The use of activity based costing in the healthcare industry: 1994 vs. 2004.

The steep rise in the cost of providing healthcare services in the United States has lead to pressure to identify the causes of this increase and to find ways to more effectively utilize the nation's healthcare resources. As in other industries, this has lead to a search for better management tools and techniques.

Ten years ago we examined the adoption of one of these tools, activity based costing, in the healthcare industry. In this paper we present the results of a follow-up survey that examines various issues related to the adoption of ABC/M at the present time and compare the results of this survey to those obtained a decade ago. Issues examined include the satisfaction of healthcare organizations with their costing systems, the reasons for the adoption or nonadoption of ABC/M by healthcare organizations, the rate of utilization of these systems, and the perceived costs and benefits of ABC/M systems. We also compare ABC/M to other performance management (PM) tools.

ACTIVITY BASED COSTING

First appearing on the management accounting scene in the mid 1980s, activity-based costing promised to revolutionize the way costs were allocated to the products produced and services performed by organizations. Numerous articles have appeared since its introduction, detailing the effectiveness of this technique for a variety of purposes. Activity based management, which emphasizes managing the activities an organization performs rather than the results of those activities, involves a paradigm shift in management, a move from a functional view of an organization to a cross-functional one. The effectiveness of activity based costing/management (ABC/M) is taken as given by many, and the technique is now routinely covered in managerial and cost accounting textbooks.

Yet reservations remain concerning this technique. These include (a) a concern that fairly stringent conditions must be met for ABC systems to provide relevant information (Noreen, 1991; Maher and Marais, 1998), (b) individual and organizational resistance to ABC as a new management tool (Argyris and Kaplan, 1994), (c) implementation concerns, including the high cost of designing and implementing such systems and the necessity of designing and supporting new information systems (Udpa, 1996; Canby, 1995), and (d) a concern that ABC is a passing fad, the management technique du jour, to be shortly replaced by another (Robinson, 1990).

THE HEALTHCARE INDUSTRY

The rapid increase in healthcare costs has resulted in healthcare providers facing increased pressures to provide services to their patients in a more effective and efficient manner. Additionally, they have faced challenges maintaining their revenues. This study encompasses a period in which significant changes occurred in the way healthcare providers were reimbursed for the services they provided. Hospitals, which had seen their reimbursements for services provided to Medicare patients transitioned (from 1983 to 1987) to a prospective payment system (PPS), saw this payment system further implemented for capital costs (from 1991 to 2001) and outpatient services (2000). Similarly, effective with cost reporting periods beginning on or after July 1, 1998, Medicare skilled nursing facility (SNF) were reimbursed based on a PPS basis. Continued implementation of the PPS reimbursement methodology continues, with development of the inpatient prospective payment system (IPS) for Medicare payment of hospital services provided in inpatient psychiatric hospitals and psychiatric units of acute care and critical access hospitals, effective for cost reporting periods beginning on or after January 1, 2005 (over a three-year transition period).

To meet the economic challenges faced by the industry, and to provide low-cost high-quality services, healthcare organizations need to develop stringent control over their operations. Essential tools for accomplishing this goal are these organizations' cost accounting systems. Ramsey (1994) notes that a cost accounting system should accomplish three goals: it should promote cost efficiency, it should allow the organization to maximize its resources by managing the services it offers its patients, and it should highlight opportunities for continuous improvement of operations. Traditional costing systems used by healthcare organizations fail to meet these objectives.

THE ADOPTION OF ABC/M IN THE HEALTHCARE INDUSTRY

Given the cost pressures on the healthcare industry and its limited resources, it might be expected that the industry would welcome a tool such as ABC/M, and indeed, when ABC/M started to migrate from manufacturing to services industries, the general level of interest in the technique in the healthcare industry appeared to be high.

Numerous articles describe the potential benefits to healthcare organizations from adoption of ABC/M systems. Ramsey (1994) recommends that hospitals consider implementing ABC systems. Chan (1993) states that by combining ABC with standard costing hospitals can better plan and control the cost of the services they provide. Udpa (1995) notes that, "Pricing ... is now an important criterion through which hospitals compete for business from large organizational buyers.... This price competition and the resulting importance of accurate cost information make the need for a new cost system urgent in most hospitals." Ross (2004) notes additional potential benefits from adoption of ABC/M, including the ability to identify areas where cost reduction can be achieved, to manage customer demand, and to optimize an organization's product line, while King et al. (1994) note its possible use as a performance measurement tool.

These recommendations have not gone unheeded, and ABC/M systems have been implemented by healthcare organizations ranging from HMOs to hospitals to insurers. Shields (2001) describes the use of ABC to reduce distribution costs for hospitals. Lawson (1996, 2003) describes the use of ABC by an HMO to better quantify the cost of various services that it performed and to better determine the profitability of the various products that it offered. Additional ABC implementations have been described in the areas of nursing management (Storfjell, 1996), a full service renal dialysis clinic (West and West, 1997), a microbiology laboratory (Gordts, 1996), a rehabilitation facility (Dowless, 1997), a healthcare insurer (Thurston et al., 2000), and an outpatient clinic (Canby, 1995). West and West (1997) indicate that approximately 22 percent of all US and Canadian hospitals were using ABC systems at the time of their study.

Given these "success" stories, and the time that has elapsed since the introduction of ABC/M in the healthcare industry, it might be reasonable to believe that ABC/M has achieved relatively widespread usage by now. Anecdotal evidence and prior research appear to indicate that this is not the case. For example, Shields (2001, p. 15) notes that while "hospitals can become more efficient using ABC ... few hospitals use activity-based costing internally"; Dowless (1997, p.86) similarly indicates that "activity-based costing (ABC) is not widely used in the healthcare industry."

