| Note on Full Cost Accounting in Health Care |
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Beginner |
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The question “What did it cost?” is important in
many organizations. Arriving at an answer can be much more difficult
than it might first appear. Obviously, it is rather easily answered if
we are discussing the purchase of inputs (supplies, labor, and so on)
for the service-delivery process. Even calculating the full cost of a
“unit” produced—whether it is a dialysis procedure or 50 minutes of
psychotherapy—is relatively easy as long as the organization provides
completely homogeneous goods or services. Complications arise, however,
when we introduce multiple goods and services into an organization,
particularly when we use different kinds and amounts of resources to
provide them. This note discusses these matters.
USES OF FULL COST INFORMATION
Information on the full cost of carrying out a
particular endeavor has four basic uses: pricing, profitability
assessment, comparative analyses, and external reporting. Most managers
use cost information for one or all of these purposes at different
times and under varying decision-making scenarios.
Pricing
One of the basic functions of cost information is to
assist management in setting prices. Clearly, cost information is not
the only information that management uses for this purpose, but it is
an important ingredient in the decision-making process. In a similar
vein, some hospitals and other healthcare providers (such as nursing
homes and home health agencies) are paid on the basis of their full
costs, thereby creating the need for a full-cost analysis that
effectively establishes the “price.” However, because cost-based
payment systems are generally thought to contribute to rising
healthcare costs, many insurers and other payers currently pay on some
sort of fixed-price basis, where the price is a predetermined amount
per unit of service, such as a day of inpatient care, a discharge, or
an outpatient visit. In these sorts of fixed-price situations, a
healthcare provider is a price-taker, and a full cost analysis is not
used in setting prices.
Profitability Assessments
Even if an organization is a price taker, however,
it must calculate full costs if management is to know whether a
particular product or service is financially viable.1 If a product is
not covering its full costs, it is, by definition, a “loss leader.”
Since an organization cannot have all its products be loss leaders,
full cost accounting serves to highlight where cross subsidization is
taking place.
Comparative Analyses
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