Design of an activity

Healthcare systems are under pressure to adopt contemporary management practices including activity-based costing (BBC).

This paper reports an intensive case study of the design of an BBC system in a newly-organized public foundation hospital in Spain. The study covered several years and was based on interviews, observations and extensive review of documentation. The analysis draws on an Institutional sociology framework. A primary finding Is that there was no conflict beet;en physicians and administration, unlike the previous wisdom that such conflict is inherent in BBC implementation in hospitals.Training and involving medical personnel in management, as well as educating implementers in medical issues represented major reasons for no conflict.

Although not generalist outside this specific context, this study provides the basis for broader empirical research. Keywords: activity-based costing; BBC; BBC system design; healthcare; Institutional sociology; public sector; Spain. Reference to this paper should be made as follows: Erikson, S. D.

, Ritual, l. And Cunningham, G. M. (2011) 'Design of an activity based costing system for a public hospital: a case study, Into.J.

Managerial and Financial Accounting, Volvo. 3, No. 1, up. L- 21. Biographical notes: Scott Erikson Is an Associate Professor of Accounting at Colorado universities in Europe, including the Institution De Empress Business School in Madrid, Spain.

He obtained his PhD in Accounting from the University of North Texas in the USA in 1987. His areas of research include cost management, management control and accounting information systems. He has publications in several countries. Copyright 2011 Indifference Enterprises Ltd. 2 S. D.

Erikson teal. Ignition Ritual is the Dean of Inebriate University in Madrid Spain. He has previously been on the faculties of several Spanish universities including the Institution De Empress Business School and the SKIES Business School. He obtained his PhD in Accounting from the University of Completeness in Spain in 2000. His areas of research include cost management and management control. He has publications in several countries.

Gary Cunningham is a Professor of Accounting at Jöinköping International Business School BIBS) in Sweden.He has previously been on the faculties of major universities in the USA, Europe and the Middle East. He obtained his PhD in Accounting from the University of Texas at Austin in the USA in 1976. He primarily researches management control issues, especially governmental entities and multinationals and international aspects of accounting.

Introduction Significant changes in public sector management from the sass, often called new public management (PM), reflect significant changes in consumers' mindsets who expect private-sector service levels (Hood, 1995; Olsen et al. 1998; Lolls De Lima, 2001). Public sectors managers believed public institutions could adopt and be held to, similar levels of private-sector accountability (Cunningham and Harris, 2001). Public health institutions, hospitals particularly, experienced pressure to improve management (Ham, 1997; Reef and Scott, 1998) responding to governmental and public pressure to emphasis cost management and control by adopting private- sector techniques like activity-based costing (BBC).These would not only provide cost-saving benefits, but also signal intentions to improve efficiency and effectiveness.

This paper describes a case study of BBC system design in a new public foundation hospital in Spain focusing on design elements leading to successful conflict-free implementation, including managing resistance. The design tag has been largely ignored in the BBC literature (Arnold and Lapse, 2005). It expands on previous studies of institutional forces' impacts on hospital management other countries (Maroon and Pompano, 1998).Furthermore, it focuses on costing rather than control functions, the primary focus of previous studies. The next section discusses institutional sociology in hospital cost management contexts, followed by descriptions of hospital management and BBC within this framework.

The following sections describe research methods, the Spanish healthcare system, details of the BBC design in the case-study hospital, and a including discussion presenting implications and contributions.Institutional sociology Organizational theories posit that organizational diversity results from adaptation to environmental pressures and organizations' survival requires conformity to institutional pressures (Cavalries and Dirtiest, 1988; Oliver, 1991; Carbon and Manias, 2001). Hence, public hospitals should respond to institutional pressures to seek legitimacy from Design of an activity based costing system for a public hospital 3 governmental health and finance ministries and organizations directly supervising their operations.Institutional theory emphasizes that organizations' behavior does not always reflect rational analysis (Isakson and Cornelius, 2004) but may attempt to conform to social and cultural norms (Scott, 1987, 1995). For extensive discussion and critique of institutional theory and sociology see Hopper and Major (2007).

