Financial managers are tasked with allocating indirect costs to direct
costs in regards to patient charges. Direct costs include labor and
supplies while indirect costs are intangible things referred to as
overhead. In order to access the costs a method of cost accounting is
used. There are several methods. One method is activities based
costing (ABC) which "assigns a cost to each product and service based
on its actual consumption" (Lorange 2021). This is the method that
makes the most sense to me. I like dealing with hard numbers and
facts. I understand that it is useful to have a system to project future
costs, but there are so many variables that you cannot necessarily
take into account. c In Time-Driven Activity Based Costing (TDABC)
the cost is attributed to time while Performance-Focused Activity
Based Costing (PFABC) "identifies each important activity explicitly
and directly mapping the resource costs to the activities" (Carroll &
Lord 2016). Ratio of cost to charges (RCCs) are calculated based on
total charges for all services and the allocated costs for overhead. The
cost are allocated by following four methods: Direct apportionment is
used to allocate all costs that comes from a non revenue generating
department. Step Down Apportionment first allocates all costs from
non revenue generating departments to other non revenue
generating departments followed by an allocation of costs to revenue
generating departments. Double Apportionment allocates costs from
non revenue generating departments to other non revenue
generating departments while simultaneously allocating costs from
revenue generating departments to other revenue generating
departments follwed by allocating all costs to non revenue generating
departments. Multiple apportionment involves "multiple
simultaneous apportionments during the first steps" (Nowicki 2022).
So while a patient can be billed for labor and supplies like a fracture
repair and a cast, they cannot be directly billed for the electricity the
surgeon used to see or the air conditioning to keep the OR cool.
Those are overhead charges that are paid by the departments that
actually generate revenue like the surgery center.
Healthcare utilization is "the number of services used over a period of
time divided by a population denominator" (Carrasquillo 2013). For
example, a hospitals same day surgery center usually performs 30
surgical procedures out of the 200 patients that have procedures per
day. During covid all elective surgeries were cancelled. Therefore out
of 200 patients that needed surgery only 10 of them were emergency
procedures and of the 10 only 2 had them at that hospital. This is how
utilization rates effect volumes and revenue. Due to the lower volume
of patients that department will report a signficantly lower revenue.
References
Carroll, N., & Lord, J. C. (2016). The Growing Importance of Cost
Accounting for Hospitals. Journal of health care finance, 43(2), 172–
185. Retrieved May 18, 2022 from
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6910125/
Carrasquillo, O. (2013). Health Care Utilization. SpringerLink.
Retrieved May 18, 2022, from
https://link.springer.com/referenceworkentry/10.1007/978-1-
4419-1005-9_885?error=cookies_not_supported&code=e4711bfe-
73ba-4758-b8a4-
83f3d4bf8a0c#:%7E:text=The%20number%20of%20services%20use
d,persons%20living%20in%20the%20USA).
Lorange, Y. (2021, December 20). Activity-Based Costing in Healthcare
Improves Outcomes. Health Catalyst. Retrieved May 18, 2022, from
https://www.healthcatalyst.com/insights/activity-based-costing-
healthcare-improves-
outcomes#:%7E:text=Activity%2Dbased%20costing%20(ABC),costin
g%20systems%20don't%20provide
Michael Nowicki. (2022). Introduction to the Financial Management of
Healthcare Organizations, Eighth Edition: Vol. Eighth edition. Gateway
to Healthcare Management. Retrieved May 18, 2022 from
https://eds-p-ebscohost-
com.ezproxy.snhu.edu/eds/ebookviewer/ebook/bmxlYmtfXzMwOT
Q1NTFfX0FO0?sid=d91d1ebf-8cf1-4a35-969d-
fa68d3e5e6a8@redis&vid=0&format=EB&lpid=lp_190&rid=0