This raises the question as to why more healthcare organizations do not use this methodology. Udpa (1995) notes, "There are numerous challenges in implementing an ABC system in hospitals". Major concerns are the time required to collect data required by an ABC system and the attendant cost of such data collection, difficulty (or impossibility) of collecting required data, and the failure of organizations to view ABC as more than just an accounting exercise. King et al. (1994, p.148) express a similar sentiment, indicating that "the identification of sufficiently homogeneous cost pools and cost drivers at a level of aggregation which would not result in a hospital ABC system being impractically detailed and expensive is viewed as a major hurdle to ABC implementation."

A similar observation was made by Canby (1995) who notes that while use of ABC can help eliminate the wasting of healthcare resources, development of such a system can be a labor-intensive, time-consuming process. In addition to these considerations, Dowless (1997) points to the need to hire additional personnel experienced in implementing ABC/M and to modify existing information management systems as reasons for lack of implementation of these systems. Given all of these issues regarding implementation, it is no wonder that healthcare organizations may be reluctant to implement ABC/M systems.

THE STUDY DESIGN

In a previous study of the use of ABC/M in the US healthcare industry, the author surveyed organizations on the mailing list of The Institute for the Advancement of Healthcare Management (IAHCM). This Institute, affiliated with the School of Business, the University at Albany, State University of New York, has as its purpose assisting healthcare organizations in the New York Capital Region in developing innovative approaches to operations and effective solutions to problems by applying the basic principles of management to the business of healthcare. The results of this survey, conducted in 1994, have been previously published (Lawson, 1994).

The current (2004) survey was similarly mailed to organizations on the IAHCM's mailing list. In addition, in order to increase the sample size and achieve greater geographic diversity, the survey was also mailed to the chief administrator at a random sample of healthcare organizations throughout the State of New York. Of the 404 surveys mailed, 46 were returned as undeliverable and 52 usable responses were received, for a response rate of 14.5% (of delivered surveys). While this is lower than the 22.8% usable response rate reported by Innes et al. (2000), it is still a relatively high response rate for research of this kind. An examination of the responses indicated that the survey participants were reflective of the overall study population.

While differing slightly in the research questions that they contain, the purpose of both surveys was the same: to study the use of ABC/M by healthcare organizations. More specifically, these surveys examined:

* The satisfaction of healthcare organizations with their accounting systems,

* The extent to which ABC/M is being used by healthcare organizations,

* Benefits from implementing ABC/M systems,

* Reasons for not implementing ABC/M,

* The design of these systems,

* Obstacles faced in implementing ABC/M, and

* How ABC/M compared to other management tools and techniques.

The survey contained ten questions regarding organizations' current accounting system. Responses were provided on a 5-point Likert scale ranging from "strongly agree" (1) to "strongly disagree" (5), with "neither agree nor disagree" (3) being at the midpoint. This was followed by two questions regarding the use of quality improvement programs (yes/no; type of programs implemented). Respondents were also asked about their use of a variety of other management tools and techniques and their usefulness (rated on a 5-point Likert scale). There were 15 questions regarding beliefs regarding ABC/M with answers being either of the yes/no type or provided on the 5-point Likert scale described above. Finally, the survey concluded with six "demographic" questions regarding attributes such as the organization's size, number of employees, location (urban/suburban/rural), and payer mix.

RESULTS

Familiarity with ABC/M

Survey respondents were generally familiar with ABC/M, and this familiarity has increased over the past ten years. In 1994, 27 percent of survey respondents responded that they were familiar with ABC/M. Another 29 percent stated that they were somewhat familiar with ABC/M and 44 percent were unfamiliar with the technique. This compares to 38 percent of 2004 survey respondents stating that they were familiar with ABC/M (an increase of 11 percentage points), 35 percent stating that they were somewhat familiar with the tool (an increase of 6 percentage points), and the remaining 27 percent being unfamiliar with ABC/M. Given the recent introduction of this technique in the healthcare industry in the early 1990's the increased familiarity with this technique was expected.

Utilization of ABC/M Systems

This increased awareness of ABC/M might be expected to translate into greater usage of this tool. This is not the case. The results of the 2004 survey indicated that 14 percent of the healthcare organizations responding to the survey utilize an activity-based cost/management system. This is down slightly from the 16 percent that utilized ABC/M in 1994, although the difference is not statistically significant. This result is surprising given than in 1994 activity-based costing was a relatively new technique, only beginning to be utilized in service industries such as healthcare, Given the typical adoption pattern of management techniques, it would have been expected that the use of ABC/M would have increased over the last decade.

An analysis of ABC/M usage by type of healthcare organization is presented in Exhibit 1 (the difference between the 52 responses received for the 2004 survey and the 36 organizations reflected in Exhibit 1 is due to the 16 respondents who were not familiar at all with ABC/M and who were therefore unable to answer this question). It can be seen that while the overall use of ABC/M remained virtually unchanged, its usage has changed dramatically in the various industry segments, with usage by hospitals declining from 21% to 8%, while usage by organizations other than hospital and long-term care facilities (LTCF) increased from 8% to 20%. The lower usage of ABC/M by hospitals might be expected, given their greater complexity and therefore greater cost of implementing an ABC/M system.

The failure for the rate of utilization of ABC/M to increase in the healthcare industry is only part of the bleak outlook regarding ABC/M implementation. As shown in Exhibit 2, the percentage of organizations considering adoption of ABC/M in the future decreased from 18 percent of survey respondents in 1994 to only 7 percent a decade latter. However, despite the overall decline in the usage of ABC/M, none of the organizations responding to the 2004 survey reported dropping an existing ABC system. (This apparent "paradox" is can be explained by different samples of organizations responding to the two surveys).

