What types of cost allocation criterion and methods are available to all healthcare organizations?
suppose a house that cost $270000 appreciates by 5% each year. In about how many years will the house be worth $350000? Use the ewuation 350=(270)(1.05)^x and round the value of x to the nearest year..
Healthcare organizations use various cost allocation criteria and methods to distribute costs among different departments, services, or patients. The selection of specific criteria and methods depends on the organization's objectives, available data, and the level of detail required. Here are some commonly used cost allocation criteria and methods in healthcare:
1. Direct Cost Allocation: This method assigns costs directly to a specific cost object without any allocation. For example, the cost of a specific medical procedure performed on a patient is assigned directly to that patient.
2. Indirect Cost Allocation: Indirect costs are those that cannot be directly attributed to a specific cost object. They need to be allocated to various cost objects based on a predetermined allocation basis. Different methods can be used for indirect cost allocation, including:
- Cost Centers: Costs are allocated based on the specific departments or cost centers within the organization. For example, the costs of medical supplies used in the surgery department are allocated to that department.
- Activity-Based Costing (ABC): This method identifies activities that consume organizational resources and assigns costs based on the specific activities performed. For example, the costs of operating a laboratory can be allocated based on the number of tests conducted or the hours of equipment usage.
- Relative Value Units (RVUs): RVUs are a common method used in healthcare to allocate costs based on the relative complexity or resources required for different services or procedures. The Medicare Physician Fee Schedule often uses RVUs to determine reimbursement rates.
3. Patient-Level Costing: This approach assigns costs at an individual patient level, considering the specific services, resources, and the length of stay for each patient. It provides a more accurate picture of the costs associated with individual patients.
4. Diagnosis-Related Groups (DRGs): DRGs are a classification system used for grouping and paying hospitals based on patients' diagnoses. Hospitals can allocate costs based on the DRG assigned to each patient, which provides a standardized framework for cost allocation.
It's important to note that each organization may use a combination of these criteria and methods, depending on its specific needs and circumstances. The cost accounting department or finance team within the healthcare organization is responsible for determining the most appropriate cost allocation criteria and methods to use.