Week 2 Discussion Post 24 | IHP 450 - Healthcare Management and Finance

Financial managers are tasked with allocating indirect costs to direct costs in regards to patient charges. Direct costs include labor and supplies while indirect costs are intangible things referred to as overhead. In order to access the costs a method of cost accounting is used. There are several methods. One method is activities based costing (ABC) which "assigns a cost to each product and service based on its actual consumption" (Lorange 2021). This is the method that makes the most sense to me. I like dealing with hard numbers and facts. I understand that it is useful to have a system to project future costs, but there are so many variables that you cannot necessarily take into account. c In Time-Driven Activity Based Costing (TDABC) the cost is attributed to time while Performance-Focused Activity Based Costing (PFABC) "identifies each important activity explicitly and directly mapping the resource costs to the activities" (Carroll & Lord 2016). Ratio of cost to charges (RCCs) are calculated based on total charges for all services and the allocated costs for overhead. The cost are allocated by following four methods: Direct apportionment is used to allocate all costs that comes from a non revenue generating department. Step Down Apportionment first allocates all costs from non revenue generating departments to other non revenue generating departments followed by an allocation of costs to revenue generating departments. Double Apportionment allocates costs from non revenue generating departments to other non revenue generating departments while simultaneously allocating costs from revenue generating departments to other revenue generating departments follwed by allocating all costs to non revenue generating departments. Multiple apportionment involves "multiple simultaneous apportionments during the first steps" (Nowicki 2022). So while a patient can be billed for labor and supplies like a fracture repair and a cast, they cannot be directly billed for the electricity the surgeon used to see or the air conditioning to keep the OR cool. Those are overhead charges that are paid by the departments that actually generate revenue like the surgery center. Healthcare utilization is "the number of services used over a period of time divided by a population denominator" (Carrasquillo 2013). For example, a hospitals same day surgery center usually performs 30 surgical procedures out of the 200 patients that have procedures per day. During covid all elective surgeries were cancelled. Therefore out of 200 patients that needed surgery only 10 of them were emergency procedures and of the 10 only 2 had them at that hospital. This is how utilization rates effect volumes and revenue. Due to the lower volume of patients that department will report a signficantly lower revenue.

References

Carroll, N., & Lord, J. C. (2016). The Growing Importance of Cost Accounting for Hospitals. Journal of health care finance, 43(2), 172–