the surgery); and
.
other activities (date and the SOD or AA involved).

The surgery room database, the nursing database and the quality manual integrated
by interviews supported the identification of the length of activities for each patient
(and associated DRG).
The surgery room database provides, for each patient and associated DRG,
information regarding the surgery: date, duration (in terms of minutes), personnel
(surgeon, anesthetist and nurse and associated SOD or AA) entrance and exit from the
operating theatre.
Nursing database provides, for each AA, the daily average time dedicated to
assisting the patients.
The responsible of Sanitary Services of the Department A together with a doctor
member of the research team estimated the duration of other activities (different from
surgeries and nurse assistance like visits or reservations of a visit) using the quality
manual and on the base of their experience. They subsequently interviewed key
employees (heads of AAs and SODs) in order to validate their estimations.
The quite good informative systems and the simple and few data required to build
the TDABC model made the collection of data relatively easy and fast. On the other
side the integration of data coming from different sources was longer because different
sources often had non-uniform patient code and because of the amount of data.
The work for implementing TDABC in Teaching Hospital Alfa consisted in four
main stages:
(1) mapping of processes;
(2) calculation of the capacity cost rate;
 QRAM (3) calculation of the indirect cost per patient; and
11,2 (4) analysis of the cost per patient and the cost of (un)used capacity.
(1) Mapping of processes. Mapping the processes includes:
(a) the identification of activities; and
174 (b) the identification of the length of activities.

All clinical pathways, as resulting from the nosological database and by the quality
manual, are composed by seven main typologies of activities, some of which may occur
more than once (i.e. surgery). The limited number of typologies of activities allows a
greater simplicity in the development, in the management and in future updates of the
model, also in terms of informative systems.
Figure 1 provides an example of a clinical pathway. Activities can be classified as:
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.
activities before surgery;
.
surgery; and
.
activities after surgery.

First, a nurse is required to schedule the visits to do before the surgery, these visits are
necessary to plan the surgery and trace the clinical picture of the patient (reservation of
medical visits before the surgery). Visits before the surgery includes the visits with the
surgeon, the radiologist, the anaesthetist and the nurse. The surgery is then performed
if the clinical picture allows it. The surgery requires the involvement of two surgeons,

Activities before Activities after

Surgery
surgery surgery
HUMAN RESOURCES:
Surgeon, Surgeon, Surgeon (SOD) Surgeon (SOD) Surgeon
Nurses (AA) Nurses (AA)
Radiologist, Anaesthetist (SOD) Nurse (AA) Nurse (AA) (SOD) Nurse,
Anaesthetist (SOD) Nurse (AA) Admin. (AA)
Nurse (AA)
Reservation of
Visit before the Medical Visit after the Visit after
medical visits Hospital
before the
surgery Surgery assistance in surgery
discharge
discharge
(Nurse) the ward (Nurse) (Nurse)
surgery

Visit before the Nurse Visit after

surgery assistance in discharge
(Surgeon) the ward (Surgeon)

Visit after the

surgery
Visit before the (Surgeon) Visit after
surgery discharge
(Radiologist) (Admin.)

Visit before the

Figure 1. surgery
(Anaesthetist)
Example of a clinical
pathway = outpatient activity = inpatient activity
 one anaesthetist and three nurses. After the surgery the patient is hospitalized (medical Time-driven
and nurse assistance in the ward). During the hospitalization the surgeon and the nurse activity-based
visit the patient to check his/her conditions (visit after the surgery). If the patient’s
clinical picture is good, the patient is discharged (hospital discharge). After discharge costing
the patient receives a further visit by the surgeon and by the nurse, to check his path of
recovery (visit after discharge). Administrative activities are also performed in this
phase. The “activities before surgery” and the “visit after discharge” are considered 175
here in outpatient regime, whereas the others are inpatient activities.
Starting from the classification of Cinquini et al. (2009), according to our cost
measurement purposes and to our context, in this research it has been possible to
classify activities in three levels: single patient, SOD level and AA level:
(1) Single patient level includes activities (and costs) strictly related to the single
patient’ clinical pathway, performed both by SODs and by AAs. Each patient is
recorded by a unique code (the nosological code) and associated with a specific
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DRG. The single patient level is the basic object of cost analysis. Other cost
objects are aggregations of the single patient level costs.
(2) SOD level includes activities (and costs) related to SODs. These activities, like
physical examinations, medical assistance and surgeries, are performed by the
SODs.
(3) AA level includes activities (and costs) related to AAs. These activities, like
nursing examinations, nursing assistance in the ward and nursing assistance
during the surgery, are performed by the AAs.

