AN ANALYSIS OF THE WARD MEDICAL APPARATUS EFFICIENCY BY MEANS OF THE BREAK-EVEN POINT

MUDr. Rudolf Střítecký, Ing. Karel Půbal

Abstract
The study is based on an epidemiological analysis. It is a cost analysis of A regional hospital and its individual cost centres, with the aim of defining an optimal structure for a non-profit regional hospital serving an area with 100,000 inhabitants. We assume that it is possible to define a viable and relevant structure for a hospital on the basis of epidemiological research In the area, along with a cost analysis and a break-even point calculation. 

Introduction
All health systems in the world struggle with a lack of financing. Consumption exceeds the financial possibilities of these health systems. There are many things that are influenced by this shortfall. This article will try to describe some of the most important factors. They include:
1) new technologies in therapeutic as well as diagnostic processes and constantly more innovative and expensive know-how means rising costs;
2) there can be incorrect allocations and distributions of money, coming from the limited influence of market mechanisms;
3) an elderly population in developed countries and the increasing availability of health care is expensive;
4) ineffective work in health care can be caused by the insufficient influence of market forces.

Goals of the article
The goals for this article are the following:
1) to describe the main conditions of a health system operating effectively;
2) to define current health systems according to their way of financing;
3) to point out some drawbacks and weak points of the Czech health system;
4) to examine the usage of the break-even point method for evaluation of the efficiency of ward department, which includes:
    a) recognition of the minimum profitability conditions for the investigated regional hospital; and
    b) the highest possible expenses for a patient while still ensuring profitability for the hospital; 
5) to analyse the economically efficient hospital in J.Hradec, which serves an area of 60,000 inhabitants;
6) to extrapolate the results to a virtual hospital serving an area of 100,000 inhabitants.

The basic conditions of a well operating health care system
The basic condition of an efficiently run, modern health care system is the dynamic balance of the ‘health care triangle’: in other words, the dynamic balance between treatment expenses, availability and quality. 
It is possible to say from the macro-point of view that if one of these premises is changed the other two must be changed as well. This, of course, applies to closed health system financing where there is a limited budget to finance health care. For example, if the cost of health care rises, either the quality or the accessibility of health care or both these parameters will change at the same time. 

Figure 1: Health triangle

If we do not want to change accessibility or quality, we must inquire into the cost of health care. We know that about 50-55% of the whole sum scheduled for health care goes to ward facilities. We also know that the cost in not equally distributed among ward facilities. Our big university hospitals have much higher expenses compared to small hospitals than any hospital in European Union. In our research, we have focused on the analysis of financing small hospitals, which are the most common in our country. We have also tried to evaluate the accessible data of a successful facility.

Management and types of health care
It is known that the main differences between individual health care systems are caused by different ways of financing these systems, by proprietary relations and by labour law relationships. Expenses are mostly influenced by expensive ward department care, especially ‘acute’ ward equipment in hospitals. In developed health care systems, management teams, consisting of a medical director, an economic director and a personnel director, often have a substantial role in leading the hospital. The work of this team is unified through a common strategy and conception, which is elaborated by the management team.
We divide health care systems into five groups according to how the hospital should handle financial planning.
     a) The European type of pluralistic health care is based on compulsory basic health insurance, additive insurance and third-party payments (Germany, Austria, Holland, partly the Czech Republic).
     b) National Health Service, NHS, is a central system that is financed by a certain ratio of GNP according to a government proposal, and is approved by parliament (Great Britain, Spain).
     c) The liberal model of health system, known as Wild health care, operates almost solely in the USA. It is based on voluntary health insurance, connected more to market principals. The system is supported by Medicare and Medicaid, which are financed from public resources and the state, and supports socially weak patients and those without insurance.
     d) The socialistic health system model, which is a strongly centralised system that is common in communist ideology, where only one political party decides about what ratio of the GNP will be allocated to health care (Cuba, North Korea).
     e) Health systems in developing countries often find it difficult to identify the main resources for financing health care (much of Africa and South America). 
None of these systems solve the financing problems of health care ideally. The selection of the system depends on traditions and the cultural and historical values of the country in which it operates.

