Why department P&Ls mislead a hospital, and what to cost instead
A surgery's revenue lands in one department and the care it needed lands in others. Cost the patient's whole stay instead.
Summary
- A department profit and loss statement (P&L) credits a surgery's revenue to the surgeon's specialty and books the care it needed elsewhere. The surgery looks richer than it is.
- Cost the care episode instead: everything one patient used from admission to discharge, against what was collected for that stay.
- Treat the ICU as part of the cost of the surgeries that send patients to it, not as a department that loses money.
- When several specialists treat one patient, agree in advance how cost and margin are shared, and share both.
Picture a knee replacement on the orthopaedics report. The surgeon's fee, the implant and the theatre time are all there, set against the package the patient's insurer paid. The margin looks healthy. (An illustration, not a client case.)
Now follow the patient. He is in his seventies with a weak heart, so he spends two nights after surgery in the intensive care unit (ICU). There, one nurse watches one or two patients around the clock. Those nights sit on the ICU's report, so one department shows the revenue and another the cost.
Neither report is wrong. Each answers a smaller question than the one the founder is asking: did this patient's stay make money?
The unit to cost is the episode, not the department
An episode of care runs from the moment a patient is admitted to the moment they go home. It covers everything the hospital did for them in between: the operation, the bed, the nursing, the scans, the medicines and any night in intensive care.
Departments are how a hospital organises its people. Episodes are how it earns. An insurer or a family pays for the stay as a whole, often as one package. Cut that stay into departmental slices and you learn how busy each team was, not whether the stay paid.
What sits in the loaded cost of a surgical episode
The loaded cost of an episode is its direct cost plus a fair share of the shared services it leaned on. For a planned surgery it usually has five parts.
What sits in the loaded cost of one planned surgical episode
| Part of the episode | What it includes | Where a department P&L tends to put it |
|---|---|---|
| Before surgery | Admission, blood tests, scans, the anaesthetist's assessment | Laboratory and radiology |
| The operation | Surgeon and anaesthetist fees, theatre time, implants and consumables | The surgeon's specialty |
| Critical care | ICU or high-dependency nights, specialist nursing, monitoring | The ICU, as its own cost centre |
| Recovery | Ward nights, ward nursing, medicines, physiotherapy | Nursing, pharmacy and physiotherapy |
| Shared overhead | Housekeeping, equipment upkeep, billing, administration, the building | Spread across departments, often by revenue |
Only the second row appears on the specialty's own report. Cost apportionment sets out how to split the last row fairly, and costing hospitals and diagnostics how to price an ICU night against a ward night. This piece is about where those costs land.
Intensive care is part of the surgery, not a separate business
Run as its own department, an ICU nearly always looks like a loss. It is expensive to staff, and much of its work is billed inside other specialties' packages.
That loss then gets used against it. The ICU is asked to cut nurses or wait for its expansion, while the specialties that fill it look more profitable than they are. Responsibility blurs too: the surgeon decides who goes to the ICU, but the ICU carries the bill.
Nobody asks whether the brakes on a car make money; the car simply cannot be sold without them.
The fix is to move ICU cost into the episodes that used it. If cardiac and orthopaedic patients account for most ICU nights, most of its cost travels with them. The ICU is then judged on what it controls: how full it is, how long patients stay and how well they recover.
When three specialists share one patient
Complex patients rarely belong to one team. Take, as an illustration, a diabetic woman in her seventies admitted with a broken hip. Orthopaedics operates, cardiology steadies her heart before theatre, and the kidney specialist manages her dialysis through recovery.
On a department view, whoever admits her collects the revenue and the other two show only cost. That rewards whoever holds the admission, not whoever did the work. Soon the cardiologist and the nephrologist learn that complex patients spoil their reports.
The fairer rule shares both sides. One workable version: the lead specialty owns the episode, and each specialist who treats the patient takes a share of its margin in proportion to the cost they added. Whatever the rule, agree it before the first dispute, write it down and apply it the same way every month.
Moving from department reports to episodes
You do not need new software to start, only your main procedures and a month of discharge records.
- Pick five procedures. The busiest, or those you are thinking of growing.
- Trace each episode. For every patient discharged after one of them, list the ICU nights, ward nights, scans and medicines.
- Load the shared cost. Price each ICU and ward night at the hospital's own rates, and add a share of overhead.
- Set it against what was collected. The amount received from the insurer or patient, not the bill raised.
- Compare the two rankings. A procedure that moves sharply between the department view and the episode view is where the next pricing conversation starts.
Keep the department reports for day-to-day running. Use the episode view for the bigger calls, such as which services to grow, how to price a package and where the ICU sits in the plan. It belongs on the founder's one-page monthly review as loaded .
Questions
How do you calculate department-wise profitability in a hospital?
Take each department's revenue, subtract its direct costs, then a share of shared costs based on what it uses. For deciding which treatments to grow, use the episode view instead.
What is service line profitability analysis in a hospital?
It measures profit by clinical service, such as cardiac surgery or joint replacement, rather than by cost centre. Done well, it follows each patient's episode across every department that treated them.
What is an episode of care?
Everything a hospital does for one patient from admission to discharge. It is the unit a patient or insurer actually pays for.
How should ICU costs be allocated?
To the episodes that used it, in proportion to each patient's nights there and the nursing they needed.
What is a department-wise P&L for a hospital?
A profit and loss statement for each department: revenue, direct costs and a share of overhead. It is the right tool for managing a department's own spending.
Figures as at October 2026.
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