Financial managers use financial resources and the cost classifications to allocate direct/ indirect
costs when attempting to figure out how to charge patients by using the visit summary and placing it
into categories. d Health organizations use charts to determine what specific areas that would generate
the most monetary profit. There are four methods to allocate direct and indirect costs according to
(Nowicki). A direct cost can be an in-house surgery center where small procedures can be done with
twilight anesthesia. An indirect cost could be lights/ dry cleaning/ off-site supplies meaning items that
are not in the office but located near.
The utilization office should get prior authorization so there are no delays in payments. Also,
discharging patients in a proper time manner, or doing a proper observation before admittance. These
things would help generate proper payments.
There are many ways in which healthcare financial managers use financial resources and cost
classifications to allocate indirect costs to direct cost when determining patient charges. According to
Nowicki, direct cost is described as costs that are directly traced from a department such as labor and
supplies, whereas indirect cost (also known as overhead cost) is described as a cost that is not traced
from a department (2022). An example of indirect cost can be heating and cooling. An example of
how indirect cost can be allocated to direct cost can be in radiology. In radiology where all types of
images and scans are performed, the direct cost would be the X-ray machines and medical staff to
perform. The indirect cost may include lighting, environmental services, and housekeeping services.
The indirect cost for each image and/ or scan would be included in the budget by the financial
manager but will also include the financial cost of having the department cleaned thoroughly and the
amount of electricity for lighting needed.
According to Bragg & Koroly, U.S hospitals are losing millions each year due to denials by health
plans and government payers for critical care (2019). Utilization reviews and rates are important to
discover prospects to better organizational omissions, efficient practices and enhance training (Bragg
& Koroly. 2019). It is important that financial managers prepare for these declines and have a backup
plan so that care can be delivered safely.
d d There are many ways in which costs are classified. Costs may be classified by accounting function,
by management function, or by traceability. These costs may also be classified by relevance which
will work and contribute to management decision making. For example, controllable costs such as
actual labor of employees and uncontrollable costs such as utilities are considered when allocating
costs (Nowicki, 2022).
d d d d d d d d d d Healthcare managers allocate costs to ensure patients pay only for services and products they
have received. This can be done in several ways such as direct apportionment which is the easiest
way to allocate cost. There is also step-down apportionment which takes the disadvantage of direct
apportionment into consideration. Double apportionment, which is the most practical method and
multiple apportionment, which is the most accurate however requires increased computer time and
digital memory (Nowicki, 2022).
Utilization rates are the number of services used over a length of time divided by a
population. Utilization helps with managing costs and delivery of services, as well as decreasing
revenue loss. By working with departments within an organization, utilization can facilitate resources
and services in a quality cost effective manner (Weiner, 2022).
There are many different methods that financial managers can use cost allocation to convert indirect
to direct cost. Direct cost can be traced directly to the department product or service (Nowicki, 2022),
for example in an Endoscopy unit the direct cost that can be billed to the patient for service would be
surgery personnel, equipment, stents, and medications (Loras, Mayor, Fernandez-Banares, & Esteve,
2018). Indirect cost also known as overhead costs cannot be traced directly to the department product
or service (Nowicki, 2022). For example, cleaning of the facilities, equipment repair, communication
expenses (Loras, Mayor, Fernandez-Banares, & Esteve, 2018). d
Common cost accounting methods our traditional costing, activity-based costing, time driven activity-
based costing, performance focused activity-based costing, and ratio of cost to charges (Carroll and
Lord, 2016). Each of these methods have benefits and disadvantages. Depending on the facility and
department one method may be more financially favorable.
Utilization rates are the services being used by patients, the more patients using services (volume)
correlates to more revenue being generated due to those services being billed. As used in example for
this discussion, the Covid-19 pandemic caused forecasted utilization rates for hospitals and facilities
to be outside of predicted. Another example was the high utilization rate of telemedicine that had not
been considered prior to the pandemic. “Understanding these trends will allow health systems and
providers to better determine patient needs and allocate appropriate resources” (Wang, et al., 2022)
References:
Loras, C., Mayor, V., Fernández-Bañares, F., & Esteve, M. (2018). Study of the standard direct costs
of various techniques of advanced endoscopy. Comparison with surgical alternatives. Digestive and
Liver Disease, 50(7), 689–697. https://doi-org.ezproxy.snhu.edu/10.1016/j.dld.2018.03.002
Michael Nowicki. (2022). Introduction to the Financial Management of Healthcare Organizations,
Eighth Edition: Vol. Eighth edition. Gateway to Healthcare Management.
Carroll, N., & Lord, J. C. (2016). The Growing Importance of Cost Accounting for Hospitals. Journal
of health care finance, 43(2), 172–185.
Huang, B.Z., Creekmur, B., Yoo, M.S. et al. (2022) Healthcare Utilization Among Patients
Diagnosed with COVID-19 in a Large Integrated Health System. J GEN INTERN MED 37, 830–837
https://doi.org/10.1007/s11606-021-07139-z
Nowicki, M., (2022). Introduction to the Financial Management of Healthcare Organizations, Eighth
Edition: Vol. Eighth Edition. Gateway to Healthcare Management.
Weiner, M., (2022). The importance of utilization management in healthcare [podcast]. Blog
Revenue Cycle, The Hospital Finance Podcast.
Bragg, L. & Koroly, A. (2019) Utilization review: 5 reasons hospital lose revenue.
https://www.hfma.org/topics/hfm/2019/april/utilization-review--5-reasons-hospitals-lose-
revenue.html
Nowicki, M. (2022) Introduction to the financial management of healthcare. Gateway to healthcare
management.
Nowicki, M. (2018). Introduction to the Financial Management of Healthcare Organizations (7th ed.).
Chicago, IL: Health Administration Press.
