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Strategic cost accounting helps create a competitive edge.

D T Meeting1, R O Harvey

  • 1HMG Healthcare Services, Inc., Hudson, OH, USA.

Healthcare Financial Management : Journal of the Healthcare Financial Management Association
|May 29, 1999
PubMed
Summary

Healthcare cost allocation methods have evolved. The reciprocal method offers a more sophisticated approach for accurate cost data, improving management decisions and contract negotiations.

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Area of Science:

  • Healthcare Management
  • Health Economics
  • Cost Accounting

Background:

  • Healthcare cost allocation methods have significantly evolved over the last 30 years.
  • Current government regulations mandate the step-down allocation method for Medicare payments.
  • The step-down method has limitations in generating crucial cost data for management and contract negotiations.

Purpose of the Study:

  • To evaluate different cost allocation methods in healthcare organizations.
  • To identify the most effective method for generating accurate cost data.
  • To inform management decision-making and managed care contract rate negotiation.

Main Methods:

  • Analysis of four primary cost allocation methods: direct, step-down, double-apportionment, and reciprocal.

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  • Evaluation of the sophistication and accuracy of each method in representing organizational costs.
  • Focus on allocating costs from service departments to revenue departments.

    • Main Results:

    • The step-down allocation method, while mandated, is insufficient for detailed management needs.
    • The reciprocal method is identified as the most sophisticated among the evaluated techniques.
    • The reciprocal method demonstrates potential for providing the most accurate cost representations.

    Conclusions:

    • Traditional cost allocation methods like step-down may not meet modern healthcare management needs.
    • The reciprocal method offers a superior alternative for accurate healthcare cost allocation.
    • Implementing the reciprocal method can enhance financial decision-making and contract negotiations in healthcare.