Some important weaknesses in the Czech Republic health care system
After the velvet revolution in 1989, the Czech Republic began to return to its traditional European values. At this time, it began to reform its health care system according to the system used in ‘the first republic’. In 1992, a key element in financing the whole health care system was put into practice when parliament passed bills establishing compulsory insurance and third party payment. Unfortunately, another systemic change has not yet been realised, and current problems with Czech health care are the consequences of the stagnation. 
The present day health care system of the Czech Republic differs remarkably from developed Europe, both in terms of organisation and structure. In developed health systems, the management team ensures an optimum balance between medical and economic aims. The structural process of directing a hospital is usually horizontal. In the Czech Republic, a director in charge of a hospital is often a doctor with insufficient economic experience or an economist with an insufficient knowledge of management. In these cases the structural process is strictly vertical.
The difficulty in controlling expenses is a worldwide problem. This development trend has several causes. A growing population is one of the most important, as are inefficient health facilities strengthened by state patriotism and new expensive technologies in diagnosis and care that involve high pill consumption. The Czech Republic is not an exception to this trend. Unfortunately, the situation in our country was and is even more difficult. The transition to the new political system and the arrival of a market environment has taken aback both the Ministry of Health and the hospitals themselves.
The majority of hospitals in Europe are lead by a team of professionals. This team covers all spheres of operating a hospital. This is where the cardinal microeconomic problem of Czech hospitals can be found. Most management consists of only one person (a doctor or economist) who is not able to balance professional and economic aims. One aim is always stressed at the expense of the other, either with disproportional service or economic restrictions. In the Czech Republic the professional aim is dominant.
If we look at the map of the Czech Republic, we will easily see more disproportions: an unbalanced allocation of ward facilities and special health facilities.
There are also problems in the balance between big and small hospitals. Inefficient big hospitals consume more money, although they only care for 17% of patients outside the administrative district. The list of problems is increased by the very high number of specialists per 100,000 inhabitants compared to OECD countries.
There are many unsolved situations on the macro-level of health care management in the Czech Republic. These include:
•	unfinished privatisation;
•	lack of pharmacy-economic studies for pharmaceutical politics of the Ministry of Health and insurance companies;
•	no systematic transformation of the health system;
•	no transparent way of financing health care;
•	the state health system is vaguely defined;
•	no political will to implement unpopular changes.
The list is incomplete, but for our research it is satisfactory and any further analysis of these topics will not be beneficial.
These problems also result in the quality of health care being at a lower level in the Czech Republic than in the developed countries of Europe. This manifests itself in the fact that the health of our population is worse, life expectancy is shorter, there is a higher occurrence of cancer, and so on.
When we focus on parameters of efficiency and compare the Czech Republic with developed countries, we see that developed countries report higher efficiency in the care of patients than the Czech Republic. Although we have a larger number of small and very large hospitals, we have lower bed occupancy, lower patient turnover per doctor, and longer periods of treatment, especially in large hospitals. Generally, an extensive treatment prevails to the detriment of the intensity of the care.
Objectively speaking, it is necessary to note that Czech hospitals are financed exclusively from insurance institutions without the possibility of patients' additive insurance. Health care is economically limited by revenue. Furthermore, hospitals operate with constantly changing financing methods (fee-for-service, lump payment for ward per day, payment for an individual patient).
Figure 2: Czech health care on the macro-level

The analysis of the break-even point 
We here consider a hospital as a company, working with market competition and forced to reply to flexible free market circumstances. One of the tools which help a hospital survive under these circumstances is a managerial tool called the break-even point. This tool will be used in our micro-economic analysis of the hospital in question.
The analysis of the break-even point answers many questions which managers often face, such as:
•	What is the minimum production to make sure the organisation is profitable?
•	What is the minimum production capacity before the organisation becomes unprofitable?
•	What are the maximum production expenses for one product without becoming unprofitable?

The analysis is based upon the following values: amount of product q, product prices p, product variable costs b, fixed costs FC (e.g., energy, water, wages), costs TC and revenues R (insurance company payments).

