There are a variety of ways in which healthcare financial managers
can allocate indirect costs to direct costs. I have chosen to hone in on
two of those five methods, Performance-Focused Activity Based
Costing (PFABC) and Ratio of Costs to Charges (RCC).
PFABC is an in-depth method of recording, tracking, and reporting
every last detail of an organization's financial movements. Carroll &
Lord (2016) explain this method as "The other significant difference
between PFABC and other costing approaches is that PFABC
calculates the cost drivers’ standard rate (quantity) and price
variances. This helps managers evaluate the true drivers of cost by
separating the analysis of volume and price variances. The extra
processes in the PFABC approach make PFABC more difficult to
establish but enable PFABC to offer a richer and more detailed
examination of the organization’s activities." For every activity that
occurs within an organization, there is a cost that can be directly
linked to it. Financial managers can use this accurate and detailed
report to assess the financial health and direction of a facility, plus
appropriately allocate funding to departments based on this method
of cost accounting. Surpluses and deficits can be readily identified
using this method because that's what it's designed to do.
RCC, on the other hand, is estimate-based accounting. These
estimates do not show accurate numbers, but rather a general idea of
a facility's financial health. This method is the standard for CMS
reporting. As defined by Carroll & Lord (2016), RCCs can be defined
as "The cost report uses traditional costing methods to allocate
overhead costs to clinical departments, allowing hospitals to estimate
the full cost of each revenue-producing department. Hospitals can
pair these estimates with information about the total charges for all
services provided by a clinical department to compute a department-
level ratio of cost to charges (RCC). The RCC, when multiplied by the
hospital’s charge for a specific service, can be used to estimate the
cost of providing an individual." This method would be ideal for its
current purpose of CMS reporting, but also for casting financial
projections and outlining budgets. It stands to reason why this would
be the standard healthcare financial practice because it's hard to
predict utilization at the hospital level with community trends such as
tourism or sports activities being an unknown variable that should be
reflected in financial planning. What I mean by this is that hospitals
are not just used by the locals. Tourists get sick. Athletes get injured.
However, it's not something that can be stated, so it has to be
estimated. Just like the local community and the rate at which it might
get sick or have a random increase in the number of automobile
accidents can't be accurately predicted. That's when estimate-based
accounting is necessary.
The utilization of healthcare services within a population are related
to volumes and revenue generation through a positive correlation.
Simply stated, the more times the population obtains (uses) services,
the more volume is generated, and that leads to an increase in
revenue. Healthcare relies upon illness and injury, as well as
preventive care, to maintain its own financial health. When it's
noticed that only a portion of the population is seeking care,
healthcare facilities should start to find ways to offer services that are
affordable for or appealing to the remainder of the population that is
not utilizing services so that they don't end up losing revenue, or the
opportunity for additional revenue generation.
An example of that is the "Blue Card" program offered through
BayCare Health System, Inc., in my local area, specifically. This is a
financial assistance program with eligibility requirements to ensure
that the population can obtain necessary medical care, be it for a one-
time encounter or ongoing health issues. According to the BayCare
Financial Assistance webpage, "the total community benefit was
$346 million or 9.4 percent of operating revenue" in 2016. This
healthcare organization does free screening events, health education
seminars, and conducts a survey to assess the needs of the
community every few years. I think this is an excellent example of the
utilization, volume, and revenue generation relationship should look
like. If the population won't come to a facility for services, take the
services to the people. Yes, it technically doesn't generate revenue,
but in my own dealings with the population, I've noticed that BayCare
is the preferred provider for many. People talk, and word of mouth is
the best advertisement. That's how only 9.4 percent of operating
revenue is spent on the community, and the total revenue for that
same year (2016) was $3.97 billion (baycare.org, 2016).
BayCare Health System, Inc. (2016). 2016 Report to the Community.
file:///C:/Users/geeel/Dropbox/My%20PC%20(DESKTOP-
Q1TU2D2)/Downloads/2016%20Report%20to%20the%20Communi
ty.pdf
BayCare Health System, Inc. (2016). Financial Assistance.
https://baycare.org/about-us/blog-financial-assistance
Carroll, N., & Lord, J. C. (2016). The Growing Importance of Cost
Accounting for Hospitals. Journal of health care finance, 43(2), 172–
185. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6910125/
