Hospital cost accounting and the new imperative

Government regulatory structures, prospective payment mechanisms, a more competitive environment, and attempts to link cost accounting principles to planning, budgeting, and fiscal control all have served as catalysts for hospitals to increase their reliance and emphasis on cost accounting. Current hospital accounting systems are relatively inexpensive to develop and maintain, and they fulfill the financial reporting requirements mandated by Medicare and other third-party payers. These systems, however, do not provide information on what specific service units cost, and managers must have this information to make optimal trade-offs between quality, availability, and cost of medical services. Most health care organizations have a predetermined charge for each type of service, but the charge may not accurately portray the cost of providing the service. Knowing true costs will enable managers to select the most cost-effective method of treating a patient; know the financial implications of adding tests or procedures; relate costs to established norms of care; establish ranges of acceptable costs in various diagnostic groups; negotiate more successfully with rate review organizations and health maintenance organizations; and vigorously market and advertise the services that most contribute to the organization's overall financial health. The goal of microcosting is to determine the full cost of providing specific service units. The microcosting process comprises three components: data collection, cost modeling, and cost analysis. Microcosting is used to determine full costs for 20 percent of the hospital's procedures that are responsible for generating 80 percent of the hospital's gross revenue. Full costs are established by adding labor costs, materials costs, equipment depreciation costs, departmental overhead costs, and corporate overhead costs.(ABSTRACT TRUNCATED AT 250 WORDS)