Healthcare financial managers utilize different methods, financial resources, and cost classifications
to allocate indirect cost to direct costs when determining patient charges by dividing them into
specific categories. According to Nowicki (2022), cost accounting provides necessary information
needed to set charges, manage cost and analyze profit. Some cost can be managed by traceability,
such as direct costs, indirect costs, full cost, and average cost. Direct costs are traced back to
department, products or services which includes labor and supplies, while indirect cost is not traced
back to a department (Nowicki, 2022). Healthcare does not bill patients for heating or ac, so to make
sure patients are paying for services and products received, the cost as to be allocated. The
organization will use a process called cost allocation to assign the cost of heating and cooling to a
department that generate patient bills, such as radiology and lab (Nowicki, 2022).
Utilization rates determine the specific costs in each department and determines what’s affecting the
department. Decreasing utilization within an organization can help decrease the facilities cost and in
return help the decrease the cost for patients. There are many tools that can be used to help decrease
utilization, such as Root Cause Analysis (RCA). RCA is a lean tool that can be used to tackle
unnecessary utilization in healthcare by using a 5 step process to determine the issue, collect data,
recommend and implement solutions (Colleage, 2022).
Cost accounting in healthcare organizations is essential as it aids in assessing the value or cost of
products and amenities. Healthcare financial managers are important in performing cost accounting
duties with the use of financial resources and cost classifications to allocate both direct and indirect
costs when establishing patient charges. The financial managers in healthcare help in eradicating
barriers associated with price transparency which entail finding approaches to communicate the
various complex financial elements.
One of the ways is through the operation cost those avails amenities to patients who visit the
emergency section. This section necessitates equipment with the financial manager having to seek
money with this aspect referred to as the non-operating cost. Also, direct cost is directly proportional
to sections entailing labor and supplies or logistics. The indirect costs encompass the overhead
charges.
The healthcare financial managers also assign relative value unites to intermediate goods, for
example medication in estimating their direct cost. The indirect cost entail areas such as lighting, and
the cleaning services as well as other services provided by the junior employees. the time used in
cleaning and electricity used would be included in the budget. The financial manager in healthcare
also reviews budgets for catherization facilities. Health care financial managers need to comprehend
how the different volumes as well as payment results will impact a healthcare organization.
Utilization declines tend to be viewed mostly in the inpatient environment because of the various
medical care reforms and the ever-alternating demographics. Also, outpatient utilization tends to
indicate an augmentation due to the growth and progression of the universal healthcare coverage in
line with the Affordable Care Act. The reduction of utilization can help a health care organization
lessen costs and augment their eligibility for tiered or narrow networks. Medical facilities and health
systems necessitate to depict that they have the capability of lessening the various costs essentially by
eradicating utilization from the system in an effort to operate in the various greatly selective
networks.
There are a variety of ways in which healthcare financial managers can allocate indirect costs to
direct costs. I have chosen to hone in on two of those five methods, Performance-Focused Activity
Based Costing (PFABC) and Ratio of Costs to Charges (RCC).
PFABC is an in-depth method of recording, tracking, and reporting every last detail of an
organization's financial movements. Carroll & Lord (2016) explain this method as "The other
significant difference between PFABC and other costing approaches is that PFABC calculates the
cost drivers’ standard rate (quantity) and price variances. This helps managers evaluate the true
drivers of cost by separating the analysis of volume and price variances. The extra processes in the
PFABC approach make PFABC more difficult to establish but enable PFABC to offer a richer and
more detailed examination of the organization’s activities." For every activity that occurs within an
organization, there is a cost that can be directly linked to it. Financial managers can use this accurate
and detailed report to assess the financial health and direction of a facility, plus appropriately allocate
funding to departments based on this method of cost accounting. Surpluses and deficits can be readily
identified using this method because that's what it's designed to do.
RCC, on the other hand, is estimate-based accounting. These estimates do not show accurate
numbers, but rather a general idea of a facility's financial health. This method is the standard for CMS
reporting. As defined by Carroll & Lord (2016), RCCs can be defined as "The cost report uses
traditional costing methods to allocate overhead costs to clinical departments, allowing hospitals to
estimate the full cost of each revenue-producing department. Hospitals can pair these estimates with
information about the total charges for all services provided by a clinical department to compute a
department-level ratio of cost to charges (RCC). The RCC, when multiplied by the hospital’s charge
for a specific service, can be used to estimate the cost of providing an individual." This method would
be ideal for its current purpose of CMS reporting, but also for casting financial projections and
outlining budgets. It stands to reason why this would be the standard healthcare financial practice
because it's hard to predict utilization at the hospital level with community trends such as tourism or
sports activities being an unknown variable that should be reflected in financial planning. What I
mean by this is that hospitals are not just used by the locals. Tourists get sick. Athletes get injured.
However, it's not something that can be stated, so it has to be estimated. Just like the local community
and the rate at which it might get sick or have a random increase in the number of automobile
accidents can't be accurately predicted. That's when estimate-based accounting is necessary.
The utilization of healthcare services within a population are related to volumes and revenue
generation through a positive correlation. Simply stated, the more times the population obtains (uses)
services, the more volume is generated, and that leads to an increase in revenue. Healthcare relies
upon illness and injury, as well as preventive care, to maintain its own financial health. When it's
noticed that only a portion of the population is seeking care, healthcare facilities should start to find
ways to offer services that are affordable for or appealing to the remainder of the population that is
not utilizing services so that they don't end up losing revenue, or the opportunity for additional
revenue generation.
An example of that is the "Blue Card" program offered through BayCare Health System, Inc., in my
local area, specifically. This is a financial assistance program with eligibility requirements to ensure
that the population can obtain necessary medical care, be it for a one-time encounter or ongoing
health issues. According to the BayCare Financial Assistance webpage, "the total community benefit
was $346 million or 9.4 percent of operating revenue" in 2016. This healthcare organization does free
screening events, health education seminars, and conducts a survey to assess the needs of the
community every few years. I think this is an excellent example of the utilization, volume, and
revenue generation relationship should look like. If the population won't come to a facility for
services, take the services to the people. Yes, it technically doesn't generate revenue, but in my own
dealings with the population, I've noticed that BayCare is the preferred provider for many. People
talk, and word of mouth is the best advertisement. That's how only 9.4 percent of operating revenue is
spent on the community, and the total revenue for that same year (2016) was $3.97 billion
(baycare.org, 2016).
BayCare Health System, Inc. (2016). 2016 Report to the Community.
file:///C:/Users/geeel/Dropbox/My%20PC%20(DESKTOP-
Q1TU2D2)/Downloads/2016%20Report%20to%20the%20Community.pdf
BayCare Health System, Inc. (2016). Financial Assistance. https://baycare.org/about-us/blog-
financial-assistance
Carroll, N., & Lord, J. C. (2016). The Growing Importance of Cost Accounting for Hospitals. Journal
of health care finance, 43(2), 172–185. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6910125/
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.
Colleaga. (2022). How Can Unnecessary Health Care Utilization be Eliminated? Www.colleaga.org.
https://www.colleaga.org/article/how-can-unnecessary-health-care-utilization-be-eliminated
Nowicki, Michael. (2022). Introduction to the financial management of healthcare organizations (8th
ed.). Chicago, IL: Health Administration Press. ISBN: 978-1-64055-282-1
