Healthcare finance managers can use financial resources and cost classifications for the purpose of
allocating indirect costs to direct costs while determining patient charges. For instance, they can
allocate indirect expenses to relevant activities by utilizing cost drivers. The cost drivers need to be
carefully selected so that they can reflect the application of a specific resource pool. This method is
considered to be useful because of its high accuracy and the rational nature of financial management
information. By adopting the activity-based costing method, it will be possible to trace the indirect
costs and assign them to individual elements such as patients so that they can be effectively charged
by a healthcare facility. ABC system is considered to be much more effective as compared to
traditional methods since it helps in making better decisions relating to product mix and also helps in
product price calculations. Performance-focused activity-based costing is another method that can
help in allocating indirect costs to direct costs. However, such a process involves a series of steps. For
instance, the actual resources that have been used or each activity can be assessed by adopting
methods such as surveys, interviews, and on the basis of the actual time that has been utilized (Carroll
& Lord, 2016).
Utilization rates are related to volumes and revenue generation. The cost that arises in the health care
setting is related to the price of the delivered service and the utilization rate. Price is the rate that has
been set for the rendered service. On the other hand, utilization rate relates to the volume of services
that have been provided. A suitable example is the total number of patient visits in a healthcare
facility. The process relating to revenue generation involves the reimbursement that is done by
multiple payers or third-party payers. The utilization rate is likely to get altered when there is a
change in volume, and there is a decline in the revenue that is generated. Physicians working in the
healthcare setting can reduce the utilization rate by offering a better quality of care services so that
patients would not have to visit the facility often. When there is a decline in utilization rates, the
number of patient visits can reduce, and it can also lead to a decline in the revenue that is generated.
Samaris has argued that the proper insight into utilization trends is critical to adapt to the evolving
healthcare domain as it can impact revenue (Samaris, 2013).
“Performance-Focused Activity Based Costing (PFABC) is a third iteration of ABC. PFABC is a
hybrid ABC method that attempts to overcome some of the weaknesses associated with TDABC and
ABC” (Carroll & Lord, 2016). PFABC’s filling the voids for both, while keeping the beneficial
elements, and have added value to the managerial costs system by giving the ability to analyze a
variety of aspects at once, like the effectiveness and efficiency of the organization’s performance,
acting as an aid in planning and budgeting, as well as, linking resource costs directly to each
important activity performed. Resources are vast with this method and include actual utilization of
time as basis, surveys, interviews, actual materials and more. This allows for the cost driver to be
time or activity, creating even more versatility.
The traditional costing method “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). While being easier to implement that the PFABC, requiring managerial or financial
investment, and being widely accepted, it yields impractical and unreliable true cost results because it
disallows the ability to separate service and product lines.
The price for healthcare services rendered is set by the healthcare provider. The number of
services rendered dictates the utilization rate. Revenue is then generated by the price and number of
services rendered, or their utilization. If the volume of services raises, the revenue may go with it in
theory, however, after analysis, “hospitals may try to attract new surgical volume by offering
discounted rates. 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 &
Lubaersky, 2001).
To determine patient cost, healthcare financial managers use different methods to allocate indirect
and direct costs. Cost allocation is to make sure patients are only paying for services they received.
Indirect costs are things like housekeeping and heat - these costs are incorporated into direct costs
like radiology and lab fees. d
Utilization in healthcare is “the quantification or description of the use of services by persons for the
purpose of preventing and curing health problems, and promoting maintenance of health and well
being” (Carrasquillo, 2013) The utilization rate is directly related to service volumes which in turn
relate to revenue and volume generation including in-patient stays, ambulatory surgery and service
visits, and ER visits. d As utilization rates increase, revenue and volume increase too (AHRQ, 2022).
Healthcare cost and utilization project (HCUP) Agency for Healthcare
Research and Quality accessed 5/19/22
www.ahrq.gov
Carrasquillo, O. (2013) Health care utilization. In: Gellman M.D., Turner
J.R. (eds) Encyclopedia of Behavioral Medicine. Springer, New
York, NY
doi.org/10.1007/9\7-1-4419-105-9 885
Carroll, N., & Lord, J. C. (2016). The Growing Importance of Cost Accounting for Hospitals. Journal
of health care finance, 43(2), 172–185.
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.
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 and analgesia,
92(5), 1215–1221. https://doi.org/10.1097/00000539-200105000-00025
Carroll, N., & Lord, J. C. (2016). The growing importance of cost accounting for hospitals. Journal of
health care finance, 43(2), 172.
Samaris, D. (2013). Anticipating utilization trends key to adapting in an evolving market. Healthcare
Financial Management, 67(4), 26-28.
