Linking cost control measures to health care services by using activity-based information

Canada's health care institutions are under pressure to limit expenditures, maintain or increase productivity, and assimilate new technology. Even though more than 75% of hospital operating expenditures are controllable, according to a study by the Economic Council of Canada, cost systems are needed to provided essential management information. The new Canadian Management Information System (MIS) Guidelines for health care are designed to provide accurate cost measurement of patient treatment and to help managers evaluate the impact of planned program changes on areas of operational responsibility. Other potential benefits of implementing the MIS guidelines include correcting dysfunctional funding of health care units with benchmarking and setting high reporting standards for resource use at the patient level (MIS, 1991). This paper focuses on one important aspect of bringing these costs under control by examining the relation between cost deviations (variances) and underlying cost drivers. Our discussion will lead to the conclusion that incompatibility of DRG methodology and traditional cost accounting models may be an important source of cost variability within diagnostically-related disease groupings.