Chapter 15 Product Costing

Learning Objectives Describe the existing needs for cost information in health care firms. Describe how cost information relates to the 3 key activities of management: planning, budgeting, and control Describe the three main phases of the costing process. Explain the two systems necessary to accurately cost healthcare encounters of care.. Describe the concept of relative value units. 2

Three Questions for HealthCare Cost Accounting What are we trying to cost? What time period is relevant? How can we use existing cost systems? 3

What are the cost objects of HealthCare? Health care firms produce a large number of products Many of these products are bundled into an encounter of care An encounter of care includes all products and services during a specific treatment or episode of care Examples of encounters: Inpatient – MSDRG’s (e.g. MSDRG #193 – Simple Pneumonia & pleurisy w/MCC) Outpatient – APC’s (e.g. #0143 – Lower GI procedures) 4

What time period is relevant Time periods will either be historical or future Historical costing is by itself of little value Future costs are most relevant but often rely on historical cost data. 5

How can present reporting systems be best utilized in costing encounters of care? Present Financial accounting system will continue to exist because they fulfill reporting needs Basics of most current financial accounting systems A measure of facility cost (e.g. $100 million) Allocation of facility cost to responsibility centers or departments Dilemma of costing How to take departmental cost measures and assign those values to encounters of care 6

Figure 15–1 The Planning-Budgeting-Control Process

Planning and Product Issues Products versus product lines A treated patient represents a product – or “encounter of care” Strategic business units (SBU’s) DRG’s or APC’s are not SBU’s or product lines Clinical specialty areas may represent SBU’s 8

Budgeting and Resource Expectations Budgeting translates product decisions into resource expectations Two major objectives are Assure financial viability of plan Establish a basis for management control Primary output of a budget is a set of departmental budgets outlining expected costs 9

Control and Corrective Action Deviations or variances from budget are identified Corrective action may be taken to correct the variance in future time periods Sometimes variances may reflect changes in budget assumptions 10

Figure 15–2 The Cost Measurement Process

Valuation Areas What basis should be used Most cases it is historical cost Assigning cost to a time period can be an issue in 2 types of cases Long lived assets such as building and equipment Normal accruals where costs are recognized prior to expenditure, e.g. payroll 12

Allocation Areas Primary task is assignment of costs charged to indirect departments to direct departments Allocation of indirect costs require 2 decisions Allocation basis, e.g. hours worked or square feet Apportionment Method Step down Double distribution Simultaneous equations 13

Production Phases Actual process of creating products/services in a health setting is split into two stages Stage 1 – Departments/activity centers acquire resources and produce products “service units” (SU’s) Some SU’s are traceable to the patient – others are not Stage 2- Consumption of SU’s in treatment process (e.g. surgeries, lab tests, etc.) Physicians often direct this stage of production 14

Figure 15–3 The Production Process for Health Care Firms

Two Required Systems for Costing Encounters of Care Standard cost profiles Tells how much it did or will cost to produce specific service units (SU’s) such as lab tests or surgical procedures Standard Treatment Protocols (STP) Tells us how many units of a SU either were required or will be required to produce a specific encounter of care. 16

Table 15-1

Table 15-2

Relative Value Costing Some departments such as lab have many products or service units (SU’s) Relative values are often used to collapse many units to just one 19