What is the cost of controlling quality? Activity-based cost accounting offers an answer

Achieving high-quality outcomes in healthcare organizations requires effective systems of control. Such systems consist of formal and informal transactions between patients, providers, payors, and policymakers, among others (Shortell 1972; Stiles and Mick 1997). One method for evaluating the suitability of control-oriented transactions to tasks is to compare the costs of controlling the quality of the good or service produced to the cost of its material and labor inputs. Activity-based cost (ABC) accounting provides the methodology for explicating the causal relationship between healthcare organizations' control-oriented transactions, the services whose quality they ensure, and the costs of both control activities and services delivered. Understanding these relationships is of vital importance to those charged with evaluating the feasibility of proposed managed care contracts, new product lines, and existing service configurations. In this article, we explain why traditional accounting practices are poorly suited to accomplishing the control function in today's healthcare arena, highlight activity-based costing's potential to redress the shortcomings of conventional practice, and elaborate the strategic importance of adopting the new methodology.