Institutional sociology emphasizes cultural, normative and cognitive factors and suggests organizations must appear legitimate; behavior may be directed more towards environmental acceptance than technical efficiency (Scott, 1992, 1995, 2001; Baxter and Chug, 2003).These pressures produce isomorphism, processes that force organizations to resemble others facing similar environmental conditions (DiMaggio and Powell, 1991). Hence, organizations ultimately conform to institutional pressures to achieve legitimacy, institutional support and stability. By contrast, market-based theories view organizations as economic transacting and rational decision making sites (Scott, 1995, 2001); Baxter and Chug (2003) suggest behavior is directed towards internal technical efficiency due to market pressures.

Isomorphism is either competitive (Hannah and Freeman, 1977, 1984) or institutional (DiMaggio and Powell, 1983).PM advocates presume that rational behavior improves efficiency and effectiveness and can coexist with isomorphic legitimacy seeking. Furthermore, increasingly in private and public organizations, legitimacy depends on demonstrating efficiency and rationality (Lapse, 2001). Isakson and Cornelius (2004) conclude that institutional sociology approaches have provided new and different insights into contracting between venture capitalists and more contracting experience (also see Cornelius, 1997). In this study, the new Spanish foundation hospital is an entrepreneurial organization.Health ministry contractors are not entirely analogous to venture capitalists, but recent changes in contractual relationships between them and healthcare providers have introduced private-sector methods like BBC into the process similar to those required by venture capitalists (Ferguson and Lapse, 1989; Reef and Scott, 1998).

Typically, healthcare providers have been in weaker positions than fenders because of limited knowledge of their costs (Evokes, 1985; Ryan et al. , 1996; O'Connell and Feely, 1997; Richter et al. , 2001). Table 1 Exogenous and endogenous forces Researcher(s) Coercive isomorphismMimetic isomorphism Normative isomorphism DiMaggio and Powell (1983) Political influence: formal and informal pressures Uncertainty encourages imitation Professionalisms of the work force: more concerned with status than efficiency Scott (1995) Regulative: coercive rules, laws and sanctions Cognitive: taken for granted, symbolic, mimetic aspects of Normative: social beliefs and norms Cavalries and Dirtiest (1988) Formal and informal coercive pressure A more passive response Normative: legislation of professional autonomy Source: Irvine (1999) and Isakson and Cornelius (2004) 4Irvine (1999, discussed by Isakson and Cornelius, 2004) outlined an approach to understanding institutional theory social traditions in accounting for religious organizations with changing environments. Her delineation of religious organizations and changing environments has similarities to those of public hospitals. Table 1 presents exogenous and endogenous factors acting on and within organizations making them more homogeneous over time.

DiMaggio and Powell (1983) classified these forces as coercive, mimetic and normative isomorphism.In coercive isomorphism, external pressures such as the regulatory environment Scott, 1995), or demands of taxpayers, legislators, patients and their families and the public on hospitals affect institutional choice. DiMaggio and Powell (1983) suggest coercive isomorphism impacts are greatest when organizations like public hospitals are subject to legislative initiatives, economic, or moral imperatives. Mimetic isomorphism is the tendency to mimic successful organizations and is more likely to occur when there is a high degree of environmental uncertainty (DiMaggio and Powell, 1983).In new hospitals, uncertainty can motivate administrations to mimic established hospitals.

Equally important, it can motivate corollary participants like hospital physicians to mimic physicians in other hospitals. DiMaggio and Powell (1983), however, claim that institutions confident in their identity, internal structures, goals and abilities to achieve aims have little incentive to mimic others. The final framework factor of Irvine (1999), Scott (2001) and Isakson and Cornelius (2004) is normative isomorphism.Individuals trained in the same discipline and working in and what is acceptable (DiMaggio and Powell, 1983). Because of normative isomorphism, institutions like hospitals that draw on a standard pool of Workers' like Hessians find their ability to improvise new approaches is compromised because the Workers' often follow professional norms that are not always consistent with organizations' norms. Institutional sociology has been studied extensively, but not in system design contexts (Scott, 2001 ; Dacca et al.