The break-even point with constant price and linear costs
It holds that with constant price the revenue develops according to this relation:

and the expenses with linear (proportional) develop according to this relation:
 
Then, if that is true, then profit is the difference between revenues and expenses:

It is obvious that we get profit when R > TC; in the opposite situation there is a loss. When R = TC, there is neither profit nor loss. This is called the critical level of production, the dead point, the critical point of profitability, or the break-even point. We will use the term ‘break-even point’. We can analytically derive it from the equations above:
;

The amount we are looking for is derived in this way:

The formula of the break-even point to calculate lump payments
In this model we set the T = constant and after a simple adaptation of the equations we find:
;

Figure 4: The break-even point with linear development of expenses and revenues

The analysis of break-even points for individual cost centres of ward part NsAČ:  Jindřichův Hradec
The analysis of the hospital in J. Hradec is primarily concerned with cost analyses for 1996 and 1997. Using the study ‘Area with the use of data UZIS CR’, we counted the real patient population of the hospital, which is 60,000 inhabitants, although the administrative area has 100,000 inhabitants. However, two hospitals operate in the district. We analysed in detail only the ward part of the hospital; we evaluated the complementary departments (i.e., microbiology, biochemistry, haematology, pathology and radiodiagnosis) only within the framework of the whole hospital. The complementary departments create 46% of the whole financial turnover of the hospital, whose revenue was CZK 23 million annually. After a break-even point method analysis, we realised that out of all ward departments only the ophthalmology department—using a fee-for-service system—made a profit. We know that this is a purely economic evaluation, but the results of this evaluation are essential for successful, first-rate therapeutic work, as is apparent from the ‘health care triangle’ and the ‘theory of two inconsistent aims’. The hospital, which is in permanent financial debt, cannot provide quality care. However, two questions still remain to be discussed: according to which criteria should the potential legitimacy of the displayed financial deficit be reviewed, and how can it be reimbursed? 
After analysing the break-even point for individual ward departments and administrative districts of 60,000 inhabitants, we found that only the ocular department is profitable, when people pay for a service. There the amount of hospitalised patients for 1996 exceeds the calculated critical point (see Table 1). The OBG and the UNK department were not profitable because the profit was lower than the fixed expenses of the department for the whole year. The construction method of calculating the break-even point with lump payments was stated in the previous chapter. Interestingly, with lump payments the ophthalmology department seems to be unprofitable, too, just like the OBG and UNK departments. 

Table 1: The break-even point individual cost centres (wards) using the figures for 1996 for an administrative district with 60,000 inhabitants; (fee-for-service and lump system in CZK)
	Internal medicine	Neurology	Paediatrics	Surgery	OBG	Urology	Orthopaedics	ORL department	Ophthalmology	Dermatology	
Number of patients	2820	672	2155	2675	1596	640	730	524	975	359	
R/1 patient
(CZK)	7,307.7	7,363.4	6,675.3	7,641.9	6,409.6	16,269.0	4,981.0	5,090.3	7,256.2	7,203.3	
VC/1patient
(CZK)	2,717.6	1,641.1	1,604.9	2,515.4	1,013.6	8,400.8	1,528.2	1,026.8	2,165.8	1,887.5	
q fee-for-service	4,021	844	2,613	3,644	2,185	784	1,001	768	887	415	
Number of patients	2,820	672	2,155	2,675	1,596	640	730	524	975	359	
q lump sum system	792	71	710	700	-1,540	505	118	-442	1 183	202	

	To make the results more illustrative we transformed the table into figures. One figure shows lump payments and the second shows fee-for-service.
Figure 5: The rate of hospitalised patients to calculated patients (lump sum system), 1996

Figure 6: The rate of hospitalised patients to calculated patients (fee-for-service), 1996

In the fee-for-service system, there is remarkable pressure on the economic efficiency of the individual cost centres. However, only the ophthalmology department reaches beyond this general tendency and displays an economically positive result. This is caused by the large number of patients; the ophthalmology department services two districts (Pelhřimov and J. Hradec) and looks after ward patients from the hospital in Dačice. Many of these patients need treatment for cataracts, where the patients themselves pay for the artificial part. Conversely, in the lump sum system all cost centres are profitable except for the URL and OBG, which have high fixed costs. 
There is a significant pressure on the efficiency of individual departments and a significant market influence by the FC and VC rate.