The healthcare organizations surveyed included both for-profit and not-for-profit entities. The utilization of ABC/M might be expected to differ among these two groups, given the possible greater motivation of for-profits to control costs and maximize profits. The results of the 2004 survey confirm these expectations, with the usage of ABC being greater for for-profit organizations than for not-for-profits (see Exhibit 3). Use of tools such as these may help explain, at least in part, the greater profitability of for-profit organizations (Younis et al., 2004, p. 99).

The propensity to use ABC/M is affected by an organization's payer mix. As shown in Exhibit 4, organizations that have adopted ABC/M tend to have a smaller proportion of Medicare patients than non-adopters. It may be that organizations with a high proportion of Medicare patients--and which thus have a large portion of their revenues paid based on a fixed schedule set by the US federal government--feel less of a need to accurately know the costs of the activities they perform in order to set their fee schedules in a manner that will maximize their profitability.

The same relationship held true with regard to the proportion of uninsured patients and ABC/M utilization, with organization with a higher percentage of uninsured patients being less likely to use ABC/M (see Exhibit 5).

Satisfaction with Conventional Accounting Systems

One factor that might explain the failure of ABC/M to be more widely used is the degree of satisfaction of organizations with their conventional accounting systems: organizations that are satisfied with their existing (conventional) accounting system would not feel the need to incur the expense and effort associated with implementing an ABC/M system. Our survey asked a series of questions examining the satisfaction of healthcare organizations with their current accounting systems. Responses were provided on a 5-point Likert scale ranging from "strongly agree" (1) to "strongly disagree" (5), with "neither agree nor disagree" (3) being at the midpoint. Exhibit 6 lists these questions, along with the responses obtained.

Analysis of the data from both surveys indicates that the attitude of healthcare organizations towards their accounting systems has changed little over the last decade. The responses to the questions in Exhibit 6 indicate that, on average, healthcare organizations are dissatisfied with their accounting systems. These organizations, on average, slightly agree that their current accounting systems do not provide all of the information required for managerial decision-making (question 1). The average response was virtually the same for 1994 and 2004.

One area of improvement was the perceived ability of an organization's financial reports to reflect operational improvements. In 1994 organizations believed, on average, that they had achieved considerable operational improvement which had not been reflected in the financial statements. In the latter survey, on average the respondents neither agreed nor disagreed with this statement (question 4).

With regard to their cost accounting systems, healthcare organizations were noncommittal as to whether their cost accounting system provided accurate and useful information (question 3; average 2004 response = 2.94). Respondents to the 1994 survey agreed that there was a need for an improved cost accounting system to support managerial decision-making (question 2; average response = 2.51). The average response (2.10) to this question by the 2004 respondents indicated an even higher level of agreement with this statement, although the difference is not statistically significant. Respondents to both surveys agreed (question 7) that improvement in service or product costing information would give their organization a competitive advantage.

One commonly cited failing of conventional accounting systems is their inability to determine the cost of the various activities performed by an organization. While the respondents to the 1994 survey only marginally agreed with this statement (question 5), the level of agreement by the 2004 respondents was greater. One perceived consequence of this failing is the inability to reflect actual cost in patient billings (question 6).

Relationship between ABC/M Adoption and Quality Improvement Programs

Many healthcare organizations are implementing quality improvement (QI) programs, most frequently in customer service and internal staff areas (see Exhibit 7). In 1994, the surveyed organizations agreed that their accounting systems provided information that supported these improvement efforts. A decade later, this was not the case (Exhibit 6, question 8). In both surveys, respondents felt that a greater ability to determine the cost of activities would assist their efforts in this regard (Exhibit 6, question 9).

It might be expected that organizations that have initiated QI programs, with their emphasis on improvement of organizational activities and processes, would be more likely to deploy ABC/M systems. However, the presence of QI programs does not appear to affect the rate of usage of ABC/M systems (see Exhibit 8). This relationship (or lack thereof) is the same in 2004 as it was a decade earlier.

Comparison of ABC/M to Other Performance Management Techniques

Healthcare organizations, like firms in any industry, have a wide choice of performance management (PM) techniques from which to choose when adopting techniques to better manage their operations. Previous research (Stratton et al., 2004) has show a strong relationship between the rate of utilization of a PM tool and its perceived usefulness. Does this relationship hold for healthcare organizations, and does the perception of the relative usefulness of ABC/M compared to other PM tools help explain the degree of utilization of these systems?

In order to explore these questions, participants in the 2004 survey were asked to indicate which of a list of PM tools were utilized by their organization. They were also asked to indicate on a seven point Likert scale the extent to which they agreed that a given tool was important to their organization, with a response of one indicating strong agreement as to the importance of the tool and a response of seven indicating strong disagreement.

Exhibit 9 summarizes the results of these questions. It can be seen that budgeting was the most widely utilized tool, followed by benchmarking and strategic planning. These three tools are also considered the most important of the PM tools (i.e., received the lowest average rating on our scale). Conversely, the least utilized tool, Six Sigma, was also considered the least important.

The close relationship between the usage of a tool and its perceived importance can be portrayed graphically as in Exhibit 10, which clearly indicates the strength of this relationship.

In Exhibit 10, ABC/M is represented by the observation furthest below the regression line. This indicates that given its perceived importance as a PM tool, it is relatively underutilized. This may be due to the newness of the technique relative to some of the other more established tools. On the other hand, it may be due to the perceived difficulty in implementing an ABC/M system. In order to explore this idea, we next examine the perceived costs and benefits of implementing ABC/M systems.