The identification of the average length of activities (b) was supported by the quality
manual, interviews and hospital informative systems or databases as recalled in at the
beginning of this sub-section. Table I shows the illustrative report of the activities
performed, the average length and the standard deviation length for each activity of
the sample DRG 493 “Cholecyst laparoscopic surgery” provided to six patients in the
period January-April 2010. The table also reports the source used to get the information
on the length of activities.
As shown by Table I (third column), the length of the activities of surgery and nurse
assistance for each patient have been effectively measured by using the hospital
informative systems. Adopting a precise measurement for this kind of activities is
fundamental for the reliability of the model, because, as shown by the fifth column
(standard deviation), their length and complexity could vary significantly across
patients.
Using quality manual and conducting some interviews allowed the estimation of
the length of activities before and after the surgery and medical assistance. For these
activities the adoption of an estimate, instead of a precise measurement, represents
a balanced compromise between the reliability of the model and the cost of collecting
data. In fact these activities are quite standardized and, according to the interviews
and the quality manual, their length and complexity do not vary significantly
across patients. Hence, this model assumes that the duration of these activities is the
same for all patients and correspondently the standard deviation across patient is
nearby zero.
In order to understand the impact of the different level of intensity of care on costs
let’s take the example of the activity “nurse assistance”. The time spent in performing
 QRAM
493.00 – Cholecyst laparoscopic surgery
11,2 Activity Average length SD length
typology Activity Source (minutes) (minutes)

Activities Reservation of medical visits Interview 5 0

before surgery before the surgery
176 Anaesthetist visit Interview 20 0
Visit before the surgery – Interview 35 0
nurse
Visit before the surgery – Interview 70 0
surgeon
Surgery Surgery anaesthetist Surgery room 128 26
information system
Surgeon (2) Surgery room 136 52
information system
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Surgery nurse (3) Surgery room 385 79

information system
Hospitalization Medical assistance Interview þ nosological 15 0
database
Nurse assistance Nurse 315 266
database þ nosological
database
Activities after Visit after surgery – nurse Interview 35 0
surgery Visit after surgery – Interview 35 0
surgeon
Discharge – surgeon Interview 60 0
Visit after discharge – Interview 5 0
administrative
Table I. Visit after discharge – nurse Interview 15 0
Illustrative report of Visit after discharge – Interview 15 0
activities performed and surgeon
their average length on
the DRG 493 Note: “Cholecyst laparoscopic surgery”