, 2002).Studies of managing resistance to change in system design processes are particularly lacking. Hopper and Major (2007) and Major and Hopper (2005) for example, use institutional sociology to discuss BBC implementation in a for-profit telecommunications organization, but not sign issues. Moreover, because the firm was well established, they could not address such issues in newly created organizations like the hospital in this study. Difficulty in obtaining common strategies is supported by some studies (McGuire et al.

1997; West and West, 1997). They identify problems in the design and implementation stages of BBC, including the identification of activities, cost pools and drivers. Suggestions for addressing problems include focusing the initial design on specific subunits of the organization rather than the entire organization (Became et al. 2001 ; roller's, 2002).

This paper expands studies of institutional forces' impacts on management adaptation in hospitals by addressing managing resistance during BBC design.This approach is consistent with Oliver (1991) suggesting successful adoption of PM in Spanish hospitals should actively involve many strategic adoption choices rather than passively responding to the environment and complying with demands; successful PM employment should recognize that hospitals' responses to conformity pressures depend on why these pressures are being exerted, who is exerting them, what these erasures are, how they are being exerted and where they occur (Oliver, 1991). Hospitals and BBC in institutional settings 3. 1 Management processes of hospitals Hospitals are amongst public institutions most affected by PM because of reduced public funding and emphasis on performance measurement (Arnold and Lapse, 2004, 2005) and one response has been the adoption of contemporary management systems including BBC [see Jones and Degrade (2002) and Armstrong (2002) for history and critiques]. Extensive external pressure from PM advocates, coercive isomorphism, has motivated hospitals to implement BBC.Cost control is a major issue for hospitals changing from a fee-for-service model, in which providers could pass on cost increases, to managed care in which providers are paid fixed predetermined fees (Ferguson and Lapse, 1989; Reef and Scott, 1998).

Payers without having realistic knowledge of their costs (Long et al. , 1983; Evokes, 1985; Ryan et al. , 1996; O'Connell and Feely, 1997; Richter et al. , 2001). Changing relationships between hospitals and payers were major elements of introducing market discipline.

Success, even survival of hospitals, especially under captivate yester with rates paid per procedure or per patient, depends on appropriate resource utilization and controlling costs per service unit (Brotherhood, 1990); both are focus of BBC. In changed healthcare environments, hospitals have advantages when contracting with payers when there are prospective and retrospective reviews of high volume procedures that assess resource utilization and BBC facilitates such reviews (Hushes and Holder, 1993). Moreover, adopting BBC provides not only economic benefits but also signals hospitals' intentions to improve efficiency.Such institutionalizing represents coercive isomorphism.

3. Physicians and hospital cost management Skepticism, political self-interest and control constrain organizations' willingness to conform, whereas capacity, conflict and awareness bound their ability to conform (Oliver, 1991). Responses to conformity pressures depend on why pressure is exerted, by whom, what pressures are exerted, how and in what environmental context. In hospitals, pressures to adopt BBC come from funding agencies seeking economic efficiency.Physicians however, often perceive this objective conflicting with their clinical healthcare objectives. The non-profit nature of hospitals and lack of formal eructation controls compound physicians' skepticism (Mechanic, 1976).