Perceived Benefits of ABC/M Systems

Exhibit 11 presents five statements regarding possible benefits of ABC/M systems that were contained in both the 1994 and 2004 surveys. Respondents were asked to indicate the extent to which they agreed with each of the statements on a five point Likert scale, with a response of one indicating strong agreement and a response of five indicating strong disagreement.

The advantages of an ABC/M system over a conventional costing system appear to be well understood. Respondents, on average, agree that use of an ABC/M system would enable better understanding of their organization's operations, provide better costing information, and better assist process improvement efforts. This was the case in both 1994 and 2004, with no significant difference (based on the Wilcoxon sign-rank test) between the responses for those two years.

Conversely, significant differences exist between the responses of organizations that utilize ABC/M systems and those that do not. As might be expected, users of ABC/M systems more strongly agreed as to the benefits of those systems than nonusers.

One result of concern is the higher level of agreement from 2004 survey respondents than from 1994 respondents with the statement that the primary benefit of ABC/M systems was cost control (p = 0.05). The possible perception that ABC/M is simply a costing exercise could preclude its use as part of a more pervasive management control system.

Reasons for Nonadoption of ABC/M Systems

Given the general dissatisfaction of healthcare organizations with their existing accounting systems, discussed earlier, and the general perception that deployment of ABC/M systems bring benefits to organizations implementing such systems, the questions arises as to why more organizations have failed to implement these systems. Survey respondents who have not implemented ABC/M were asked to give the reasons that their organizations had not adopted this technique. Ten reasons for non-adoption of ABC/M were supplied, and additional space was provided for write-in answers. Exhibit 12 summarizes the responses to these items.

Respondents to the 2004 survey were much more likely to give reasons for nonadoption of ABC/M than respondents to the prior survey. However, the reasons cited for nonadoption, when ranked in order of frequency of selection, have approximately the same ranking in both surveys.

The cost of designing and implementing an ABC/M system was a top concern to respondents of the 1994 survey, and it remained the top concern a decade later. Related to this concern was the second most cited reason for nonadoption in 2004: the need to create new systems for data capture and processing. These reasons were followed by a lack of commitment by senior management and the failure to gain acceptance from managers.

These results are consistent with those from a study conducted by Innes et al. (2000), which found that the support of top management was the key factor in the success of an ABC/M system. They also found that of non-adopters of ABC systems, over half rejected ABC based on its perceived complexity and the need for new information systems to generate activity data.

ABC/M System Implementation

Among organizations implementing ABC/M systems, there appears to be a reluctance to adopt this methodology as the sole costing system for their organization. This was indicated in two ways. First, survey respondents were asked to indicate their level of agreement (on a 5-point Likert scale) with the statement that ABC/M systems should be implemented as a stand-alone system, parallel to a conventional costing system. The average response by 1994 survey respondents was 2.78; for 2004 respondents it was 2.86. Thus for both surveys, the average response was close to 3 ("neither agree nor disagree"). The average response to this question by ABC/M users (3.33) was significantly (p = 0.04) higher than for non-users (2.64). However, while statistically significantly different, both average responses are again close to "neither agree nor disagree".

A second indication of the reluctance of ABC/M implementers to use ABC/M as the sole costing methodology is indicated by the preponderance of organization that have only partial implemented ABC/M systems: in 1994 no respondent had fully implemented ABC/M; in 2004 only one had.

Similar results regarding the extent of implementation have been reported elsewhere for ABC/M system users in general. In this case, in addition to the general reluctance of ABC users to rely on ABC/M as their sole costing model, the unique regulatory reporting requirements of the various segments of the healthcare industry in the US may contribute to the need for dual costing systems.

Attributes of ABC/M systems

Survey respondents which employ ABC/M systems were asked how long they had utilized those systems. While the data is relatively sparse, the data from the 1994 survey is consistent with adoption of a relatively new technique, with all adopters having used ABC/M for less than three years, and most having used it for only one to two years (see Exhibit 13). Ten years later, most of the companies using this technique had used it for over three years, with there being only one organization that had recently adopted the technique. It would thus appear that fewer organizations are adopting this technique currently as compared to when it was first introduced in this industry. This is consistent with our earlier stated finding regarding the decreased interest in implementing these systems.

ABC/M systems appear to have slightly increased in complexity over the past decade. Exhibit 14 indicates that both the number of cost pools and the number of cost drivers employed in ABC/M systems have increased over time. While this trend can be viewed positively in that it may indicate expanded usage of ABCA/M systems within organizations, it also may have a down-side in that the increased complexity of these systems may result in higher implementation costs, discouraging future implementation of ABC/M systems.

Of the healthcare organizations that have implemented ABCA/M systems there appears, from the limited data available from this survey, to be a trend away from the use of consultants and towards the in-house development of these systems. This can be generally viewed as a positive development. As Lawson et al. (2004, p. 37) indicate, while the use of consultants can facilitate implementation of a performance management system, consultants should be used judiciously, with an organization ensuring that the use of consultants does not replace the involvement of its own personnel, which is necessary for organizational acceptance of the system.

To see whether the reasons non-adopters of ABC/M systems have not adopted these systems are, in fact, actual problems in implementing these systems, ABC/M systems users were asked to list the problems encountered in designing and implementing their systems. In 1994 the most prevalent problem was lack of resources (including computer support), although getting acceptance from the various level of the organization and designing the ABC/M model were also mentioned (see Exhibit 15). In 2004, obtaining adequate resources appears to no longer be a problem, although designing the model and getting employee acceptance remained problematic.