the activity changes across different AAs belonging to different levels of intensity
of care. According to our records, the activity “nurse assistance” in the AA “intensive
therapy”, characterized by high intensity of care, requires much more time
(915 minutes) than in the AA “day surgery” (222 minutes), of medium intensity of
care and in the AA “hospitalization breast unit” (161 minutes), of low intensity of care.
The reason is due to the different level of intensity of care and implies that the higher is
the intensity of care the higher is the length of activities and resource consumption. In
accordance with Cinquini et al. (2009), the activity “nurse assistance” is influenced by
the severity of care: each AA has homogeneous typologies of patients in terms of
severity (high, medium-high, medium, low severity) and in terms of resources
consumption accordingly. Hence, the duration of activities can be considered a first
element to contemplate in the planning and individuation of resource assignment.
(2) Calculation of the capacity cost rate. According to Kaplan and Anderson (2007),
the development of the TDABC model requires the calculation of the capacity cost rate
of the department, in our case for SODs and AAs of Department A. The capacity cost
rate is calculated as follows:
 Cost of Capacity Supplied Time-driven
Practical Capacity of Resources Supplied activity-based
costing
The numerator of the ratio, Cost of Capacity Supplied, is the total cost of fixed resources
assigned to SOD or AA under analysis. It represents, in monetary terms, the available
capacity used to perform the activities.
Fixed resources (and related costs) assigned to SODs are mainly medical staff, while 177
fixed resources assigned to AAs are nursing staff and machineries (the letters in the
form of the depreciation).
Fixed costs traced to SODs may be both actual and figurative. The latter includes
the costs of university teaching doctors and trainee doctors (advanced students in
medicine). In fact the university employs and pays these doctors to teach and do
research, but they also provide services to the hospital, thanks to a special agreement
between hospital and university. Hospital does not incur in costs, but university
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teaching doctors and trainee doctors actually contribute to hospital activities and
outputs and are formally assigned to a SOD. For this reason their figurative cost was
computed in the cost of activities.
In particular, the figurative cost of university teaching doctors was calculated
considering the average hourly cost of a hospital doctor working in the same SOD and
the actual amount of hours worked for hospitals (provided by the informatics register
of attendance). The figurative cost of trainee doctors was calculated considering the
average hourly cost of a hospital doctor working in the same SOD and the amount of
working hours estimated by the Responsible of Sanitary Services of the Department,
because actual hours were not recorded for this category of doctors.
The denominator of the ratio, Practical Capacity of Resources Supplied, represents the
available capacity in terms of time, i.e. the time at disposal of the available resources in
order to perform activities. This measure is derived from the digital register of
attendances of personnel. We further decreased this amount of time to consider meetings
and breaks, by a percentage estimated by the Responsible of Sanitary Services of the
Department A. Specifically, the amount of hours recorded was decreased by 20 percent for
hospital doctors, by 10 percent for nurses, by 40 percent for university teaching doctors.
The percentages of reduction are different for these three categories, because the time
resulting from the register of attendances already considers meetings and breaks in the
case of nurses, while it includes also time spent in education in the case of hospital doctors.
Table II provides the example of capacity cost rate calculation for a sample AA and
SOD.
Table II identifies for each SOD and AA the total cost of the resources (Cost of
Capacity Supplied ), the available capacity expressed in terms of minutes (Practical
Capacity of Resources Supplied ) and the capacity cost rate (cost per minute). The table
furthermore specifies the nature of costs as actual or figurative.
Table II provides a first set of information useful to support decision-making. This
information is the available capacity in terms of minutes, i.e. the time available to
perform activities and the capacity cost rate that determines the cost of activities,
together with their length.
(3) Calculation of the indirect cost per patient. The cost of activities results from
multiplying the time spent in performing activities and the capacity cost rate of SODs
and AAs performing the specific activity.
 QRAM
Practical Capacity
11,2 Total capacity cost rate
cost (e) (minutes) (CCR) (e)
Unit code and Typology
SOD/AA denomination of cost Resource (A) (B) (A/B)

178 AA 2000 – operating Actual Equipment 37,727 1,292,924 0.0292

theatre A (depreciation)
Personnel 693,755 1,292,924 0.5366
(nurses)
Total 0.5658
2001 – operating Actual Equipment 66,659 1,576,683 0.0423
theatre B (depreciation)
Personnel 906,701 1,576,683 0.5751
(nurses)
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Total 0.6173
2016 – intensive Actual Equipment 12,915 544,080 0.0237
therapy (depreciation)
Personnel 254,615 544,088 0.4680
(nurses)
Total 0.4917
2286 – hospitalization Actual Personnel 85,310 154,875 0.5508
medical and surgical (nurses)
cardiology
2325 – week surgery Actual Personnel 34,238 78,125 0.4383
– generic surgeries (nurses)
SOD 1161 – generic Actual Personnel 309,646 263,325 1.1759
oncologic surgery (nurses)
Figurative Personnel 57,196 60,800 0.9407
(trainee doctors)
Total 2.1166
1171 – breast unit Actual Personnel 84,368 90,007 0.9373
surgery (doctors)
Figurative Personnel 35,528 47,379 0.7499
university
Table II. teaching doctors
Capacity cost rate Personnel 27,355 36,480 0.7499
calculation for a sample (trainee doctors)
of SODs and AAs Total 2.4371

