Understanding Healthcare Cost Accounting
Over the past few months, we’ve been discussing various elements of accounting, particularly the accounting issues related to the healthcare industry. As is well-known and reported in the media, the costs of receiving quality care can be high. But this is a two-way street. Delivering high-quality patient care is also expensive for healthcare providers and, if anything, continues to march higher. According to a May 2024 report by the American Hospital Association, hospitals and other healthcare businesses are facing increasing operational costs and various economic pressures (consider inflation) when providing care for their patients. To this point, healthcare cost accounting – the process of identifying, classifying, and reporting the costs associated with providing healthcare – is increasingly important to understand. Simply put, healthcare cost accounting consists of the analysis and recording of the labor, materials, and overhead costs to determine the actual cost a healthcare facility incurs for providing service. As we’ve mentioned in other articles on this site, the reason for conducting thorough accounting procedures and reviews (or audits) is for healthcare businesses to manage their financial resources wisely and to make better informed strategic decisions. Thus, management’s choices can offer better efficiencies and better patient outcomes.Direct and Indirect Costs in Healthcare
In healthcare (like in many industries), costs can well be categorized into two main segments: direct and indirect costs. Direct costs are expenses that are specifically related to the delivery of patient care. Obvious ones include labor costs for physicians and nursing staff, medications and medical supplies, equipment costs such as the machinery used in operating room settings or monitoring devices in patient rooms, as well as diagnostic and various testing expenses. So, the salary of a heart surgeon who performs valve replacement operations, plus the expenses for the surgical instruments used, would be considered direct costs. Indirect costs, on the other hand, are those not directly related to the patient’s care but are indeed necessary to support the overall functions of the healthcare entity. For these, consider administrative salaries and benefits for employees from top managers to support staff and even outside consultants. Facility maintenance, rental costs (if necessary), and utilities would also be considered indirect costs of a healthcare business. Marketing and advertising expenses, information technology costs, and others are examples. Here, the salaries of the hospital’s admin staff and the cost of setting up and running the business’s IT infrastructure would be considered indirect costs. These direct and indirect costs must be accurately identified and reported through effective healthcare cost accounting procedures as they truly impact the financial performance of the organization – both positively and negatively. Tracking and allocating costs leads to informed decisions, better resource allocation, and pricing. Again, by doing this right, managers can see which areas have inefficiencies, optimize resource usage, and ensure the sustainability of the system.Key Benefits of Quality Healthcare Cost Accounting Systems: Cost Data and Control
A high-quality cost accounting system plays a crucial role in assessing and managing a business’s costs involved with providing service. While it may sound jargony, this does indeed help with “data-driven decision making,” which leads to better expense management and improved patient care. That said, more expensive care doesn’t necessarily mean better care or better patient outcomes. For example, a hospital might use cost accounting data to compare multiple surgical procedures to determine which one is more expensive due to the inefficient use of supplies. This more expensive procedure isn’t necessarily better or more advanced, just more costly. Anotherplus with cost data analysis is that it can provide leverage when a provider is negotiating contracts with payers and optimizing revenue cycle management. What does this mean? Well, in healthcare, it means the process a facility will use to manage the “financial elements” of a patient’s care, from registering a patient to the final bill being paid. Elements of this include:- Reducing Denials and Errors so insurance claims are right and there is less of a chance to be denied service from an insurance company. Meticulous coding and billing practices are necessary.
- Improving collections is another area to focus on, whether they are from patients or insurance providers. One strategy for this is better patient communication regarding their responsibilities to pay their share.
- Quality Patient Registration and Data Management can help healthcare entities make sure data is correctly obtained and updated on an ongoing basis. This leads to better claims and billing management.
- Using Advanced Analytics meanshaving data, not for data’s sake (which doesn’t help an organization), but using ongoing data and analytics gained from it to give managers the ability to deeply monitor and improve a range of financial issues.