SUMMARY AND CONCLUSIONS

Familiarity with ABC/M systems has increased over the last decade. However, contrary to expectations, use of these systems has declined slightly over that time period, as has the percentage of organizations contemplating implementing such systems. These results are consistent with those of Innes et al. (2000) who found similar results in a study of the UK's largest companies over the 1994 to 1999 time period. They report a decline in ABC/M usage from 21.0% to 17.5% over this period, and a decline in organizations considering its use from 29.5% to 20.3%. Thus the decline in both usage of these systems and the intent to implement these systems appears to be international in scope, and not confined solely to the healthcare industry.

ABC/M is viewed as providing relatively high value when compared to other performance management techniques. The technique is view by both users and nonusers alike as being able to provide a better understanding of an organization's operations and more useful cost information than conventional costing systems, with users agreeing more with these views than nonusers. Hurdles to implementing ABC/M systems include the cost of such systems, data processing concerns, and lack of senior management commitment.

It might be expected that ABC/M implementation would be related to the presence of QI programs. This is not the case. This may indicate that organizations have not made the leap from activity-based costing to activity-based management. Reinforcing this conclusion is the fact that most implementations tended to be only partial, indicating a possible lack of commitment to ABC/M and a failure to move beyond using ABC solely to get better costing data. Additional support for this position is provided by the indication of ABC/M users that they were unsure, on average, as to whether the primary benefit of ABC/M is to control cost.

The focus of organizations on the "cost" rather than the "management" part of ABC/M will lead many to conclude that the benefits of ABC/M do not exceed the rather substantial cost of implementing and maintaining such a system. This failure is understandable, as most articles regarding ABC implementation in healthcare (and in general) have focused on the new information provided by "dicing" cost data in a new manner. Relatively unexplained is how an organization implementing ABC/M transitions to a process-oriented organization.

This is unfortunate since by making this leap an organization can achieve significant performance improvement. Organizations need to manage their processes and the activities that make up these processes. Solely focusing on obtaining a refined estimate of costs will result in a failure to realize the potential of activity-based management. In deciding whether or not to implement an ABC/M system, organizations need to look at all of the potential benefits that can be realized from these systems, as well as consider their ability to make the organizational changes necessary to achieve those benefits.

REFERENCES

Argyris, C., & Kaplan, R. (1994). Implementing new knowledge: The case of activity based costing. Accounting Horizons, 8(3):83-105.

Canby IV, J. (1995). Applying activity-based costing to healthcare settings. Healthcare Financial Management, 49(2): 50-55.

Chan, Y.L. (1993). Improving hospital accounting with activity-based costing. Health Care Management Review, 18(1): 71-77.

Dowless, R. (1997). Using activity-based costing to guide strategic decision making. Healthcare Financial Management, (Jun.): 86-90.

Gordts, B. (1996). The containment of cost of health care. Acta Chir Belg, 96(2): 56-58. Innes, J., Mitchell, F., & Sinclair, D. (2000). Activity-based costing in the UK's largest companies: a comparison of 1994 and 1999 survey results. Management Accounting Research, 11: 349-362.

King, M., Lapsley, I., Mitchell, F., & Myes, J. (1994). Costing needs and practices in a changing environment: The potential for ABC in the NHS. Financial Accountability & Management, 10(2): 143-160.

Lawson, R. (1994). Activity-based costing systems for hospital management. CMA Magazine, 68(Jun.): 31-35.

Lawson, R. (1996). Process-based costing at Community Health Plan. Journal of Cost Management, (Spring): 31-43.

Lawson, R. (2003). Development of an HMO cost management system. Research in Healthcare Financial Management, 8(1): 31-41.

Lawson, R., Stratton, R., & Hatch, T. (2004). Timing and precision: Implementing a scorecarding system successfully. CMA Management, 78(1): 34-37.

Maher, M., and Marais, M. (1998). A Field study on the limitations of activity-based costing when resources are provided on a joint and indivisible basis. Journal of Accounting Research, 3(1): 129-142.

Noreen, E. (1991). Conditions under which activity-based costing systems provide relevant costs. Journal of Management Accounting Research, 3(1): 59-168.

Ramsey, R. (1994). Activity-based costing for hospitals. Hospital & Health Services Administration, 39(3): 385-396.

Robinson, M. (1990). Contribution margin analysis: no longer relevant/Strategic cost management: the new paradigm. Journal of Management Accounting Research, 2(1): 1-32.

Ross, T. (2004). Analyzing health care operations using ABC. Journal of Health Care Finance, 30(3): 1-20.

Shields, T. (2001). Hospitals turning to activity-based costing to save and measure distribution costs. Healthcare Purchasing News, 25(11): 14-15.

Storfjell, J. (1996). Bridging the gap between finance and clinical operations with activity-based cost management. Journal of Nursing Administration, 26(12): 12-17.

Stratton, W., Lawson, R., & Hatch, T. (2004). Scorecarding as a management coordination and control system. Cost Management, (May/Jun.): 36-42.

Thurston, K., Kelemen, D., & MacArthur, J. (2000). Cost for pricing at Blue Cross and Blue Shield of Florida. Management Accounting Quarterly, (Spring): 1-10.

Udpa, S. (1996). Activity-based costing for hospitals. Health Care Management Review, 21 (3): 82-96.

West, T., & West, D. (1997). Applying ABC to healthcare. Management Accounting, (Feb.): 22-33.

Younis, M., Forgione, D.A., Kahn, M., & Barkoulas, J. (2003). Hospital Profitability in Florida: A Revisitation. Research in Healthcare Financial Management, 8(1): 95-102.

Raef A. Lawson Institute of Management Accountants 

Address for correspondence: Raef A. Lawson, Institute of Management Accountants, 10 Paragon Drive, Montvale, NJ 07645-1760 USA, [e-mail].

