Cost management will be an increasing focus for all healthcare leaders, which is complicated by what is the importance of accounting for healthcare the various types of costs normally encountered when managing a practice. Effective physician and administrator partners are able to ask each other the right questions to understand and define the type of cost being discussed and the implications of decisions on cost behavior. Table 1 contains examples and descriptions of the types of costs leaders may need to define and discuss to evaluate potential opportunities or decisions.Clarity is essential when discussing costs. Clear and transparent communication about practice costs includes a shared language and common understanding. The effectiveness of conversations increases and decisions are made more quickly with improved accuracy when everyone is on the same page.

• The guidance must specify the design of the cost systems, including, for example, the structure of cost pools and the cost drivers.
• This transparency fostered trust among healthcare providers and patients alike, ultimately boosting sales.These examples highlight the power of tailored strategies in transforming how healthcare services connect with audiences.
• In a world of shrinking fee-for-service payment, the industry can no longer rely on revenue management; we require accurate cost management technology and analytics.
• The information gathered with the cost analytics approach can provide valuable data regarding profitability by service line/medical condition, DRG, and individual physician variability.

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How Healthcare Accounting Impacts the Patient

Further, the question of which body or institution designs the guidance and collects the data needs to be addressed, as does the organization of the data collection process. In terms of data collection, we need to consider whether data are collected from all providers or whether a sampling approach should be chosen. The question of costs, but also of the representativeness of the costing data, plays a role in this later consideration. Another crucial question that needs to be answered is how to handle information governance (Smith et al., 2008). The quality of the information produced using costing data depends on the quality of the raw cost data. Audits and quality checks are therefore essential to ensure public trust in information and to ensure a well-informed public debate.

Patient volumes and revenues may increasingly be dictated by the decisions of individual patients shopping for low-cost services and as a result, providers will see increasing pressure to set prices at levels that reflect the costs of providing care. An activity-based approach to costing enables cost improvement plans that take into account the impact of indirect costs on activities. Certain types of overheads may be more linked with certain service lines than with others. Rather than advising to cut costs by 10% across all activities, cost management can better focus on the specific costs and the specific activities that cause excessive costs. Analysed at the patient level, this information can then be compared with the health outcomes achieved to inform analysis of both efficiency and effectiveness.

4. The role of cost data in delivering efficient health care

Unfortunately, these efforts will not be sufficient to create the kind of price competition that reduces hospital costs. The prices that these newly-informed patients face will, in many cases, bear little relation to the underlying cost of delivering care (Dobson, DaVanzo, Doherty, & Tanamor, 2005). Before price competition can incent hospitals to reduce their operating costs, hospital pricing practices must change. Hospitals will have to set prices that relate to the cost of providing individual services instead of setting prices at levels that maximize profitability under contract pricing with insurers. This is an important step in achieving the ultimate goal of creating a marketplace in which hospitals compete on the basis of price. Unfortunately, little is known about the cost accounting systems hospitals are using to collect service-level cost information and the capabilities these systems afford the hospitals using them.

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Development of a clear conceptual framework and a clear vision of the purpose of the costing approach are needed. Part of such a framework must be the link of costing with practices that are informed by costing, such as DRG development, tariff setting, cost–effectiveness calculations and links with financial accounting and IT. The guidance must specify the design of the cost systems, including, for example, the structure of cost pools and the cost drivers. Much of the emphasis in this chapter has been placed on the importance of the technical characteristics of costing system design. When designing a costing system, it is important to maintain a clear understanding of the decisions and objectives that the system is there to support. In this section, we review in more detail the various ways in which cost data can act as a vital input into efforts to measure and manage efficiency at both provider and health care system levels.

The paper goes on to identify recent changes in payment systems that are likely to make service-level pricing, and hence cost accounting, a more important factor in hospital management. Finally, the paper discusses alternative views of the future of hospital markets in which the importance of cost accounting is more limited. But beyond the potential of providing such benefits, the use of cost analytics represents a progressive approach aimed at representing resource consumption, expenses and revenue, and operational data at a patient encounter level.

Studies suggest that the direct variable costs that can be directly influenced by physicians are around 42% (Taheri, Butz & Greenfield, 2000) with 58% of fixed and indirect costs1 being out of reach of physicians’ responsibility. A volume-based allocation of indirect costs is not appropriate for supporting cost management at the patient-level, which instead requires an activity-based approach. An activity-based approach also allows linking costs with health outcomes in a meaningful way (Kaplan & Porter, 2011).

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• Ultimately, the hope is that value (price and quality) will become the basis of competition, and hospitals will be incentivized to reduce their prices by cutting their underlying costs (Herzlinger, 2002).
• This type of work generally involves working alone, although it can also require working with others.
• Costs for nurses take into account the number of nurses present, which can also be captured in the system.

This, in turn, is dependent on a constructive engagement between costing and clinicians. Providers will not make the necessary investments to obtain quality cost data if the data do not play a role in clinicians’ day-to-day decision-making. If things go badly, then poor-quality cost data are largely ignored by clinicians to the extent they can manage to do so. If things go well, however, then data on cost variations can become an important tool to identify areas for clinical improvements. This is an indirect cost in the sense that it is a cost whose behaviour we do not easily understand at the patient level and so we are challenged when it comes to choosing an appropriate cost driver. As a department, there will likely be an annual budget that groups together all of these resource costs.