Hospital cost analysis: allocating pharmaceutical expenditures in Papua New Guinea

Health departments in developing countries are increasingly turning to financial cost-accounting studies to help inform their management and planning decisions. A stumbling block often encountered in conducting hospital cost studies is the problem of allocating pharmaceutical expenditures to various cost centres. The method most commonly used is an estimation of the average drug expenditure per patient based on a sample of outpatient prescriptions and inpatient medical records. Total pharmaceutical expenditure is estimated by multiplying the average cost of treatment by the total number of patients. This ‘bottom up’ analysis is inadequate, however, as it often undervalues total consumption due to incomplete medical records. Other drawbacks to this method are that it is time consuming to review medical records and it is often difficult to apply a sampling frame. This paper describes two methods to allocate hospital drug expenditure developed in Papua New Guinea. These methods are applicable when total drug expenditure is known, but consumption by cost centre is unknown. Both methods allocate total drug expenditure based on the number of outpatient visits and in-patient discharges at that hospital. However, the inpatient discharge figure is augmented by a factor determined to reflect the cost difference between treating an inpatient and outpatient. The first method attempts to use the number of drug items per inpatient and outpatient prescription as a proxy for the relative cost of treating inpatients and outpatients. The second method determines a hospital-specific cost differential by building up the average cost of treating an inpatient and an outpatient using standard treatment protocol for the most prevalent illnesses. The latter method, which incorporates the various hospitals' case mix patterns in its determination of average cost, produces results which reflect more accurately the inpatient/outpatient cost differential for each hospital. Calculations conducted for the standard treatment analysis can then also be used to help inform pricing strategies, if cost recovery efforts are underway, and improve inventory management.