EXHIBIT 1
ABC USAGE BY TYPE OF ORGANIZATION

                              ABC USERS          NON-ABC USERS

Type of Organization        2004      1994      2004       1994

Hospitals                   1 (8%)    5 (21%)   11 (92%)   16 (67%)
Long-term care facilities   1 (11%    1 (11%)   7 (78%)    8 (89%)
Other                       3 (20%)   1 (8%)    9 (60%)    8 (67%)
Total                       5 (14%)   7 (16%)   27 (75%)   32 (71%)

                                DON'T KNOW

Type of Organization           2004      1994

Hospitals                   0 (0%)    3 (13%)
Long-term care facilities   1 (11%)   0 (0%)
Other                       3 (20%)   3 (25%)
Total                       4 (11%)   6 (13%)

EXHIBIT 2 ORGANIZATIONS CONSIDERING THE USE OF ABC/M

            CONSIDERING USE OF ABC/M

SURVEY   YES             No        UNSURE

1994     5 (17.9%)   16 (57.1%)   7 (25.0%)
2004     2 (6.7%)    20 (66.7%)   8 (26.7%)

EXHIBIT 3 USE OF ABC/M BY FOR-PROFIT STATUS

                 Use ABC   Don't Use ABC   Don't Know

For profit       3 (33%)        5 (55%)       1 (11%)
Not-for-profit   2 (8%)        22 (85%)       2 (8%)

EXHIBIT 4
EFFECT OF PERCENTAGE OF MEDICARE PATIENTS ON USAGE OF ABC/M

                 Use ABC   Don't Use ABC   Don't Know

<20%             3 (60%)   11 (41%)        0
>20%-30%         1 (20%)   7 (26%)         1 (33%)
>30%-40%         0         4 (15%)         1 (33%)
>40%-50%         0         3 (11%)         0
>50%-60%         1 (20%)   1 (4%)          0
>60%-70%         0         1 (4%)          0
>70%-80%         0         0               1 (33%)

EXHIBIT 5
USAGE OF ABC BY PERCENT OF PATIENTS UNINSURED

                 Use ABC   Don't Use ABC   Don't Know
<1%                 1            5             1
1 to <5%            3           10             1
5 to <10%           0            5             0
10 to <20%          0            0             0
20% or more         1            5             0
Not applicable      0            2             1

EXHIBIT 6
SATISFACTION WITH EXISTING ACCOUNTING SYSTEM

                                            Strongly
                                   Survey    Agree     Agree

 1. Current accounting system       1994       7         13
    does not provide all of the              (20%)     (37%)
    information required for        2004       10        25
    managerial decision-making.              (20%)     (48%)

 2. There is a need for an          1994       10        10
    improved cost system to                  (29%)     (29%)
    support managerial              2004       13        30
    decision-making.                         (25%)     (58%)

 3. Our current accounting          1994       5         11
    system provides accurate and             (14%)     (31%)
    useful service or product       2004       5         21
    cost information.                        (10%)     (40%)

 4. Our department has achieved     1994       6         15
    considerable operational                 (18%)     (44%)
    improvements, which are not     2004       0         15
    reflected in our current                  (0%)     (29%)
    financial reports.

 5. It is difficult to determine    1994       6         13
    the cost of the various                  (17%)     (37%)
    activities performed in our     2004       5         30
    organization using                       (10%)     (58%)
    information provided by
    our current accounting
    system.

 6. Our current accounting          1994      n/a        Na
    system is useful for            2004       8         34
    customer/ patient billing.               (15%)     (65%)

 7. Actual costs are accurately     1994       Na       n/a
    reflected in customer/          2004       3         15
    patient billing.                          (6%)     (29%)

 8. Improvement in service or       1994       17        10
    product costing costing                  (49%)     (29%)
    information would give our      2004       12        29
    organization a competitive               (23%)     (56%)
    advantage.

 9. Our current accounting          1994       4         24
    system provides information              (10%)     (57%)
    useful in guiding process       2004       1         14
    improvement efforts.                      (2%)     (46%)

10. Improvement in tracing the      1994       11        22
    costs of activities                      (26%)     (52%)
    performed would facilitate      2004       7         39
    process improvement efforts.             (13%)     (75%)

                                             Neither
                                            Agree or
                                   Survey   Disagree    Disagree

 1. Current accounting system       1994        5          8
    does not provide all of the               (14%)      (23%)
    information required for        2004        0          14
    managerial decision-making.               (0%)       (27%)

 2. There is a need for an          1994        5          7
    improved cost system to                   (14%)       (9%)
    support managerial              2004        1          7
    decision-making.                          (2%)       (13%)

 3. Our current accounting          1994        4          11
    system provides accurate and              (11%)      (31%)
    useful service or product       2004        2          20
    cost information.                         (4%)       (38%)

 4. Our department has achieved     1994        7          6
    considerable operational                  (21%)      (18%)
    improvements, which are not     2004       28          9
    reflected in our current                  (54%)      (17%)
    financial reports.

 5. It is difficult to determine    1994        3          10
    the cost of the various                   (9%)       (29%)
    activities performed in our     2004        4          11
    organization using                        (8%)       (21%)
    information provided by
    our current accounting
    system.

 6. Our current accounting          1994       n/a        n/a
    system is useful for            2004        3          3
    customer/ patient billing.                (6%)        (6%)

 7. Actual costs are accurately     1994       n/a        n/a
    reflected in customer/          2004       16          12
    patient billing.                          (31%)      (23%)

 8. Improvement in service or       1994        3          4
    product costing costing                   (9%)       (11%)
    information would give our      2004        7          4
    organization a competitive                (13%)       (8%)
    advantage.

