"To realize an effective cost control, a practical and accurate cost
accounting system is indispensable in hospitals." (Cao et al., 2006).
Healthcare financial managers use financial resources and cost clarifications
to allocate indirect costs to direct costs when determining patient charges by
splitting up the charges into individual categories. Direct costs are costs that
can be traced back to a specific department, product, service, or supply
(Nowicki, 2018). Indirect costs cannot be traced to a specific department or
back to the patient, and are considered "overhead costs". It is important that
their is separation of these costs so that the patient is in turn only being
billed for services rendered. Unfortunately, "the hospital production process
is complex and even the normally simple process of defining what outcome
is being costed is difficult in the context of hospital operations." (Carroll and
Lord, 2013). Traditional based 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
(Paulus, van Raak, & Keijzer, 2002). This method however, doesn't
differentiate between product & service lines and marketing channels,
rendering it unreliable. Activity based costing is "widely used in the
preparation of budgets as it serves as a planning mechanism that shows the
relationship between goal achievement and resource intensity" (Namazi,
2009; Turney, 2010). Time driven activity based costing (TDABC) "is an
attempt to overcome some of the weaknesses associated with ABC. TDABC
differs from traditional ABC, in that time is used as the primary cost driver.
The assumption underlying the TDABC method is that most resources (i.e.
manpower, equipment, and facilities) have capacities that can be measured
in terms of time" (Namazi, 2009) Performance-based activity based costing
(PBABC) is different from TABC and ABC in that "the actual resources for
each activity can be assessed in a variety of ways, including interviews,
surveys, or based on actual utilization of time, materials or other resources"
(Namazi, 2009).
Hospitals typically like to keep utilization high in order to attract more
revenue. Unfortunately, this typically has a reverse effect, as and increase in
hospital utilization accounts for an increase in wait times for procedures or
beds in a hospital. In regards to increasing utilization in a surgical suite to
attract more revenue, "With a 15% reduction in payment for the new
patients, the increase in volume may not increase revenue and can even
decrease the contribution margin for the hospital surgical suite." (Dexter et
al., 2001). Although higher volume of patients equals more revenue for the
hospital, it is not without repercussions.
Megan
References
Cao, P., Toyabe, S. I., & Akazawa, K. (2006). Development of a Practical
Costing Method for Hospitals. The Tohoku Journal of Experimental
Medicine, 208(3), 213–224. https://doi.org/10.1620/tjem.208.213
Dexter, F., Macario, A., & Lubarsky, D. A. (2001). The Impact on Revenue
of Increasing Patient Volume at Surgical Suites with Relatively High
Operating Room Utilization. Anesthesia & Analgesia, 92(5), 1215–1221.
https://doi.org/10.1097/00000539-200105000-00025
Namazi M (2009). Performance-focused ABC: A third generation of
activity-based costing system. Cost management, 23(5), 34–47.
Paulus A, Van Raak A, & Keijzer F (2002). Core articles: ABC: The
pathway to comparison of the costs of integrated care. Public Money and
Management, 22(3), 25–32
Turney PB (2010). Activity based costing: An emerging foundation for
performance management. Cost management, 24(4), 33–43.
