Cost Accounting in Healthcare
The ever changing healthcare delivery environment has placed heavy burdens on board members,
administrators, chief financial officers, and department directors. Advances in technology, joint
ventures and mergers, and institution specialization have contributed to changes in healthcare
delivery. New methods of reimbursement have surfaced: Medicare prospective payment
system, Medicaid methodologies, and HMO and PPO contracts. Now, more than ever, cost
information is crucial to the decision making process.
Cost Accounting
Cost accounting is the process of determining the full and incremental costs of providing services
and goods to patients and customers. To determine the full cost of providing a service, we must
insure that all costs have been included. For instance, a number of departments, which do not
provide direct patient or customer services, are absolutely essential to the operation of the
institution. The burden of these overhead departments must be allocated to the using
departments. In reality, to make sound management decisions, costs must be known at the
procedure, patient, and department levels.
Costs may be determined based on historical methods of charging for services, such as patient
days and procedures. Products or product lines may also be defined for cost analysis, such as
DRGs or a specific type of day surgery patient. Finally, we may wish to determine full and
incremental costs within the structure of our organization (revenue center or department). The
need to know the cost of each procedure and major product line is essential to financial stability
of every healthcare institution. Without accurate cost information, hospitals are at financial risk
when making decisions considering current operations as well as long-term plans. The cost of
providing services is obviously only one of many considerations. Accurate costing, however, has
been a major missing component of the decision-making process.
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