Week 3 Discussion Post 12

Unlike direct costs, those costs that can be traced directly to a service, product, or

department, indirect costs (overhead) cannot be linked in a direct way (Nowicki, 2022).

Carroll & Lord (2016) as well as our text, describe five cost accounting techniques

to allocate indirect costs to direct costs.

Traditional Costing is a method that allocates overhead to direct costs by using an

easy-to-understand and apply formula involving a pre-determined percentage rate. While

depictions of a service or product’s true cost (Carroll & Lord, 2016).

Activity-Based Costing uses cost drivers or activity measures to allocate indirect

of the product's direct costs and creating a relative value unit (RVU) which is a measure of

what resources are used by each product. Total indirect and direct costs are then assigned

to the product based on the relationship set by RVU (Nowicki, 2022).

Interestingly, I use RVUs when determining which surgical procedure is the

primary (more complex) procedure in the surgical data abstraction work that I do. There is

an RVU calculator found online that I use as a tool.

Ratio of cost to charges (RCC) explained by Carroll & Lord (2016) is a method of

costing that is specific to the healthcare industry and uses traditional costing methods to

allocate indirect costs to clinical departments in the creation of a cost report. This report

allows hospitals to estimate the total cost of each revenue-producing department. The

Nowicki (2022) points out a serious flaw with this method and that is that it

assumes a non-changing relationship between cost and charge, and this is simply not

correct.

Process Costing determines the product cost during a given accounting period.

This method divides the full costs of a department or organization divided by the number

of services or products produced or provided during that period and is not appropriate for

all situations (Nowicki, 2022).

Utilization rates as they relate to volume and revenue

According to the London School of Hygiene and Tropical Medicine, utilization

rates can be calculated by taking the total number of new patient consultations or

volume. If the population of an urban city is 100,000 people, but only 3,000 sought

healthcare consultations in a 12-month period, then with a utilization rate of 0.36,

financial managers might need to ask themselves what barriers to healthcare exist in this

area (London School of Hygiene and Tropical Medicine, n.d.)? Why is the volume of new

consultations not greater? How can we reduce barriers to healthcare and increase volume

as well as increase revenue?

According to a study by The National Academies of Sciences, Engineering, and

Medicine (NASEM) in 2018, the availability of healthcare services does not necessarily

mean that they are equally accessible to all people within a population. Healthcare

utilization is determined by not only the need for care but also whether that care can be

if a population of an area has relatively equal access to healthcare but this population of

people has more co-morbidities, say in a predominant minority community, then the

utilization rate will be higher than that of a community where access to healthy food and

exercise are prevalent (Risa et al, 2021). In order to increase volume in some areas, then

Jane

References

Carroll, N., & Lord, J. C. (2016). The growing importance of cost accounting for

hospitals. Journal of Health Care Finance, 43(2), 172–185.

London School of Hygiene and Tropical Medicine. (n.d.). Health service utilization.

http://conflict.lshtm.ac.uk/page_145.htm#:~:text=Health%20service%20utilization

%20can%20be,to%20calculate%20the%20annual%20number.

National Academies of Sciences, Engineering, and Medicine; Health and Medicine

Division; Board on Health Care Services; Committee on Health Care Utilization

and Adults with Disabilities. (2018). Factors that affect health-care utilization.

https://www.ncbi.nlm.nih.gov/books/NBK500097/