Cost Accounting in Healthcare Syntellis Performance Solutions

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Healthcare providers can benefit significantly from automating and delegating significant portions of their accounting. As a result, it’s easy for new practice owners to make mistakes as they transition into business ownership. As a result, healthcare professionals are often unprepared to manage their company’s accounting and tax responsibilities. To make matters worse, the unique nature of the healthcare industry creates financial issues beyond what most business owners face.

Have Great Financial Health With Medical Accounting

Regardless, since January 2021, healthcare organizations are required to make costs transparent for consumer review. Traditional Costing is a cost accounting methodology that allocates organizational overhead to a specific output based on a predetermined cost driver or by using a pre-determined percentage rate (Paulus, van Raak, & Keijzer, 2002). It requires minimal financial and/or managerial investment which helps explain its wide use and acceptance (McKenzie, 1999). Now that we’ve explained why cost accounting data is crucial for hospitals and health systems, we will explain how and why existing systems used by many organizations aren’t meeting their needs. Decades of M&A activity have left these products as low priority to the acquiring company, causing them to lack many of the critical requirements of a truly advanced cost accounting and decision support tool.

They frequently interact during the patient’s care journey; service-line physicians’ clinical decision-making and practice patterns often drive consumption of service-center resources. However, separate physician and administrative executives often lead service lines and centers, and organizations financially track and measure them separately. Service centers are integral to service line management because they provide critical services to the service lines.

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Healthcare CFOs can meet emerging cost challenges by adopting a comprehensive, scalable, and maintainable costing solution—ABC. As a healthcare costing methodology, ABC breaks organizational resource use down by patient, provider, service-line, diagnosis-related group, or chosen subset. The data is granular and actionable, pinpointing where the system has the opportunity to improve financially. The Health Catalyst PowerCosting™ is the first activity-based cost accounting system widely available today to track 100 percent of clinical costs, using time-driven and other activity drivers to understand resource consumption accurately. In the short term, barriers to price transparency include finding ways to communicate complex information on prices, provider quality, and financial liability to consumers in ways that they can understand.

Using the Transition system methodology, there are several potential sources of measurement error when estimating the unit costs of products and services. Bias may occur when intermediate products are identified and when direct and indirect dollar values are assigned to each intermediate product. In the second step of the Transition system methodology, procedures and services provided in patient care departments are selected accounting for medical practices and grouped into discrete intermediate products. The identification of the intermediate products at each department is generally based on the assumption that a relatively small number of procedures and services make up a high percentage of the department’s costs. Department managers generally follow the “80/20 rule” thereby identifying the 20% of a department’s products and services that account for 80% of its costs [13].

Cost Accounting in Healthcare

Starting any small business comes with its share of risks, but opening a private practice can bring personal and professional rewards. And as Business News Daily points out, more small practices means benefits for the community, with greater competition and more widespread access to care for patients. But the cost of starting a medical practice and controlling overhead are critical concerns, and planning appropriately is vital to sustainability and future success.

The RVUs previously assigned to each intermediate product are used to allocate intermediate products. First, the indirect cost of a single RVU is estimated by dividing the total indirect costs assigned to the department by the department’s total number of RVUs. The indirect cost of each intermediate product is then estimated by multiplying the intermediate product’s assigned number of RVUs by the indirect cost of a single RVU. Once indirect costs have been assigned to individual intermediate products, the user is able to estimate the total unit costs of intermediate products by adding the product’s direct costs (fixed and variable) and indirect costs. A practical and potentially accurate method that hospitals have started to adopt to estimate costs is that of hospital cost accounting systems. Hospital cost accounting systems are software systems that integrate resource utilization and financial data already recorded in other hospital information system databases.

Modern Cost Accounting

If these changes materialize, cost accounting information will become a much more important part of hospital management than it has been in the past. In the first step of the Transition system methodology, hospital departments are categorized as either direct or indirect cost centers (Figure 1). Each department incurs expenses that are directly or indirectly related to providing medical services. Direct cost centers are patient care departments (e.g., radiology, operating room) that directly provide services to patients, and the costs incurred by these departments are called direct costs. Indirect cost centers are hospital overhead departments (e.g., administration, housekeeping), and the costs incurred by these departments are called indirect costs. Overall, U.S. hospitals have been slow to adopt the more sophisticated forms of cost accounting like ABC, TDABC, PDABC or even traditional costing methods.

The portion of revenue from each type of payer is critical to hospital profitability. Cash accounting, on the other hand, only records revenue and expenses when the transaction has been finalized. It’s a simple, straightforward method, and it can be sufficient in certain industries with less complex accounting requirements. However, this method is normally not a good fit for health care facilities because payments can take months to be finalized – and sometimes, they may not ever be finalized. However, if they’ve never worked with a busy medical practice before, they may not be able to develop effective medical practice accounting solutions. Accounting for medical practices involves many more moving parts than accounting for most other businesses.

How Is Accounting For Medical Practices Different?

To achieve and sustain financial success and maintain timely compliance, you need a team that focuses on every aspect of your clinical and billing operations. One must be cautious about approaching value-based medicine through the lens of time-driven activity-based costing, which has some limitations. The following categories provide a framework for systemwide accountability and measurement, but the PowerCosting provides the capability to customize and add additional or alternative measurements. All measures are rooted in the idea of “cost per”; every clinical output is anchored to its resource (cost) input, providing a clear and comprehensive indication of the optimization of resources. The George Washington University’s online Healthcare MBA blends business and healthcare concepts in a rigorous and experiential program. The program provides traditional MBA core courses and specialized healthcare electives to help tailor the curriculum to your goals.

• While the same fundamental accounting principles apply to every business in the United States, the nature of the healthcare industry presents some unique issues.
• Outsourcing your medical billing and accounting allows you to focus on what’s more important while still achieving the financial results you desire.
• Costing methodologies apply basic mathematical principles and sophisticated technology to calculations to ensure accuracy, repeatability, and reliability.
• Here is what you need to know about accrual vs cash accounting, and how to manage your accounts receivables and revenue recognition depending on your choice.
• Doing so will help lay a foundation that can make these complexities significantly more manageable.

Syntellis’ Axiom™ Cost Accounting supports a variety of costing approaches and methodologies designed to more precisely attribute costs to patient care activities. When used in conjunction with “standard” costing techniques — such as RCC, RVU, and RCU — activity-based costing enables hospitals and health systems to know more precisely what a patient’s costs are. The trick is to keep this view of patient cost aligned with the organization’s overall profitability view. Activity-based costing techniques have some inherent limitations that must be well understood. Techniques that assign cost based on anything other than the general ledger can lead to variances that will need to be addressed and explained to users, particularly if the organization has always relied on GL-based cost accounting techniques.

Neither is inherently superior, but the accrual basis is generally better suited to medical practices. Unfortunately, medical practices provide services to their patients but have to coordinate payment between them and their insurance companies. There are many more moving parts than usual, and it’s much easier for things to go wrong.

• That typically happens when a cost accounting system is too complex, and users lack the knowledge to interpret the data contained with it.
• Doctors often provide services and go without the corresponding revenues for months, if they ever receive them at all.
• Change and disruption are likely to be the norm for healthcare organizations going forward.
• This Accounting Handbook for Medical Practices gives physicians a valuable, usable, and readable journey through the proper processes of financial accounting and related issues.

While for some indirect cost pools, such as housekeeping, a fairly accurate and plausible allocation basis can be found (e.g., square footage), many other indirect costs are much more difficult to allocate in a plausible way. The costs of central administration are one example of indirect costs that are difficult to distribute. A more accurate method for assessing the costs of health care services is that of “top-down” costing.