16 Pieces to Medical Practice Operating Expenses

These comprehensive costing solutions give health systems a full understanding of cost across the care continuum—the only level of insight that will enable strategic cost transformation in the industry’s new normal. Ratio of cost to charges (RCCs) is a costing method specific to the health care industry. Hospitals participating in the Medicare program are required to file annual Medicare Cost Reports with the Centers for Medicare and Medicaid Services (CMS). The cost report uses traditional costing methods to allocate overhead costs to clinical departments, allowing hospitals to estimate the full cost of each revenue-producing department.

It seems Gapenski acknowledged the increasingly important role cost accounting is likely to play in the healthcare market. The most recent update of his widely-used textbook on health care finance and accounting included much-expanded coverage of techniques for estimating costs at the product or service level. There are several reasons why a more modern cost accounting approach is needed in healthcare post-COVID. First, the pandemic has resulted in a significant increase in the number of patients requiring care, while delivering care has slowed down.

Financial Management

The Transition system framework views hospital activity as a three-stage process [3]. In the first stage, procedures and services provided to the patient are converted into intermediate products. In the third stage, patient cases are grouped to form groups of patients with a common characteristic such as a similar clinical diagnosis.

This begs the question, why have hospitals been slow to adopt systems that hold a great deal of theoretical promise? The answer is that, for hospitals, the costs of implementing sophisticated cost accounting systems are relatively large while traditionally the benefits to doing so have been modest. The costs of implementing a cost accounting system for a hospital are significant, yet the benefits of a sophisticated cost accounting system may be low for many hospitals. The reason for this limited benefit relates to hospitals’ perceived inability to influence their prices. Many hospitals feel that their ability to improve payment rates is limited, even if they develop sophisticated cost accounting systems (Arrendondo, 2014).

Introduction to the Healthcare Cost Accounting Industry

Not that they’re not important, but you could set your sights and focus your attention on other aspects of your business that matter just as much. Whether you use Paypal or a credit card processor, we incorporate that information into your books. We will also connect your financial accounts to your bookkeeping software and begin data entry that includes your accounts receivable general ledgers. Our team consists of Certified Public Accountants, Registered Investment Advisors, Enrolled Agents, and Tax Preparers. We have the qualifications and experience to service all of your medical accounting needs.

When it comes to understanding the total cost of care during COVID-19, the world has changed. These are costs that need to be incorporated into the RVUs to keep a practice profitable. It is absolutely possible to calculate RVUs manually, accounting for medical practices and for smaller practices, this can be the least expensive choice. Especially for practices with tenured, experienced team members able to help with determining RVUs, it can be a way to encourage staff involvement and elevate thinking.

Expenses and the Medical Practice: Segmentation

This decision point is, in some ways, the more critical focus when designing a costing system or responding to a major organization initiative. When selecting a cost method, consider the type of item being costed, the resources available for the cost calculation, and the accuracy desired in the results. Cost items are typically chargemaster (CDM) codes but can also be items such as CPT codes or the pseudo cost items created through the Axiom Direct-to-Encounter utility. Traditional costing approaches include Ratio of Cost to Charge (RCC), Relative Value Unit (RVU), and Relative Cost Unit (RCU). These more basic methods can be used for indirect costs, areas where scrutiny of results is less of a focal point, or where resources are limited in some way. In addition, Axiom offers several advanced costing methods for areas that need a more refined approach.

Larger practices may want to consider investing in software or calculation programs and automating the process as much as possible. Using the reverse markup method, an organization can leverage its markup policy to back into the vendor cost when the vendor cost is unavailable. This method is not as accurate as Microcosting but does offer efficiency since it requires less maintenance and no detailed data feeds. While General Ledger represents a true cost, the detail level is too high for informed decision-making.

Health Care Professional Services

For monthly costing, per-unit costs by cost item and cost category are computed each month based on the volumes and dollars for that specific period and stored specific to that month in a unique cost set. All costing is an art form and there will always be some degree of smoothing or averaging. The goal of a good costing system is robust analytics that can lead to more reliable decision-making at the service line and other levels, plus increased precision of physician-, payer-, and procedure-level profitability data. In addition to these advanced “assignment” methods, an expansion of basic RVUs to the more strategic areas of focus can be leveraged to increase accuracy and reliability of the RVU allocation approach. This expansion should include detailed time-and-motion studies at the charge item level to ensure reliable results for labor allocations using RVUs.

Each of these trends will make it more important for hospitals to establish new prices that reflect the costs of providing particular services. Recently, calls for hospitals to be more transparent in their pricing have increased. Ultimately, the hope is that value (price and quality) will become the basis of competition, and hospitals will be incentivized to reduce their prices by cutting their underlying costs (Herzlinger, 2002).