The National Health Service (NHS) Costing Design and Costing System

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In the middle of today’s rapidly increasing healthcare costs, practitioners among other healthcare providers face increased pressure to offer services efficiently and effectively to their patients. Furthermore, the challenge is compounded by the ongoing transition toward a value-based payment environment in the healthcare industry. Healthcare providers are thus unable to make this transition especially when they lack effective managerial costing methods, hence the need for costing design and costing systems (Plant and Scaife, 2007). Nevertheless, even as these organizations restructure many of their operational processes to meet the challenges of the value-focused ecosystem, many of them continue to use rapidly obsoleting managerial costing practices. Through leaders, managerial accounting has appreciated the need of shifting to costing practices to curb the ongoing business changes and its transformation necessities. Since the 80s, numerous ground-breaking administrative pricing methods have been developed. However, many accountants have been reluctant to propagate these appropriate practices due to external financial demands and regulatory reporting. As an alternative, they have computerized their old managerial accounting practices without altering them (Stevens, 2004, p. 39).

Amid 2011-2014, The National Health Service (NHS), for instance, faced the major challenge of transforming itself into a patient-centered organization while saving over 20 billion euros. For this change to occur, managing care more effectively and efficiently is crucial, and more sophisticated financial analysis systems for hospital activities are essential. Until recent years reference costs have been the primary NHS's costing tool which was published and collected by the Department of Health in 1998 (Chapman and Kern, 2010).  These systems are designed for central control procedures and meant to calculate national tariff. The NHS's reference costing utilizes top-down cost calculation mechanisms. For credibility, understanding, and better national cost collection and PbR tariff setting, the DH recommends the adaptation of Costing System (PLICS) and Patient-level Information.

The PLICS compute costs at patient level episodes and allows meaningful association of clinical data and costs. Service Line Reporting (SLR) monitors the financial statement and primary output to ensure profitability by service line is maintained. When implemented effectively, these costing systems promise various positive returns. They provide essential information at operational levels, improve economic transparency, and enhance clinical involvement in management practices. Together, they create possibilities of greater efficiency and effectiveness in care delivery (Chapman and Kern, 2010). PLICS are sources of meaningful and relevant cost information. Clinicians can, therefore, consider both the quality and cost of care before making any decision. However, adopting SLR then PLICS may be dangerous. If the process should occur, a top-down analysis may be appropriate even though the benefits of profound decision-making by cost information may not be released.

PbR, introduced in April 2004, fundamentally transformed the health care funding and NHS's costing roles. NHS trusts are now through set price per HRG, a system which is re-set and reviewed annually on reference cost basis. The novel funding calculation system has some notable consequences. The tariffs are accurately and significantly reflecting the cost. Beyond this practice, clinical staffs should have insight on how charges on tariffs relate to their physical work or clinical activities, and their implications on both financial and clinical outcomes (Chapman and Kern, 2010).

CIMA's recent study indicates that more than half of NHS trusts have adopted PLICS and SLR. Furthermore, most of them conduct cost reviews monthly but rather quarterly and are seeking managers and clinicians involved in operational level. The process is essential if PLICS and SLR are not just for regulators or stakeholders reassurance that the systems are in place. PLICS and SLR’s effectiveness and assurance are not from checking a reported cost data box, but rather the cost data constructively inform clinical decisions. It should transform form reporting to managing (Chapman and Kern, 2010). The past costing tools aimed for cost analysis and their related forms interfere with cost information form management objectives. Hospital costing has been the foremost concern of the government since 1948, the year when NHS was formed. Over the decades, HRG resource management, PbR, specialty costing, Departmental costing are some of the costing tools that have been implemented. These costing tools were designed for central control purposes.

NHS England Costing and Pricing Systems Improvement Recommendations

A fundamental shift in cost behaviour analysis is necessary for effective PLICS and SLR implementation. Top-down allocation and costs should be traced for effective management and decision making as opposed to overheads as an unmanageable and inevitable burden. Overheads, in this case, can be unpacked and they're worth, aimed at transformation processes, questioned via analysis of activities. Effective management’s central question is not at report given costs or analysis level, instead come close to cost behaviour analysis. Greater attention to ABC’s basic principles will offer trusts in PLISC and SLR investigations thus greater benefits from their costing systems.

Effective ABC critically defines what clinician understand by an activity. Activities executed by an individual are great such that they are not viable from a fiscal perspective to utilize an unlike cost driver for every activity. Consequently, activity in such system is aggregated. For instance, a corporate finance manager may be responsible for executing activities such as responding to emails, taking calls, and meeting with finance staffs or clinical units among other tasks. In an ABC system, these tasks can be aggregated into general categories, namely, Internal reporting for clinical Departments and external reporting to the Department of Health. Activities, in this case, refers to what people are doing. In NHS reporting context, activity refers to precise outputs, often, clinical procedures with various work processes. The current wave is aimed at allocating all costs to such clinical activities. Even so, ABC outcomes in an overall cost figure are not visible, and thus manageable. Various activities, which consumes resources, should be considered.

