Cost Accounting Best Practices for Healthcare Practices

Introduction

Healthcare practices, like any other business, need to have a clear understanding of their costs in order to optimize their financial outcomes. However, healthcare practices often face unique challenges when it comes to cost accounting. For example, the costs associated with different treatments can vary widely, making it difficult to determine the profitability of each treatment. Additionally, many healthcare practices struggle with allocating overhead costs in a way that accurately reflects the true costs of each treatment.

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Challenges

Whilst direct cost for each treatment, such as affiliate doctors' commission, laboratory fees, disposables and material costs, can be attributed directly to the treatment, these normally only account for one part of the total cost. There is a whole category of indirect costs which cannot be directly traced to a specific treatment or procedure.  As a result, many healthcare practices struggle with allocating overhead costs in a way that accurately reflects the true costs of each treatment.

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Indirect Costs (Overhead)

IExamples of indirect costs in a healthcare practice include rent, utilities, equipment, salaries for administrative staff and office supplies. Allocating overhead costs can be challenging, as it requires a method for determining the proportion of overhead costs that should be attributed to each treatment.

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Methods of Overhead Cost Allocation 

There are several methods that healthcare practices can use to allocate overhead costs. One common method is the direct method, which involves directly tracing overhead costs to specific treatments or procedures. For instance, direct hours involved by an administrative staff in registering and following up with patients pre and post treatment.

Another method is the step-down method, which involves allocating overhead costs to major cost centers, such as units, departments or services, and then to specific treatments or procedures.  One practical way of doing so is to specify each treatment room or dental chair and associated equipment and clinical assistant as a unit.  The drawback of this method is that it may not provide the granular data on profitability by treatment, if the unit carries out a wide array of treatments and procedures.

A third method is the activity-based costing (ABC) method, which involves identifying the specific activities that drive overhead costs, and then allocating those costs to treatments or procedures based on their usage of those activities.

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Effort Required 

Implementing cost accounting best practices in a healthcare practice requires a significant effort. Healthcare practices will need to invest time and resources in order to accurately track and allocate costs. This may include hiring additional staff or outsourcing cost accounting tasks. Additionally, healthcare practices will need to train their staff on the cost accounting methods and systems that they choose to implement. However, the effort required to implement cost accounting best practices is well worth it in the long run, as it can lead to a much better understanding of the revenue, costs, and profits associated with each treatment or procedure, which can in turn lead to improved financial outcomes for the practice.

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Conclusion

Cost accounting is essential for healthcare practices to optimize their financial outcomes. A clear understanding of direct and indirect costs is necessary. The cost allocation methods like direct, step-down and activity-based costing (ABC) are effective ways of allocating overhead costs. Implementing cost accounting best practices requires a significant effort, but it is well worth it in the long run as it can lead to improved financial outcomes for the practice.