Major and Hopper (2005) reported similar skepticism and resistance to BBC by production engineers in the telecommunications company. Production engineers are analogous to physicians because each group has institutional norms and views themselves as dominant professionals crucial for organization success.Lee and Mathematician (1994) observed different groups' conflicting interests when investigating structural elements influencing healthcare system implementations, arguing that successful BBC implementations require common strategies, which is official in hospitals given different service delivery goals. Many organizations are confronted with inconsistent institutional expectations and internal objectives. Institutional expectations of fenders and hospitals administrators may be based on PM whereas those of physicians are autonomy over decision making. In hospitals, perceived conflicts of interest between physicians and management result from different solicitation and ensuing values.

In Spain, hyper-bureaucracy compounds conflicts because physicians are civil servants employed by the state not hospitals. The medical profession is the physicians' dominant solicitation agent Laurie, 1981; Drabber and Schwartz, 1991) with physicians oriented towards patient care (Alexander et al. , 1986) and the medical profession as the primary control who control core clinical processes (Frisson, 1975).Hospital management, however, is oriented towards efficient and effective use of economic resources for all patients consistent with overall needs (Alexander et al. , 1986). Core hospital processes dependent on physicians' expertise and significant autonomy, not subject to bureaucratic controls (Mechanic, 1976), compound conflicting orientations (Barley and Delbert, 1991; Drabber and Schwartz, 1991; Sucker, 1991).

Consequently physicians have substantial authority - their decisions commit 70 to 80% of hospital resources (Hillman et al. 1986; Flood and Scott, 1987) - with essentially no responsibility for the economic consequences (Young and Salesman, 1985; Werner et al. , 1987; Burns et al. , 1993; Abernathy and Lists, 2001). Two trends have intensified perceived conflict: firstly, physicians are increasingly integrated into the management structure (Abernathy and Sidewinder, 1990).

Secondly, funding via prospective payment schemes (Peps) which pay predetermined amounts for standard treatments ladled diagnostic related groups (Drugs) transfers economic risks from payers to hospitals.In response to Peps, hospitals seek to develop sophisticated budgeting and costing systems (Commodore and Abernathy, 1999) like BBC to capture resource consumption and profitability of product lines (Chug and Dieseling, 1991; Preston, 1992). 3. 3 Cost accounting and BBC in hospitals In traditional hospital cost systems, direct costs are related to revenue-producing units, and indirect fixed costs are not. Indirect costs are allocated to direct cost units using a step-down approach.

Ultimately, all costs are allocated to stand-alone deiced services, and then to Drugs and patients using arbitrary relative costs or relative values.Two problems with traditional approaches in Spain are that allocations are based on the US published rates with questionable validity in Spain, and per-unit intermediate costs are determined by actual volume not capacity measures. Studies in English-speaking countries have employed institutional sociology to examine hospitals' responses to pressures to adopt sophisticated management planning and control tools. Some (e.

G. , Abernathy and Chug, 1996) addressed fundamental criticisms of institutional sociology, namely neglect of power and interests.Others assumed that practices adopted to secure legitimacy are only symbolic and decoupled from operative internal systems (Minorities, 1994; Caruthers, 1995; Chug, 1995). Also, institutional sociology only provides insight into processes rather than achieved states (DiMaggio, 1988).

Considerable public sector reform introduced since the sass has met minor resistance (Hood, 1991; Olsen and Peters, 1996), but public-sector implementation of BBC has been difficult Cones and Degrade, 2002), especially in hospitals (Cob et al. 1993; Arnold and Lapse, 2004, 2005). Attention has focused on technical considerations for successful implementation (Hushes and Holder, 1993; Lapse and Moses, 1994; Rotor, 1995; Ritual, 2001), with less on managing resistance. Studies of BBC applications in hospitals (Hushes and Holder, 1993; Lapse and Moses, 1994; Rotor, 1995; Ritual, 2001; Arnold and Lapse, 2004), focusing on technical considerations note a perceived conflict of interest between physicians and management and potential conflicts when physicians collaborate.Physicians who place medical priorities above administrative ones and attempt to mitigate control yester are perceived as the primary cause of resistance; they often consider costing information as obstacles to the best possible treatment and perceive costing systems as another part of complicated hospital bureaucracy (Abernathy and Sidewinder, 1990). Moreover, BBC systems are expensive to install, maintain and update, further complicating the issue (Cob et al.

