Armful practice? The National Blood Authority has radically changed its problematic cost allocation method for joint blood products, but the new approach is equally flawed--if not more so. Paul Trenchard and Rob Dixon report on their CIMA-funded project to develop a third way based on the usefulness of products rather than profitability.
| Author | Trenchard, Paul |
| Position | Finance Cost Allocation - National Blood Authority |
The manufacture of blood products provides a real example of where a global joint cost problem could affect how patients are treated by the health service. This risk led us to start working on a new approach to allocating joint costs. The project, funded by CIMA, had three objectives:
* To expand the new approach in the contexts of qualitative cost drivers and product cost-effectiveness.
* To evaluate the method against the allocation routines favoured by the blood services.
* To generalise the method, wherever possible, for wider application.
In blood product manufacturing, the joint cost problem emerges as a consequence of the routine collection (C) and safety testing (T) of whole blood that, in the case of most donations, is split-processed (S) in a laboratory to yield the following three joint products:
* red cells--used mainly to remedy blood loss during surgery;
* platelets--used mainly to prevent spontaneous bleeding in leukaemia patients;
* plasma--used mainly, after further fractionation, for the treatment of protein deficiency conditions such as haemopbilia.
In terms of simple accounting, the cost allocation procedure commonly used by blood services is based on the physical quantities method. It is an approximate equal sharing of the process costs according to the number of joint products. In algebraic terms, and using the above process abbreviations for the corresponding unit process costs, this method would allocate (C + T + S) / 3 to each joint product. It is used widely in many countries.
The particular disadvantage of this equal allocation is that, if the clinical demand for a given joint product reduces--with a corresponding wastage of the unrequired output--then the perceived joint manufacturing cost of that product must increase accordingly. Such cost-instability is particularly evident for joint platelets, because the demand for them is highly variable and, on average, far less than the relatively stable demand for red cells and plasma.
To circumvent this problem in England, the National Blood Authority introduced radical accounting changes in 1998 by allocating all the joint production costs (C + T + S) to joint red cells alone on the basis that the demand for them was the overriding quantitative cost driver. The argument for this "polarised" method was supported by the need to discard joint plasma routinely in the UK in order to minimise the transmission risk of Creutzfeld-Jacobs disease. The joint platelets supplied to...
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