Activity-Based Costing and Management


What is Activity-based Costing

Activity-based costing and management (ABC/M) is an accounting method that accurately captures all the resources used in a patient setting. It identifies all the activities involved in service delivery and assigns costs to each of the activities based on actual resource consumption. This is in comparison to traditional costing methods which capture only the average cost per patient. With ABC, all the costs incurred throughout the entire care pathway at the patient level are accounted for, meaning you can track costs attributable to a given health outcome for a given condition and level of service provision. ABC captures the actual costs of care processes, enabling service delivery costs to be linked with programmatic health outcomes. Valid patient-level outcomes and costs help to facilitate service innovation and optimize clinical practices that are centered around achieving quality health outcomes at a minimal cost. 

It is important to keep in mind that “Activity-based Costing” is not simply a one-off costing study. It is putting in place a system that brings together data on patient demographics and health status, service delivery parameters, budgets, and expenditures—all of which enables optimization of resources and real-time monitoring while ensuring quality of health outcomes. It forces all people involved in the process to look at the data and make decisions on how to improve performance and efficiency. Accurate cost estimation is essential for policymakers to understand the real production costs of health services. Without an understanding of cost drivers, determining patterns of resource consumption and value for money are not possible. 

When companies and organizations use ABC to improve the operations of the organization and measure performance in this way, it is referred to as ABM (Activity-Based Management), and when ABC and ABM are employed simultaneously, the system is referred to as ABC/M. We view ABC/M as an integral part of an effort to bring together programmatic and financial data in support of efficiency, sustainability, and effective transitions

Our Global Efforts

 ABC/M was born from a recognition that country governments and global institutions need to align and optimize their investments—particularly against the backdrop of an ongoing transition in which country governments are assuming incrementally greater fiscal responsibility for service delivery. This initiative is remarkable in that it will generate highly-detailed information, down to the patient level, allowing country governments and global institutions to align and optimize their investments. 

As a global coalition, (ABC/M) will empower ministries and funders to gather patient-level information on HIV resource allocation and then share findings through a learning collaborative model.  The ABC/M movement is now underway in a half-dozen countries (Tanzania, Uganda, Kenya, Mozambique, Namibia, Zambia), with plans to expand. Ministries will soon have access to information on the actual distribution and cost of resources allocated to patients at facilities and in their local communities, which should catalyze efforts to make resource allocation more equitable and efficient over time. Health system directors and government officials will have information on which facilities have standardized care processes that correspond to best practices, as well as those that require closer monitoring to replace ad hoc and inconsistent processes. Periodic re-estimation will provide feedback on whether policies and programmatic changes are leading to improvements in patient outcomes.

Each country-level effort has assembled a local steering committee, employed local institutions, and developed an implementation strategy focused on long-term capacity building that leverages existing data systems. While ABC has been used in high-income countries primarily for cost reduction, its application in low-resource settings will likely reveal situations where greater resources are desirable. This may include higher compensation to attract and retain frontline healthcare workers, or increased staffing levels to extend patients’ face time with providers. A primary emphasis of this initiative will be to strengthen value for money and optimize program performance.