, 1993).Hushes and Holder (1993) found that need for significant changes in attitudes of hospital administrators who rejected BBC believing healthcare is fundamentally different from other sectors where it had been implemented. Lapse and Moses (1994) found that physicians directing clinical departments did not believe that sophisticated cost systems were necessary and were suspicious and unsupported. These authors stressed the need to educate clinical directors on benefits of BBC. This need for education was supported by Ritual's study (2001) of the Spanish healthcare sector.Data collection to implement BBC was identified as another conflict area because it depends entirely on owners of the data (Hushes and Holder, 1993).

Physicians are the primary data owners in hospitals and implementation teams must negotiate with Hessians rather than making information demands. BBC design necessitates a horizontal process view of hospitals' operating processes, contrasting with typical vertical view of hospitals based upon specialized functional divisions or departments (Hushes and Holder, 1993).Due to technical complexities of hospitals, BBC designers must rely on physicians to capture intricacies of hospital processes (Lapse and Moses, 1994; Arnold and Lapse, 2004). Drugs represent operating processes with protocols for related activities, tasks and operations that can be understood only via the descriptions and specifications.

No common language exists, however, for these protocols. BBC requires standardized protocols but design is frustrated by lack of common language. Nines and Mitchell (1995) indicate that process knowledge requirements removes BBC ownership from accounting functions, especially in hospitals.Furthermore, when there are cost reduction policies physicians may believe that BBC-generated information will be used for purposes other than the original stated objectives, such as analyzing under-utilized productive capacity (Lapse and Moses, 1994), resulting in friction between physicians and management. To address this potential resistance, Lambert and Rehears (1987) advocate education and training of clinical staff.

All observations suggest that physicians have power positions within hospitals and are expected to resist accounting systems that control or curtail their behavior (Abernathy and Sidewinder, 1995).Studies of information systems needed to capture medical resources utilized in Dress critical for design and implementation of BBC because of their proprietary knowledge. Without physicians' full collaboration and participation, even the first step in the BBC design may not be achieved. 8 Research method The research method involved an intensive case study of BBC design in Fundingön Hospital Alcohol (Foundation Hospital Alcohol) in a Madrid suburb conducted between June 1998 and May 1999, which coincided with the first phase, design and implementation; the second phase involved the actual usage of the system.

The study occurred when the Spanish healthcare sector was undergoing significant PM reforms, including creating new foundation hospitals like the Fundingön Hospital Alcohol, utilizing BBC from the outset, as models for other hospitals. In addition to data collected during interviews and site visits, we examined large numbers of public documents. We also made four visits to three other Madrid area hospitals to identify common and contrasting costing practices.Recognizing the value of longitudinal case studies (Galleried, 1991), additional visits were made to the case hospital six years later in 2006 for interviews with three key persons involved in BBC design and implementation. The study began by analyzing public documents including annual reports, governmental studies and internet literature, which provided important background information.

The main data for analysis were obtained through 15 hospital visits: here with the chief financial officer (CUFF) and the controller totaling ten hours and 12 remaining visits totaling approximately 36 hours.Notes were taken in all interviews. The first interview with the CUFF and controller discussed and diagnosed hospital cost accounting systems. We received BBC design documentation and the operational plan which included organizational charts and portfolios of medical services.

The second interview analyses top management's reasons for implementing BBC and discussed potential problems identified in the literature discussed above (Hushes ND Holder, 1993; Lapse and Moses, 1994; Rotor, 1995).The third interview discussed external problems including relations with the taxing authority, the hospital proprietor Institution National De la Salad (INSTALL, National Institute of Health) and the consulting firm hired to assist BBC design. Each of the remaining 12 visits to the hospital verified statements made by top management through observation and discussions with medical personnel.