It is important to note that the cost of two different patients could differ even if under
the same DRG. In practice it depends upon the units and the related capacity costs,
which have treated the patients. As a possible reason consider, for instance, the
differences in the cost of similar units (Operating theatres A and B) of Table II.
A further step in the analysis of the cost per patient and per DRG, not possible in this
project, would be to trace all costs to the patient, including direct costs (such as
drugs, consumable, medical and surgical devices, prosthesis, meal and laundry).
The traceability of direct cost to patient will be soon available with the implementation
of the computerized clinical folder that will allow to trace all the costs to each patient.
In this way there will be the possibility to individuate the full cost per patient to compare
with the DRG tariff.
 The recognized importance of calculating the cost per patient or pathway with Time-driven
TDABC is confirmed by the discussion in the “follow-up” group. In this sense an activity-based
accountant of a Tuscany hospital, meeting the agreement of the participants, said:
costing
We need to implement activity-based costing techniques in order to calculate the cost of the
patient, a pathway or a group of pathways (Financial Controller, Hospital 12).
(4) Analysis of the cost per patient and the cost of (un)used capacity. Information 179
regarding the cost of activities per patient within SODs and AAs may be aggregated in
a different way so that several cost analysis per SOD and AA may be performed.
A first analysis may allow the comparison of the cost of activities across SODs and AAs
within the same DRG. As illustrative example we can consider the average cost of
activities (total cost of activities/number of activities performed) for a sample of SODs and
AAs contributing to the group of “activities before surgery” for DRG 493 – “Cholecyst
laparoscopic surgery”. The cost of the same activity, “visit before the surgery – surgeon”,
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may vary from the e64.3 of SOD 1177 to the e90.7 of SOD 1161.
More broadly, differences among the costs of the surgeries depend on the length of
performed surgeries and on the differences among the capacity cost rate. Differences
among the costs of the nurse assistance depend on the duration of the activities and on
the differences among the capacity cost rate. Of course, the higher is the level of intensity
of care required by patients the higher is the length of these activities, as remarked in
Table II. For other activities the cost may vary across SODs or AAs depending on
differences between the capacity cost rates. Understanding the different cost of activities
across SODs and AAs may help in better organizing the work, because it is an element to
consider when deciding in which SOD or AA performing activities is more convenient
(because the capacity cost rate or the average duration of activities is lower). Other
elements to consider, in addition to costs, may be the quality of services provided, the
presence of particular skills or competences, a particular specialization required, etc.
Another element should also be considered in assigning workload: the level of
capacity usage of the organizational unit. In this respect, the report providing the
average cost of activities per unit (AAs or SODs) in the same DRG should be analysed
and crossed with the report concerning the percentage of used and unused capacity per
SODs and AAs reported in Table III. The latter provides, for a sample of SODs and
AAs, the level of used capacity (total cost of activities according to the TDABC model)
and the Cost of Capacity Supplied. For example, services provided by highly specialized
and skilled SODs (or AAs) presenting high cost of activities and high capacity usage
might be increasingly demanded, but this would imply the consideration of additional
resources to allocate to them to meet the additional demand. SODs (or AA) with high
cost of activities and low capacity usage might be downsized or redesigned to reduce
costs and increase demand of service produced.
As showed in Table III, the percentage of unused and used capacity may vary across
units. The example of the unit 2325 – week surgery general surgery – is insightful.
The 2 23 percent underlines an overuse of capacity supplied (for example due to
personnel’s overtime). This highlights that the availability of resources in this AA
should be expanded or that demand of activities generated towards this AA should be
reduced to avoid overload. On the opposite, other SODs or AAs with low capacity usage
could be merged or reduced, so that savings may be redirected to over utilized units.
This is strictly linked with the decision-making process of the hospital and the
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11,2

