Healthcare financial managers use financial resources and cost classifications
to allocate indirect costs to direct costs when determining patient charges.
This is achieved using cost accounting methods. Cost accounting methods
involve estimating and classifying costs incurred by an organization, and is a
crucial process needed for organizational success (Carroll & Lord, 2016). The
five most common cost accounting techniques seen in the healthcare
environment include traditional costing, activity based costing, time-driven
activity based costing, performance-focused activity based costing, and the
ratio of costs to charges (Carroll & Lord, 2016). For the purpose of this
discussion post I will be discussing traditional costing and Performance-
focused activity based costing (PFABC).
“Traditional Costing is a cost accounting methodology that allocates
organizational overhead to a specific output based on a predetermined cost
driver or by using a pre-determined percentage rate” (Carroll & Lord, 2016).
This method is widely used and accepted, however unrealistically depicts a
product or service’s true cost (Carroll & Lord, 2016).
Performance-focused activity based costing (PFABC) (AKA value-based
purchasing) examines organizational performance to properly allocate indirect
expenses (Carroll & Lord, 2016). I believe this method of classifying costs
would be most effective. Financial success is dependent on performance and
quality. This method reallocates funds to the highest performing hospitals,
with consideration of the quality of care delivered at the organization, and
overall patient outcomes (Patterson, 2017). PFABC involves collection,
analysis, and reporting of information pertaining to performance of the
organization. This method allows organizations to see what has been
achieved, or should b have been achieved.
Furthermore, utilization rates are related to volumes and revenue generation.
“Having a thorough understanding of the organization's current positioning
and the likely impact of healthcare reform and market forces is essential if a
provider is to project utilization to support an accurate multiyear financial
plan” (Samaris, 2013). To determine profit or loss, managers must review
costs in relation to associated volumes and revenues. According to the
literature, revenue minus total expenses will depict organizations profit gain or
loss (Nowicki, 2022). Simply, more consumers mean more volume, however
this also means more support, and both must be taken into consideration to
determine volume.
References
Carroll, N., & Lord, J. C. (2016). The Growing Importance of Cost
Accounting for Hospitals. Journal of health care finance, 43(2), 172–185.
Michael Nowicki. (2022). Introduction to the Financial Management of
Healthcare Organizations, Eighth Edition: Vol. Eighth edition. Gateway to
Healthcare Management.
Samaris, D. (2013, April 1). Anticipating utilization trends key to adapting in
an evolving market. Healthcare Financial Management, 67(4).
Patterson, M. (2017). Review of Literature: The Clinical Nurses’ Perception of
Their Role in Hospital Reimbursement. Pursuit: The Journal of Undergraduate
Research at the University of Tennessee, 8(1), 115–123.
