Activity based costing

Activity based costing (ABC) is a key building block of Activity Based Funding (ABF). It is a costing methodology that identifies activities in an organisation and assigns the cost of each activity with resources of all products and services according to the actual consumption by each.

This will identify the correlation between a specific activity and the resources required to execute that activity, and then determining the cost of those resources. It should:

• promote cost efficiency
• allow the organisation to maximize its resources by managing the services it offers its patients
• highlight opportunities for continuous improvement of operations.

Victorian Cost Data Collection

Victorian public hospitals are required to report costs for all hospital activity, regardless of funding source, and are expected to maintain patient level costing systems that monitor service provision to patients and determine accurate patient-level costs. Health services report costed data annually to the Victorian Cost Data Collection (VCDC).

The collection acquires cost data from metropolitan, regional and sub-regional health services as per the Victorian health policy and funding guidelines. The cost data is used to:

• Refine the existing Victorian funding models
• Assist in the development of future funding models
• Enable analysis of cost data across health services
• Inform development of budget proposals
• Analyse the cost of health care
• Perform comparative benchmarking
• Inform best practice quality improvement initiatives
• Meet the cost data requirements of the National Health Reform Agreement (NHRA), via the National Hospital Cost Data Collection (NHCDC).

As part of the NHRA, Victoria uses the VCDC as the base data for submission to the Independent Hospital Pricing Authority’s (IHPA) NHCDC.

The NHCDC collects patient level cost data across the Commonwealth for the purposes of calculating national cost weights and determining the National Efficient Price (NEP) and National Efficient Cost (NEC).

Compliance

To ensure there is consistent, reliable and quality costed data, health services are to adhere to the Victorian Activity Based Costing (VicABC) documentation and its accompanying reference files and other guidance provided by the department as well as comply with the national Australian Hospital Patient Costing Standards (AHPCS) Version 4.0 or the most recent version available.

The VicABC provide a set of standard principles of costing that begin with a set of rules that are created to produce a level of uniformity, interchangeability, facilitate interoperability, reliability or means of comparison. They form the fundamental building blocks for activity-based costing by establishing consistent protocols that can be universally understood and adopted.

The rules outlined in the documentation will also assist health services to conform not only to the requirements for Victorian cost data collections but subsequently to the national requirements. Enabling a level of consistency in data between local, state, and national levels, instilling greater confidence in the data and ability to benchmark, compare findings and use in funding model developments.

The department as well as the Commonwealth expect the reporting of correct, audited, and reconciled quality cost data from health services.

The AHPCS incorporates a standard and business rule specific to review and reconciliation of source data. It states that a 'process of review is necessary to support and validate reported costs. Reconciliation of financial and non-financial information to source systems also helps to avoid errors and instils integrity and transparency in the results'.

The department also expects health services to examine their costed data for completeness across all services and have an assurance of the quality of the cost data that provides a level of understanding of the usefulness for analysis, benchmarking, reporting and use in funding models.

Underpinning this compliance is the requirement that health services complete a Data Quality Statement (DQS) where a signed declaration confirming adherence to the national and local requirements including the standards and acknowledging the validity and completeness of the data submitted.

Health services are also required to complete a Reconciliation report detailing the steps undertaken from source to final costed results. It is designed to assist the department to understand the completeness of a health service's final submission including the source data by which the VCDC is created and its reconciliation.

VCDC Technical Working Group

The VCDC Technical Working Group (VTWG), (formerly the Victorian Clinical Costing User Group), has been established to provide specific knowledge, guidance and expertise to inform relevant information and processes required for costing practitioners to ensure there is consistent, reliable and quality costed data allocated for all patients they treat.

The VTWG main objectives includes:

• Consistency in allocation methodologies used in costing across Victoria.
• Communication of Activity Based Costing (ABC) and Activity Based Funding (ABF) information between the Department of Health (the department) ABC and ABF teams and health services staff.
• Liaise with local and national organisations with regards to the profile and usefulness of costing in health services.
• Develop Victorian Patient Level Costing Standards that health services are to adhere and implement where the subject matter is Victorian-centric or not covered on the latest version of the Australian Hospital Patient Costing Standards.

Key functions of the VTWG

• Develop and document detailed allocation methodologies.
• Enable information exchange between health services and/or the department.
• Discussion and resolution of issues arising from ABC and ABF standards and policies both for Victoria and Nationally.
• Contribute to the development of education material to support all consumers of cost data.
• Liaising with other Departmental areas, hospital management and software providers to strengthen relationships, collaboration, and engagement with regards to the VCDC requirements, usage of cost data and support business and operational decision-making.
• Responding to the Independent Hospital Pricing Authority (IHPA) and/or Council of Australian Governments (COAG) with regards to Commonwealth ABF policy and ABC costing standards.

For more information, see Victorian Cost Data Collection.