Table 2: The break-even point for individual cost centres (wards) using the 1997 figures for the administrative district with 60,000 inhabitants; (fee-for-service and lump system)
	Internal medicine	Neurology	Paediatrics	Surgery	OBG	Urology	Orthopaedics	ORL department	Ophthalmology	Dermatology	
Number of patients	2,920	710	2,132	2,690	1,662	737	632	528	1,182	322	
R/1 patient
(CZK)	8,195.6	8,256.4	7,691.2	7,952.5	6,340.9	18,321.7	6,284.8	5,965.3	7,639.2	8,023.4	
VC/1patient
(CZK)	2,365.0	1,417.5	1,537.4	2,539.6	1,020.7	8,648.8	1,457.5	742.9	2,109.1	1,820.8	
q fee-for-service	3,204	732	2,145	3,524	2,275	718	737	701	831	355	
Number of patients	2,920	710	2,132	2,690	1,662	737	632	528	1,182	322	
q lump sum system	2,219	605	2,080	912	-1,534	759	284	-687	2,102	211	

Figure 7: Rate of hospitalised patients to calculated patients (lump sum system), 1997

The results are similar to those of 1996. All the cost centres hospitalise more patients than is optimum for the lump sum system. However, problems continue at URL and OBG departments, where the cause of inefficiency is high fixed costs. It is interesting to note that the ophthalmology department, while profitable with a fee-for-service system, is not profitable with a lump sum system.
Figure 8: Rate of hospitalised patients to calculated patients (fee-for-service), 1997

When changing the indices of Table1 we get the gross estimate of the number of patients necessary for individual cost centres to be profitable for a hospital with an administrative district of 100,000 inhabitants. This estimate must be considered highly theoretical because there is no time sequence long enough for fixed expenses. That is why we left them at the same level as an administrative district of 60,000 inhabitants. We know that this has led to a slight over-evaluation of the results.
The table shows that with an administrative district of 100,000 inhabitants all the cost centres are profitable even with the fee-for-service system. Table 1 was transferred into Figure 7.

Figure 7: The rate of hospitalised patients to calculated patients (fee-for-service) for an administrative district of 100,000 inhabitants

If, through rough over-indexing, we enlarge the patient population of the hospital in J.Hradec to 100,000 (the administrative area of the district) all the ward departments would be profitable. This means that for the ward departments in J.Hradec to become more profitable, a bigger patient base is necessary. The problem is that two hospitals operate in the district. From this point of view, it is necessary to abolish or change one of the hospitals into a different type of facility. This research project demonstrates that this methodology can help create a network of profitable hospitals in the Czech Republic.

Results
The fee-for-service system forces the cost centres (wards) to operate more efficiently, to use resources more strictly and to behave more rationally. The performance system of financing focuses strongly on the development of individual cost centres and a higher usage of instrument facilities, know-how, staff and buildings. 
The lump sum financing of ward facilities suppresses the rational and effective usage of health system resources as well as the effective behaviour of individual cost centres. The lump sum system lowers the motivation of individual cost centres. In fact, economic development is tied to how an institution can evolve in a market environment. These two components are bureaucratically limited in the lump sum system. As a consequence, problems can arise in the lump sum system where profitability exists in a fee-for-service system (as in the ophthalmology department). A perceived sense of unfairness and little or no chance to influence economic results discourages the working team. In an economically efficient fee-for-service system, a rough calculation of the required number of beds could be derived from the above-mentioned methodology.

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Střítecký, R., Pirožek, P. A case study: Calculation of the break-even point of Premature Children’s Unit of the Children’s Clinic at Jindrichuv Hradec Hospital, The Journal of Health Care Administration Education, Vol.15, No.3, Summer 1997

Střítecký, R., Pirožek, P., Dvořák, P. Management of Health Services in the Czech Republic, The Journal of Health Care Administration Education, Vol.16, No 2, Spring 1998

Synek, M. a kol.: Ekonomika a řízení podniku, VŠE v Praze Fakulta podnikohospodářská, Praha,  1997
and	
Internal data of hospital of Jindřichův Hradec
Úzis data 1996, 1997.
Data from project Aktion No. 24, p18