180

Table III.
QRAM

Percentages of used

in a sample of units
and unused capacity
SOD/ Total cost of Available % of used % of unused
Code – unit AA Typology of cost activities (e) resources (e) capacity capacity

2325 – week surgery general surgery AA Actual 42,353 34,238 123.7 223.70
1166 – surgical cardiology SOD Actual 311,316 393,876 79.04 20.96
2039 – surgical hospitalization D AA Actual 376,177 527,174 71.36 28.64
2070 – surgical hospitalization AA Actual 137,436 197,166 69.71 30.29
digestive apparatus
2001 – operating theatre B AA Actual 645,001 973,361 66.27 33.73
2032 – intensive urgent therapy AA Actual 298,489 513,366 58.14 41.86
2061 – cardiology hospitalization B AA Actual 155,407 276,944 56.12 43.88
2286 – hospitalization medical and AA Actual 264,949 474,288 55.86 44.14
surgical cardiology
2065 – intensive therapy – medical AA Actual 133,807 251,021 53.31 46.69
and surgical specialities
1171 – breast unit SOD Figurative (personnel – university 41,738 84,368 49.47 50.53
teaching doctors)
1171 – breast unit SOD Actual 63,623 128,604 49.47 50.53
1171 – breast unit SOD Figurative (personnel – trainee 40,600 82,066 49.47 50.53
doctors)
2289SUB – intensive therapy medical AA Actual 253,061 514,308 49.20 50.80
and surgical cardiology
2037 – hospitalization surgeries A AA Actual 187,765 386,688 48.56 51.44
(major surgery)
2140 – hospitalization surgery chest AA Actual 93,011 222,119 41.87 58.13
1201 – anaesthesia and intensive care SOD Actual 270,196 650,139 41.56 58.44
1201 – anaesthesia and intensive care SOD Figurative (personnel – university 8,480 20,404 41.56 58.44
teaching doctors)
 budgeting process. In this sense the Responsible of Sanitary Services of the Department Time-driven
A (Hospital Alfa), after looking at the report, said: activity-based
I would really need these types of information when contracting the budget for my costing
Department.
In considering capacity usage it is important to evaluate that in some cases a certain
percentage of unused capacity is required in order to face extraordinary events and 181
in order to perform other managerial activities (such as ordering drugs for patients or
managing beds in the ward) and has to be carefully considered by doctors and nurses.
This cost information should be interpreted also in the light of the peculiarities of
public hospitals. These hospitals are not commercial firms but rather providers of services
that depend on the needs of the population. Every SOD and AA focuses on addressing
specific pathologies (or types of patients): for example if a SOD does not provide services,
maybe the population does not require its services because other pathologies are more
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frequent. Hence, the presence of SODs and AAs with low capacity usage does not
necessarily mean that they are not efficient in carrying on current activities, maybe they
do not have a sufficient number of patients considering the resources available for them.
This kind of report may support hospital managers in better distributing resources
where required, maintaining in the meanwhile the same level of total hospital costs.
This policy may also allow to maintain a level of service able to face increasing health
demands without increasing costs and/or saving money and meet the objective
imposed by spending review, which clearly stated that the use of beds, personnel and
equipment must be rationalized and cannot be increased and that the maintaining or
closing of units will be based on the analysis of used capacity.
It is worthwhile to recall that the evaluation of the performance of SODs and AAs
should not stop here, but it would require a broader analysis such as other efficiency
and quality indexes.

