Healthcare managers need to understand all costs (fixed/variable,
direct/indirect) of services provided in order to determine program
profitability.Direct costs are costs that can be traced directly to a department,
product, or service while indirect cost indirect costs cannot be traced directly
to a department, product, or service. Examples of direct cost are such as labor
and supplies and examples of indirect cost can be costs associated with heating
and cooling. To allocate costs healthcare financial managers don’t directly
send bill for everything they did. Healthcare managers instead of sending bill
to patients for cooling and heating which consider an indirect cost, they assign
the cost another department that make patient bills such as lab and radiology.
(Nowicki, 2018).
To determine profit and losses, financial managers evaluate the costs in
comparison to volume and revenue. They subtract the expenses from the
revenue. (Nowicki, 2018). In deciding how to determine patient charges
financial managers measure the indirect and direct cost of operations by first
understanding the relationship between costs and expenses through a process
called cost analysis. Direct cost are such things as consumable supplies and
materials, sales commission or any cost that can be directly traced to the
organization, while indirect cost is those than cannot be traced back to the
organization such as overhead cost as rent, utilities, salaries and administration
cost (Nowicki, 2018).
Utilization rates are related to both volume and generated revenues. A study
done in the United States about hospitals that routinely keep utilization
relatively high to maximize profit found out that increasing the volume of the
patients result in increased utilization rate. The implication is to increase
patient volume, most hospitals signed a discount contract which can have
affect revenue. The study concluded that “for hospitals with a relatively high
operating room utilization (e.g., 90%), computer simulations predict that
increasing patient volume by the amount expected to "fill" the operating room
can have the net effect of decreasing contribution margin (i.e., profitability)”.
(Dexter & Macario, 2001).
References
Dexter, F. & Macario, M. (2001). The impact on revenue of increasing patient
volume at surgical suites with relatively high operating room utilization.
https://pubmed.ncbi.nlm.nih.gov/11323349/
Nowicki, M. (2018). Introduction to the Financial Management of Healthcare
Organizations (7th ed). Chicago, IL: Health Administration Press.
