Healthcare financial managers use a variety of financial resources and
cost classifications in determining patient charges through the
allocation of direct and indirect costs. Direct costs can be referred to
as expenses that go into producing goods or providing services.
Indirect costs are referred to as overhead and some examples could
be rent or utilities. A few methods that financial managers can employ
are activity-based costing (ABC), time-driven activity-based costing
(TDABC), performance-focused activity-based costing (PFABC) and
ratio of cost to charges (RCCs). ABC helps to identify necessary
activities and resources needed in producing output and overhead is
then allocated to different activities using cost drivers. TDABC is
similar to ABC but instead time is used as the only cost driver. In
some cases this can be simpler to implement than the ABC, this
approach doesn't always reflect all of the indirect costs. PFABC is also
similar to the ABC, but it allows for the resources of various activities
to be reviewed by different means and isn’t influenced by one cost
driver like the TDABC is. It is also a very useful way to determine an
activities performance and efficiency as well. The RCC allows for
hospitals to compare Medicare Cost Reports with the total charges of
different departments to form a cost to charges ratio. This method,
however, isn’t typically very accurate due to the Medicare cost
reporting process, in which it may encourage hospitals to distort their
costs. These different methods of cost classifications each have their
own pros and cons, but can each be effective ways to help healthcare
organizations allocate direct and indirect costs regarding patient
charges. (Carol & Lord, 2016).
Healthcare utilization can be defined as the use of services by
individuals for the purpose of the promotion of well-being within the
healthcare system. An individual’s well-being and the need for health
services are major factors for healthcare utilization. Primarily, need is
the factor that drives healthcare utilization the most, but there are
other factors that come into play. Factors such as geography, poverty,
sex and disability status can have an impact of whether services can
be obtained. Therefore, utilization rates can be directly tied to
volumes and revenue generation. Some examples can include
whether or not an individual is insured or has access to transportation
to access healthcare. Typically, the less volume of patients within a
healthcare organization, the less revenue generation and vice versa
(National Academies of Science, 2018).
Carol, N., & Lord, J. C. (2016). The growing importance of cost
accounting for hospitals. Journal of Healthcare Finance, 43(2). 172-
185. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6910125/
National Academies of Science. 2018. Health-Care utilization as a
proxy in disability determination, factors that affect health-care
utilization. https://www.ncbi.nlm.nih.gov/books/NBK500097/