4. Results from the empirical analysis: the impact of TDABC and IR

This section describes the impact of the TDABC model developed via the IR approach,
as emerging from the discussion of the IR (“follow-up” and “restricted”) groups and
from further evidences collected after the conclusion of the project.
First, as emerged during the discussion, the IR group appreciated the TDABC
reports because they provide a clear representation of the cost drivers, as factors
causing costs. Clinicians also felt “comfortable” with the “clinical oriented” language
provided by the TDABC model and were willing to adopt this information in the
decision making process. In fact, the potential of TDABC in healthcare stands not only
in the more feasible and effective costing approach according with the complexity of
hospital settings, but also in the link with a “process view” (i.e. clinical pathways in
healthcare), that makes the clinicians more comfortable and interested in the result of
cost calculation and increases the level of their “cost consciousness”.
Second, the adopted IR supported accounting change. Clinicians are the dominant
coalition and the strength of their ideologies can underpin the resistance of professionals
to accounting change, particularly when they are not adequately involved in the change
process (Burns and Scapens, 2001; Broadbent et al., 2001; Hassan, 2005). On the opposite,
the involvement of clinicians, enhances accounting change outcomes because change is
 QRAM seen not only in terms of complying with economic issues, but as an effective aid to real
11,2 improvements in managing clinical work and its costs.
Third, the peculiarity of the adopted IR approach, in particular the interaction and
discussion between the follow-up and the restricted group, started a process of
learning, which cannot’ be obtained in a discussion limited to inner actors.
This process of learning stimulated hospitals of the group to start a process of
182 accounting innovation based on collaboration between financial controllers and
doctors. Feedbacks collected one year after the conclusion of the project demonstrate
the learning process started by the IR project. For example, some hospitals are now
attempting to introduce process analysis finalized to support the budget negotiation, as
described in the following sentence by a financial controller:
We have started to work on a sort of bill of material for activities. We started with the
surgical Department and we worked with doctor C (the Head of Department). Together, we
mapped costs for a certain number of surgeries. Next step will be to use that information to
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build a budget, we are moving in that direction [. . .] (Financial Controller, Hospital 10).
Other hospitals have started to introduce process analysis aiming to improve processes
and to better manage the use of some resources. In some cases the aim was also to
introduce structural changes, such as closing of wards, based on the analysis of
capacity usage. The following quote by a Sanitary Manager describes the work that
hospitals are currently doing thanks to a Sanitary Managers’ direct commitment:
Next year we will close a ward because there is a low occupancy rate of beds [. . .] this will
allow to use these beds for other activities. This has been possible, because a deep analysis of
costs and activities, developed within a team composed by clinicians and controllers has been
done (Sanitary Manager, Hospital 1).
This quote underlines two main lessons learned and applied by hospitals:
(1) the potentialities of introducing activity-based tools; and
(2) the importance of the collaboration between financial controller and clinicians
in developing such tools.

Two crucial points for the success of the implementation of accounting innovations are
particularly underlined here: the top management’s commitment and the jointly
commitment of participants to the IR project. To this aim both controllers and doctors
worked overtime to produce results from the IR project.
In this respect, Hospital Alfa is not a fully positive story: controllers and doctors
attempted to extend the model to the whole hospitals together with researchers’ support. To
this aim, a specific project with Hospital Alfa started but after more than one year the project
is still far to produce the potential results. The reason is that, despite the Sanitary Manager
appreciated the results and allowed to controllers and doctors to work on it, he was not
really committed to the project and was not available to invest further resources in this field.
At that level the requirement of cost information was more aggregated and less detailed
and the traditional accounting system was probably considered sufficient to this aims.

5. Concluding discussion
The increasing budget constraints in a condition of higher citizens’ demand of health
care services, introduce a major challenge for the management of public hospitals:
 improving the capability of managing the available resources maintaining citizens’ Time-driven
satisfaction without increasing costs. activity-based
Traditional accounting tools are not able to face this challenges because of their
inability to provide detailed and insightful cost information and to make clearer the costing
reasons of costs sustainment. Moreover, in a context dominated by professionals, the
design of accounting tools is further required to represent and manage resources by
activities, to avoid clinicians’ resistance and stimulate the use of cost information. 183
In such a critical operating framework, the paper has discussed the potentialities of
TDABC – through a case study applied by using an IR approach – in supporting the
management of hospitals by providing accounting information related to the use of
resources. TDABC makes clearer the reasons of costs sustainment, while the IR approach,
by involving various actors, makes accounting tools able to represent the actual flow of
costs and avoid possible rejections in a critical setting such as health care organizations.
Results suggest that TDABC applied using the IR approach may help hospitals in
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facing this challenge by:

.
supporting “transparency”, which means clarity about accountability for
activities performed and associated costs (i.e. number of patients, number of
treatment, number of surgeries); and
.
facilitating informed resource allocation according to the activities performed or
required in the perspective of the efficiency in resource usage.

