health finance
Project description
.Types of Costs
This week we will be covering cost behavior. Most health care managers work closely with the Finance Department so, while we will be doing some calculations this week, the idea is really for you to get the concept of what it is you are looking at and why it is important.
Here are some thoughts that might help you understand the material:
Some costs are fixed costs — These costs DO NOT change regardless of the volume of services provided. A perfect example of a fixed cost is rent. Regardless of the number of patients that a clinic sees it pays the same rent each month.
Some costs are variable costs — These costs change based on the volume of services performed. An easy example of a variable cost is bandages. The more patients a clinic sees the more bandages it will use. If they do not use up the bandages then they will not buy more. Therefore, as volume goes up the cost of bandages goes up.
Some costs are semi-variable costs — These are costs that vary based on volume but in a more indirect way. An example would be…..If an RN in a hospital can take care of 5 patients and there are 5 patients on the ward then the hospital only needs one RN. When the 6th patient arrives on the ward the hospital will need a second nurse, however they will not need a third RN until the 11th patient arrives. Because of this indirect relationship semi-variable costs often increase in what is referred to as a step-wise fashion (see Fig 7-3).
These costs help you to think about the cost of providing services to patients. Why?…Because costs play a valuable role in determining whether a line of business or a program is profitable. By looking at costs as fixed, variable, and semi-variable we are able to estimate costs more accurately.
An Additional Explanation of Direct and Indirect Costs
I want to make sure that the class fully understands the difference between direct and indirect costs by stating things a little differently. Sometimes it just takes a few times through the same material to capture new concepts!
A direct cost is a cost that is specifically associated with a ‘cost object’. A ‘cost object’ can be a particular unit, department, a particular patient, etc. Examples of direct costs include salaries, medical supplies, and utilities.
An indirect cost is a cost that cannot be specifically associated with a a particular ‘cost object’. For instance, facility costs, administrative costs, general marketing costs, etc.
You can think of it this way…. If we think of a a patient as a ‘cost object’ then we can see how we might be able to figure out the direct costs — For example we could take the salary of the doctor per minute by the number of minutes that the doctor spends with the patient, we could include the cost for all of the medical and non-medical supplies used specifically for that patient….and on and on. Because we can attribute these costs directly to the patient, these are called direct costs.
Not all costs are easily attributed to the patient (or other ‘cost object’). What about the cost of the marketing that the hospital conducts? We don’t know which ad the patient saw or how many ads the patient saw. We don’t even know if the patient came to the hospital because of an ad at all. What about the salary of the CEO? Clearly the hospital cannot run without a CEO, but how much of the cost of the CEO can be attributed to this specific patient? Because we cannot attribute a certain portion of these costs directly to this patient, they are called indirect costs.
I hope that this explanations helps to clarify your understanding.
Assignmnet GHA 2
Assignment Exercise 6 – I (p. 466) Allocating Indirect Costs
NOTE: (1) The question in the text refers to worksheet #2. I do not know what this refers to since there is no worksheet #2 in the text. Please use the attached template instead and DO NOT change the Direct Costs from the values given in the original Table 6-1 and Table 6-2 and shown in the template.
It is perfectly OK to upload an updated version of the template that I have provided to you.
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