Considering the implemented costing tools, an essential limited engaging factor is the underlying approach to cost analysis behaviour: overheads and indirect costs allocations on activities or clinical units. Conventional costing models begin at the general ledger and stretch to overheads allocations across developing HRGs. Related calculations are complicated and unclearly link to clinically relevant categories. Consequently, the clinician cannot understand the cause and effect relationships amid their pronouncements as well as in their clinical results. The output of these systems cannot be used by frontline staff for performance improvement and money drive, hence pointing out problems such as certain HRC costs being above reference costs. Besides, they do not provide guidance on how to fix the issue.

The cost above behaviour analysis potentially influences how SLR and PLICS are developed and used. Complex allocation models for indirect and overheads costs are the underlying of coming up with SLR and PLICS data. For higher granularity patient or service line level data, more resources may be consumed. If top-down analysis mechanisms are still in use, there is little advancement in data transparency and usability. Clinicians, in this case, cannot easily relate cost data to physical activities, and potential inferences are greatly impaired. Accordingly, SLR and PLICS are in danger of being reduced to expensive tasks in producing and reporting, with little clinical decision-making influence. 

The query is not on granularity and analysis level, but rather the approach used. In top-down full cost, considering the DH guidelines, costs are targeted as overheads, indirect, and direct. A multifaceted top-down process cascades the assigned overheads to allocate the full cost at HRGs levels. Overheads are fixed or are inevitable in this case. Their burden is thus shared since overheads are not logically transparent in behaviour. Considering the Activity Based Costing, cost pools are translated to structure with various activities making them more manageable and transparent, hence a greater potential of evaluating efficiency and effectiveness relative to value contribution to the entire business course (Harris, 2005). The process can be very expensive. Therefore critical evaluations and decisions are necessary before determining its extent. A detailed analysis level is thus less important in driving effectiveness and efficiency. ABC approach is therefore needed costs without overheads or inevitable costs. Costs are questioned through potential indirect costs transformation and activity analysis.

Activity analysis establishes a meaningful relationship amid consumed resources and activities. Costs, initially categorised as overhead may be transformed to direct cost in general ledger categories. Seemingly, they are traced but not allocated. If fixed cashflow cost’s logics are accepted, and cost drivers and cost pools structures are given, other cash flow costs are equally possible. ABC further advocate for removing fluctuations in reported costs as levels of activities has changed via separate unused reporting capacity and capacity cost drivers. If ABC is lacking, SLR and PLICS will increment the management in consumption costs relative to long-established indicators at a clinical level cost of drug or length of stay.

NHS England Budgetary Targets Evaluation

Objectively, NHS England is aimed at improving health standards and securing high-quality healthcare. The process incorporates various mechanisms such as controlling costs and enabling changes, transforming care, and closing the wellbeing gaps. However, what are the effects of these processes on the NHS budget? The NHS's budget omits major capital investment, education and training, and public health. Up to date, the NHS uses the DH for various calculations. The announced 6.3 billion euros include revenue funding and capital investment, which were 2.8 billion and 3.4 billion respectively. The allocations are in cash terms and thus lacks inflation adjustments. 335 million of the amount will be used for winter pressure, 1.6 billion will be issued in 2018/ 2019 and 900 million to be issued in 2019/2020. Of the 2018/2019 amount, 1 billion will be used for performance improvement against 18-week target aimed at selective treatment and 600 million will be for hospitals to meet the A &E objective.

The 2018/2019 planned health spending will be approximately 4 billion lower than needed. Considering long-term tendencies in NHS expenditure that has escalated on average by 4 percent annually in real standings since its establishment, ORB projections would rise at 4.3 percent annually. ORB projections figures include efficiency savings, cost of pay and capital investments. As 1.9 billion was provided for additional funding cash, half of the calculated minimum gap failed. The estimate thus does not embrace extra funding issued for staff pay honours. The NSH budget will leave a gap of 290 billion come 2022/2023 when compared to the amount needed. The budget is applicable for the next two years despite the relative change in the entire picture. The government will thus have a prospect in future Spending Reviews to mitigate the identified opening. It may come up with novel strategies for the entire Parliament, and extra funding will be necessary to echo the pressure facing the NHS. Other implications of the current budget will include an increase in spending per head, extra pledges on capital spending, and a cut in the public health budget. With all additional money in acute sectors, it is still difficult to depict how increased mental health investment and general practices can be achieved, thus determining how growth can be made to come up with novel services. A budget master plan may include:



Budget Key

A key in which the current budget applies

Financial Period

Year the current budget is applicable

Target Currency


Capital Target

The amount in the applicable currency

Functional target

Operational expenses target



Chapman, C.S. and Kern, A., 2010. Costing in the National Health Service: from reporting to managing. London: Imperial College London.

Harris, G. M. (2005). Managing Health Services: Concepts and Practice. Elsevier: London. Miller, D.,

Plant, J. and Scaife, P., 2007. Managing Finance, Premises and Health and Safety. No-nonsense Series. Taylor & Francis.

Stevens, S., 2004. Reform strategies for the English NHS. Health Affairs, 23(3), pp.37-44.

August 18, 2023

Business Economics


Finance Management

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Number of words




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