How to track costs by department in a hospital
Total cost says little. Each department's cost, divided by what it produces, shows where the hospital is efficient and where it needs to act.
Tracking costs by department turns the hospital's total cost into accountability: each department has a manager, a budget and an output. When cost rises, the question stops being "why did the hospital spend more?" and becomes "which department spent more, per unit of output, and why?".
The cost center structure
Hospital cost centers are usually divided into three groups:
| Group | Examples | How to measure |
|---|---|---|
| Productive (revenue-generating) | Inpatient wards, ICU, surgical center, emergency, imaging, laboratory | Cost, revenue, margin and cost per unit of output |
| Support | Nutrition, laundry, housekeeping, pharmacy, maintenance, sterilization | Cost and cost per unit of service (meal, kg of linen, m²) |
| Administrative | Billing, finance, HR, IT, executive | Cost and share of revenue |
A good cost center structure is stable (it does not change every month), has one owner per center and allows comparison with last year.
Cost per unit of output
A department's total cost varies with output. To compare months and hospitals, divide cost by the unit the department produces:
- Wards and ICU: cost per patient-day.
- Surgical center: cost per surgery or per operating room hour.
- Emergency: cost per encounter.
- Laboratory and imaging: cost per test.
- Nutrition: cost per meal.
- Laundry: cost per kilo of linen processed.
A unit cost that rises while output stays stable is the clearest sign of lost efficiency.
Supplies and drugs by department
Supplies and drugs are among the largest variable costs. Track each department's consumption by group and item, based on dispensing, and compare it with the department's output. Consumption that rises without matching output calls for investigation: a protocol change, waste, loss or a recording error.
What about allocation?
Allocation distributes support and administrative costs to productive departments, to reach the full cost of each service. It is useful for pricing and service profitability analysis, but it gets in the way of day-to-day management: the ICU manager does not control laundry costs. That is why the recommendation is to track two views: each department's direct cost, for monthly management, and cost with allocation, for profitability analysis.
Department efficiency
Comparing different departments requires different criteria. A practical approach is to assess each productive department by revenue, margin and result, and each support or administrative department by cost and productivity, always against targets or its own average. The article on department efficiency presents this model.
How BI helps
BI brings together cost by cost center, output and budget in one place, and shows the month-by-month variance. In Clic Health, budget variance by cost center, consumption by department and the efficiency dashboards cover this analysis. See hospital controllership and, for hospitals running Tasy, supplies and inventory.
Related questions
How many cost centers should a hospital have?
Enough for each center to have an owner and measurable output. Too many make correct assignment hard; too few hide problems.
How should staff shared between departments be handled?
Assign them to the department where they spend most of their time, or split by schedule when reliable information exists. The criterion should be stable throughout the year.
Is cost per patient-day comparable between hospitals?
With care. Patient mix, complexity and cost assignment methods change the number a lot. The most useful comparison is usually with the hospital itself over time.
Written by the team behind Clic Health: accountants, controllers and developers with more than 20 years of work in hospital management.