Concerning the latter point, resource distribution, TDABC focuses on situations of

over-absorption of costs, i.e. when an excessive amount of activities is performed in
relation to resources available, and situations of under-absorption of costs, i.e. when a
limited amount of activities is performed in relation to resources available. In providing
this information, TDABC supports decisions such as a re-organization of hospital
activities and a re-distribution of resources according to activities performed. In
addition, activities may be assigned to less expensive units resulting from TDABC cost
analysis, as long as the quality or the typology of service is similar.
The informed re-distribution of fixed resources may support hospitals in
maintaining or increasing services, according to citizens’ needs without increasing
total costs of fixed resources. In fact the total amount of fixed resource may be better
managed and distributed across the organization.
This research, by underlining the potentialities and the weaknesses of TDABC
applied using an IR approach, contributes to literature on accounting change and
provides recommendations for effective accounting change in hospitals.
In this respect, our findings address three elements that must coexist simultaneously:
(1) the involvement of the users of organizational actors and in particular of the
dominant coalition via participative approaches;
(2) the identification of tools suitable with respect to the users of information,
i.e. clinicians – and their operative environment; and
(3) top management commitment in order to implement and systematically use
accounting innovations in the organization.

Regarding (1), organizational actors, if involved, do not resist to accounting change.

Rather, they can put their knowledge into the development of accounting tools which, by
 QRAM this way, become able to represent the flow of costs properly. Considering (2), the
11,2 identification of “clinical oriented tools” further avoids clinicians’ resistance and may
increase clinicians’ use of accounting information in decision making. Regarding (3), top
management commitment results fundamental in assuring all the investments required
to implement and systematically use accounting innovations. Otherwise the risk is for
accounting innovation to remain only pilot project without further expansion.
184 Several limitations affect the research. First, even if the application of TDABC is
quite simple, there is the need of good informative tools in order to provide process and
elaborate data. In this respect, as an example, the possibility to trace all direct costs
(such as drugs or prostheses) to the patient would increase the potentialities of this tool
giving the possibility to determine a full cost per patient or a cost per DRG. This would
also add information to be used in other decision-making process at a higher level. For
example, reorganization of hospitals in order to accomplish the DRG tariff or informed
proposals for a revision of DRG tariffs might be supported by this kind of information,
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as well as decisions to develop or change protocols or procedures in the light of an

activity cost analysis (Aird, 1996).
Second, the TDABC model can both support hospitals in enhancing internal
transparency and conducting a better management of available resources if other
measures of quality, efficiency, patients’ satisfaction, etc. can be associated to the
TDABC model to provide a complete picture of hospital processes performance and to
support fully informed decision-making.
Finally, it is worth noting the possible consequences of the extension of the
application of TDABC to all hospitals of a regional HC system, such as that of Tuscany
Region. Particularly in the current condition of budget constraints, the potential of
TDABC to provide the cost of unused capacity may reveals a crucial information to
support informed decisions of reallocation of resources from segments in which they
are in excess towards areas in which they are lacking and overloaded.
If TDABC reports become publicly available, “transparency” may be ensured also
with respect to citizens, who are the main stakeholders of the public healthcare system
by financing the healthcare system through taxation. In this respect, “transparency” in
term of diffusion of results may have a major further effect on hospitals: by influencing
their reputation in comparison, it may induce hospitals toward more
efficiency-oriented decisions.

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Corresponding author
Cristina Campanale can be contacted at: c.campanale@sssup.it

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