 9. Our current accounting          1994        6          6
    system provides information               (14%)      (14%)
    useful in guiding process       2004       10          17
    improvement efforts.                      (19%)      (33%)

10. Improvement in tracing the      1994        8          1
    costs of activities                       (19%)       (2%)
    performed would facilitate      2004        5          1
    process improvement efforts.              (10%)       (2%)

                                                         Ave.
                                            Strongly   (SA = l,
                                   Survey   Disagree   SD = 5)

 1. Current accounting system       1994       2         2.57
    does not provide all of the               (6%)
    information required for        2004       3         2.52
    managerial decision-making.               (6%)

 2. There is a need for an          1994       3         2.51
    improved cost system to                   (9%)
    support managerial              2004       1         2.10
    decision-making.                          (2%)

 3. Our current accounting          1994       4         2.17
    system provides accurate and             (11%)
    useful service or product       2004       4         2.94
    cost information.                         (8%)

 4. Our department has achieved     1994       0         2.38
    considerable operational                  (0%)
    improvements, which are not     2004       0         2.88
    reflected in our current                  (0%)
    financial reports.

 5. It is difficult to determine    1994       3         2.74
    the cost of the various                   (9%)
    activities performed in our     2004       2         2.52
    organization using                        (4%)
    information provided by
    our current accounting
    system.

 6. Our current accounting          1994      n/a        n/a
    system is useful for            2004       4
    customer/ patient billing.                (8%)       2.25

 7. Actual costs are accurately     1994      n/a        n/a
    reflected in customer/          2004       6
    patient billing.                         (12%)       3.06

 8. Improvement in service or       1994       1         1.29
    product costing costing                   (3%)
    information would give our      2004       0         2.06
    organization a competitive                (0%)
    advantage.

 9. Our current accounting          1994       2         2.48
    system provides information               (5%)
    useful in guiding process       2004       0         3.02
    improvement efforts.                      (0%)

10. Improvement in tracing the      1994       0         1.98
    costs of activities                       (0%)
    performed would facilitate      2004       0         2.00
    process improvement efforts.              (0%)

                                             Signifcance Level

                                                 [H.sub.o]:

                                            [[micro].sub.1994] =
                                   Survey    [[micro].sub.2004]

 1. Current accounting system       1994           0.791
    does not provide all of the
    information required for        2004
    managerial decision-making.

 2. There is a need for an          1994           0.200
    improved cost system to
    support managerial              2004
    decision-making.

 3. Our current accounting          1994           0.996
    system provides accurate and
    useful service or product       2004
    cost information.

 4. Our department has achieved     1994           0.008
    considerable operational
    improvements, which are not     2004
    reflected in our current
    financial reports.

 5. It is difficult to determine    1994           0.493
    the cost of the various
    activities performed in our     2004
    organization using
    information provided by
    our current accounting
    system.

 6. Our current accounting          1994            n/a
    system is useful for            2004
    customer/ patient billing.

 7. Actual costs are accurately     1994            n/a
    reflected in customer/          2004
    patient billing.

 8. Improvement in service or       1994           0.145
    product costing costing
    information would give our      2004
    organization a competitive
    advantage.

 9. Our current accounting          1994           0.055
    system provides information
    useful in guiding process       2004
    improvement efforts.

10. Improvement in tracing the      1994           0.784
    costs of activities
    performed would facilitate      2004
    process improvement efforts.

                                                 [H.sub.o]:
                                   Survey      [micro] = 3.0

 1. Current accounting system       1994           0.048
    does not provide all of the
    information required for        2004           0.009
    managerial decision-making.

 2. There is a need for an          1994           0.041
    improved cost system to
    support managerial              2004           0.000
    decision-making.

 3. Our current accounting          1994           0.799
    system provides accurate and
    useful service or product       2004           0.734
    cost information.

 4. Our department has achieved     1994           0.002
    considerable operational
    improvements, which are not     2004           0.223
    reflected in our current
    financial reports.

 5. It is difficult to determine    1994           0.244
    the cost of the various
    activities performed in our     2004           0.003
    organization using
    information provided by
    our current accounting
    system.

 6. Our current accounting          1994            n/a
    system is useful for            2004           0.000
    customer/ patient billing.

 7. Actual costs are accurately     1994            n/a
    reflected in customer/          2004           0.803
    patient billing.

 8. Improvement in service or       1994           0.000
    product costing costing
    information would give our      2004           0.000
    organization a competitive
    advantage.

 9. Our current accounting          1994           0.002
    system provides information
    useful in guiding process       2004           0.192
    improvement efforts.

10. Improvement in tracing the      1994           0.000
    costs of activities
    performed would facilitate      2004           0.000
    process improvement efforts.

Na = not asked. Level of significance determined using Wilcoxon
sign-rank test

EXHIBIT 7
QUALITY IMPROVEMENT PROGRAMS AT HEALTHCARE ORGANIZATIONS

                             1994                  2004

                             Yes         No        Yes         No

Have implemented quality   41 (91%)    4 (9%)    49 (94%     3 (6%)
  improvement program(s)

Type of Program:
  Customer service         25 (57%)   19 (43%)   42 (81%)   10 (19%)
  Internal staff           26 (59%)   18 (41%)   40 (77%)   12 (23%)
  Vendor                   16 (36%)   28 (64%)    9 (17%)   43 (83%)

EXHIBIT 8
EFFECT OF PRESENCE OF QI PROGRAM ON ABC/M USAGE

                    1994                  2004

             Have QI     No QI      Have QI     No QI
Use ABC      Programs    Progams    Programs    Programs

Yes           6 (15%)    1 (25%)     5 (14%)    0 (0%)
No           29 (71%)    3 (75%)    26 (74%)    1 (100%)
Don't know    6 (15%)    0 (0%)      4 (11%)    0 (0%)
Total        41 (100%)   4 (100%)   35 (100%)   l (100%)

EXHIBIT 9
USAGE AND PERCEIVED IMPORTANCE OF VARIOUS MANAGEMENT TOOLS.

