Financial managers do cost allocation to bill patients for the services provided. Indirect and direct
costs are separated to differentiate products or services provided to the patient (direct costs) and other
operational costs of the organization, not traced back to the patient (indirect costs) (Nowicki, 2018).
This ensures that the patient is only paying for the products and services they require while
hospitalized. Financial managers use several methods are used to allocate costs by financial
managers, such as direct, step-down, double, and multiple apportionments (Nowicki, 2018). To
complete this task, financial managers use multiple resources. These resources include organizational
charts, which identify who is responsible for each functional area within the organization, and
revenue center identification, which separates what generates revenue and what does not (Nowicki,
2018). Three methods are used to assemble costs. These methods include responsibility, full, and
differential costing (Nowicki, 2018).
Utilization rates are assessed and evaluated in order to ensure the right steps are taken at the right
time to secure appropriate payment for the hospital and coverage for the patient (Bragg & Koroly,
2019). This relates to volumes and revenue generation because this process shows areas that are
losing revenue due to a lack of need for the patient. By accomplishing this review, measures can be
taken to improve organizational oversight, systematize processes, improve training, and create
feedback (Bragg & Koroly, 2019). Overall, this process allows for making appropriate decisions for
care based on the patient's needs that can avoid any additional costs to the patient and organization.
The reading this week defined direct costs, costs that can be traced directly to a department, product,
or service (Nowicki, 2022). In a hospital this could be something such as IV pumps for departments.
An indirect cost cannot be traced directly to department, product or service, this could be something
such as lighting for the facility (Nowicki, 2022). The system of working this indirect cost into direct
costs is called cost allocation. Financial managers and healthcare organizations must carefully assign
these to make sure a patient is not overpaying for services. For example, a patient who receives X-
rays may have a fixed cost that includes the price of heating / cooling and electricity while the patient
is receiving the scans (Nowicki, 2022). The healthcare organization must consider the organizational
chart, which department is responsible for which services. Next, they must consider revenue center
identifications, or areas that do or do not generate revenue. After that is the accounting system where
costs can accurately and efficiently assign costs to services given. There is also workload statistics
which creates statistics for each department which can show influx of patients, revenue, etc.. Lastly
there is the cost allocation method, which through the other steps helps to determine the correct
pricing, including indirect services, in how to charge patients (Nowicki, 2022).
d d d d d d d d The text also talked about ratio to cost charging, or RCC. Nowicki (2022) explains that RCC
works by totaling all charges for services given and all costs for overhead, essentially it helps give an
estimated cost of each department which creates revenue. This is an important tool as it can help
divide and estimate a specific cost of service an individual may have to pay for, or even help explain
the healthcare business’s financial well-being.
d d d d d This is not the only system, but it shows how healthcare managers may be able to easily break
down cost to revenue ratios and assemble more well utilized financial tools.
Utilization rates are defined as the services used over time divided by the population using
them (Joo &Huber, 2019). During COVID 19 many hospitals were hurting financially due to lack of
elective services and surgeries (Khullar, Bond & Schpero, 2020). Although there were plenty of
critically ill patients, many elective surgeries lost profit because they were advised to not come in
unless necessary. Many patients also were either hesitant to come in to receive care due to pandemic
or were waiting unless emergent (Khullar, Bone & Schpero, 2020). Many hospitals saw a drop in
revenue due to this, however, acuity usually rose due to increase of critically sick patients. This was
also seen in child birthing areas. Overall, birthing rates decreased during covid, but have been
steadily decreasing since 2008 (Yonder, 2022). Although this news comes from North Carolina, it is
not the only state. They had to shut down OB services in some hospitals because they saw a 40
percent drop-in services used for the population (Yonder, 2022). Unlike the scholarly article provided
previously, I included this one because I found it interesting and relevant to the matter at hand. When
there is a steep utilization drop and revenue decrease due to the very much lessened use of service
hospitals may have to choose to discard the service. Even though other departments can usually make
up the revenue for a service with lessened utilization, this is not always the case. However, there is
the other issue of it being needed and a specialty, even though the population who needs it has
decreased drastically. I would love to hear some of your thoughts and opinions on this! Especially for
a service that when it is needed, is truly needed! What would you guys suggest to financial managers?
Healthcare financial managers use financial resources and cost clarifications to allocate indirect costs
to direct costs when determining patient charges. They achieve this through the means of cost
accounting methods. There are a few different cost accounting methods that have been develop over
the years. They are Traditional Costing, Activity-Based Costing, Time-Driven Activity Based
Costing, Performance-Focused Activity Based Costing, and Ratio of cost to charges. The different
cost to charges methods have pros and cons to each, some like traditional costing are easy to use but
lack in accounting for differences in products/services provided. Others like Performance-Focused
Activity Based Costing (PFABC) offer a true value of the cost to the hospital and what to charge the
patient, but these extra processes make it more difficult to use (Carroll & Lord, 2016). Therefore the
indirect costs can be translated to direct costs for patient charges.
Utilization rates are related to volumes and revenue generation. The cost of healthcare is the price and
the utilization rates (Yoder-wise, 2018). Utilization is the quantity of services performed. The number
of diagnostic test or patient visits would be considered utilization. Revenue is the generated income
from payers or reimbursement. Higher utilization means higher volume and thus a higher revenue due
to number of services being payed for.
References
Carroll, N., & Lord, J. C. (2016). The Growing Importance of Cost Accounting for Hospitals. Journal
of health care finance, 43(2), 172–185.
Yoder-Wise, P. (2018). Leading and managing in nursing. St. Louis: Elsevier Mosby.
Joo, J. Y., & Huber, D. L. (2019). Case Management Effectiveness on Health Care Utilization
Outcomes: A Systematic Review of Reviews. Western Journal of Nursing Research, 41(1), 111–133.
https://doi.org/10.1177/0193945918762135
Khullar D, Bond AM, Schpero WL. COVID-19 and the Financial Health of US Hospitals. JAMA.
2020;323(21):2127–2128. doi:10.1001/jama.2020.6269
Nowicki, M... (2022). Introduction to the Financial Management of Healthcare Organizations, Eighth
Edition: Vol. Eighth edition. Gateway to Healthcare Management.
Yonder, D. (2022, April 21). Nearly half of rural hospitals lose money on Childbirth Services. North
Carolina Health News. Retrieved from https://www.northcarolinahealthnews.org/2022/04/22/nearly-
half-of-rural-hospitals-lose-money-on-births/
Bragg, L., & Koroly, A. (2019, April 1). Utilization Review: 5 Reasons Hospitals Lose Revenue.
Hfma. https://www.hfma.org/topics/hfm/2019/april/utilization-review--5-reasons-hospitals-lose-
revenue.html
Nowicki, M. (2018). Introduction to the financial management of healthcare organizations (pp. 132-
170). Chicago, IL: Health Administration Press. Samaris, D. (2013). Anticipating utilization trends
key to adapting in an evolving market. Healthcare Financial Management, 67(4), 26-28.
