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 these 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).
a a 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.
a a 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.
a a 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?
References
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/