                                          AVERAGE IMPORTANCE RATING
                                            (SA = 1, SD = 7)

                                                  ABC       ABC
Management Tool/Technique      Use Tool   Total   Users   Nonusers

Benchmarkin                    31 (86%)   1.97    1.67      2.13
Target Costing                 16 (44%)   2.50    2.50      1.75
Pay for Performance            14 (39%)   3.07    3.00      3.30
Six Sigma                      10 (28%)   3.50    4.00      3.44
Reengineering                  14 (39%)   3.00    2.00      3.40
Performance Management         11 (58%)   2.33    2.75      2.25
Activity Based Costing/Mgmt.   15 (42%)   2.27    2.67      2.27
Total Quality Management       23 (64%)   2.43    2.60      2.50
Theory of Constraints           6 (17%)   3.17    4.00      3.00
Budgeting                      34 (94%)   1.85    1.17      1.96
Break-even Analysis            24 (67%)   2.21    2.75      2.18
Scorecarding                   10 (28%)   3.20    3.00      3.22
Strategic Planning             30 (83%)   1.80    1.80      1.86
Economic Profit (EP)            9 (25%)   2.11    1.00      2.25

SA = strongly agree; SD = strongly disagree

EXHIBIT 11
PERCEIVED BENEFITS OF AN ABC/M SYSTEM

                                           1994     2004    Sig.
                                          Survey   Survey   Level

Use of an activity based costing system    2.13     1.94    0.810
would help us understand our
operations better than a conventional
accounting system.

Activity based costing systems provide     2.00     2.03    0.654
more useful product costing information
than conventional accounting systems.

ABC/M systems provide more useful          2.25     2.14    0.611
information for process improvement
programs than conventional accounting
systems.

ABC/M systems should be implemented as     2.78     2.86    0.544
stand-alone systems that exist parallel
to existing cost accounting systems.

The primary benefit of ABC/M is to         3.17     2.69    0.053
control cost.

                                          Use     Don't    Sig.
                                          ABC    Use ABC   Level

Use of an activity based costing system   1.50    2.25     0.013
would help us understand our
operations better than a conventional
accounting system.

Activity based costing systems provide    1.50    2.19     0.024
more useful product costing information
than conventional accounting systems.

ABC/M systems provide more useful         1.80    2.31     0.074
information for process improvement
programs than conventional accounting
systems.

ABC/M systems should be implemented as    3.33    2.64     0.041
stand-alone systems that exist parallel
to existing cost accounting systems.

The primary benefit of ABC/M is to        2.90    2.90     0.951
control cost.

Level of significance determined using Wilcoxon sign-rank test

EXHIBIT 12
REASONS FOR NONADOPTION OF ABC/M.

Reason                                            1994     2004

The costs to design and implement an ABC/M       11.1%   58.82%
system are prohibitive.

We would need to create new systems for data      6.7%   48.28%
capture and processing.

There is no senior management commitment to a    11.1%   44.83%
tool such as ABC/M.

We would have too many problems in gaining        4.4%   27.59%
acceptance of the ABC/M system from managers.

ABC/M systems are too complex.                    2.2%   24.14%

ABC/M would be too disruptive.                    2.2%   20.69%

We don't use ABC/M; however, we perform           2.2%   17.24%
Activity Analysis to determine our value
added and non-value activities.

We would have too many problems identifying       2.2%   13.79%
activity-cost pools and drivers.

We would not be able to obtain all the data       2.2%   10.34%
necessary to implement ABC/M.

We do not have the types of products/services     n/a    10.34%
or competitive environment that would benefit
from an ABC/M system.

ABC/M is limited in its ability to explain        2.2%    6.90%
cost variability.

ABC/M is limited in its ability to assist cost    2.2%    6.90%
control.

EXHIBIT 13 LENGTH OF TIME USING ABC/M

                     1994      2004

< 6 mos.             0 (0%)    0 (0%)
6 mos. to < 1 yr.    1 (25%)   1 (33%)
1 yr. to < 2 yrs.    2 (50%)   0 (0%)
2 yrs. to < 3 yrs.   1 (25%)   0 (0%)
> 3 yrs.             0 (0%)    2 (66%)

EXHIBIT 14
NUMBER COST POOLS AND DRIVERS USED IN ABC/M SYSTEMS

         Number of       Number of
         cost pools      cost drivers

         1994    2004    1994    2004

3-5       1       0       0       0
6-10      1       0       l       0
11-20     0       1       1       1
21-30     0       2       0       1

EXHIBIT 15
DIFFICULTIES ENCOUNTERED IN DESIGNING AND IMPLEMENTING ABC/M SYSTEMS

                                                         1994   2004

Lack of adequate resources to effectively implement       2      0
  desired system
Difficulties in selling the concept of ABC/M to           1      0
  senior managers
Difficulties in selling the concept of ABC/M to           l      2
  middle managers
Difficulties in selling the concept of ABC/M to           l      0
  accountants
Difficulties in selling the concept of ABC/M to           1      0
  line employees
Difficulties in selecting cost drivers                    0      2
Difficulties in defining distinct activities              l      2
Allocating costs to activities in a manner that           1      l
  reflects true causation
Inadequate computer system support to implement system    l      1