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Chapter 1
Managerial Medical Cost Accounting, Structure, Modeling, and Behavior
Controlling hospital and healthcare organization costs is a function of internal controls and the decision-making process to purchase assets and incur expenditures
Managerial cost accounting consists of many goals
Providingvital costing information for internal entityuse.Developing proactive future entity strategic plansinformation.Accentuating the relevancy and flexibility of financialdata.Reviewing real-time medical service segments, rather than just total entityoperations.Acquiring nonfinancial healthcare businessdata.
What Is Medical or Healthcare Cost Accounting?
Definition:A method or means of accounting in which all incurred costs and expenses carrying out a medical activity or service, or accomplishing a patient care purpose, are collected, classified, and recorded.
Healthcare organizations and consultants are obligated to comply with the followingCostAccountingStandards(CAS) promulgated by federal agencies:
CAS501 requires consistency in estimating, accumulating, and reporting costs.CAS 502 requires consistency in allocating costs incurred for the same purpose.CAS 505 requires proper treatment of unallowable costs.CAS 506 requires consistency in the periods used for cost accounting.
Cost Behavior, Structure, and Modeling
Cost behavioris the study of how costs change in relation to variations in activity, service, or use.
The goals of Kaizencosting strategyare:
•Createwaste-free systems with economic policy and procedures.• Define clear leadership buy-in to financial initiatives.• Sustain a culture of unrelenting continuous quality and economic improvement.
Types of Costs
FixedCostAfixed costcan be viewed in the aggregate or on a per-unit basis, but it always remains constant.Such as:clinicrent and salaries.
Variable Cost
Totalvariable costincreases and decreases in proportion to activity, while per-unit variable costs remain constant per unit.Such as:durable medical equipment,indirect labor, and indirect materials such as utilities, air conditioning, clerical costs, and other medical supplies
Hybrid Cost
Ahybridcostis one that contains both fixed and variableelements.Forexample:an X-ray unit is leased for $3,000 per year, plus $10 per film. In this case, the yearly lease is the fixed element while the per-unit film charge varies depending onuse.
Extraneous Cost
Anextraneous costis not related to a specific healthcare product, department, procedure, intervention, drug, patient, or service, and includes step-down, direct, and indirectcosts.
Differential Cost
Any cost that is present under one alternative but is absent in whole or part under another alternative is known as adifferential cost.
Controllable Cost
Acontrollable costoccurs at a particular level of the clinic or healthcare entity if the physician-executive has the power to authorize the expenses. There is a risk/benefit and time dimension to controllable costs.
Opportunity Cost
Anopportunity costis the potential advantage or benefit that is either sacrificed or lost when selecting one course of action over another. It is also known as an either/or decision.
Sunk Cost
Asunk costis an expense that has already been incurred and cannot be changed by any decision, either now or in the future.
Relevant Cost
Arelevant costis avoidable as a result of choosing one alternative over another. All costs are considered avoidable, except sunk costs and future costs that do not differ between the alternatives at hand.
healthcare entity administrator should follow the steps below to identify the costs (and revenues) that are relevant in any costing decision:
Assembleall of the costs and revenues associated with the alternative.Eliminate sunk costs.Eliminate those costs and revenues that do not differ between alternatives.Decide based on the remaining costs and revenues.
Carrying Cost
Carrying costrepresents the cost of maintaining inventory in a clinic, office, or storage facility. This cost includes rent, utilities, insurance, taxes, employee costs (e.g., labor and human resource costs, salaries, fringe benefits, holidays, vacations, etc.), as well as the opportunity cost of having space or capital tied up.
Future Cost
future costsrepresents decision making in a forward direction relevant to an alternate selection process. There are two types:
Avoidable future costscan be eliminated or saved if the activity in question is saved, eliminated, or discontinued. For example, salary and administration costs might be reduced in a hospital if35percent of the beds were taken out of service.Incremental future costsrepresent a change from a specific management activity (e.g., starting or expanding a service, closing or opening a department, acquiring new equipment). For example, the incremental costs for signing a capitated managed care contract would generate 100 new patients next year.
Human Resource Costs
Labor or related human resources typically make up a large portion of the overhead costs of any healthcare entity or medical office. Several non-specific labor costs are reviewed below.Idletimelabor costsFringe benefit costsOvertime premium costs

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1%20Financial%20management%20of%20healthcare