Chapter 17: Expense Costing

Medical Office Expense Costing and Modeling

[Differentiating Managerial from Financial Accounting]

By Gary L. Bode

By David Edward Marcinko 

The two most beautiful words in the English language are ”check enclosed” – Dorothy Parker

Introduction 

Cost accounting differs from traditional financial accounting which is concerned with providing static historical information to creditors, shareholders and those outside the private medical practice. 

Traditionally, cost accounting helps determine the selling price of a product in a manufacturing environment. But it can be applied to services too. Different focuses exist with the field of cost accounting. Budgets are a typical function with subsequent analysis of any variances.

Since, generally, prices for medical services are forced on practitioners by third party payers, we will concentrates on its’ use for evaluating decisions on accepting managed care contracts and assignment on traditional health care policies. It also concentrates on information used to set long and short term practice management policies to increase profitability by decreasing costs, increasing revenues or decreasing operating assets.

More than ever, cost accounting can mean the difference between a successful medical practice; or a mediocre one. It consists of six goals: 

  • Providing vital costing information for internal office use
  • Developing pro-active strategic planning
  • Accentuating the relevancy and flexibility of financial data and practice parameters
  • Reviewing real-time service segments, rather than just total office operations
  • Acquiring non-financial business data.
  • Providing current, accurate and relevant tools for practice management

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3 thoughts on “Chapter 17: Expense Costing

  1. THE HOPE OUTREACH MEDICAL CLINIC

    The Hope Outreach Medical Clinic (HOMC) is a private, for-profit, single specialty medical clinic in a south-eastern state.

    It submitted its bi-annual Request For Proposal (RFP) to continue its current managed care fixed-rate contract. Upon review of the RFP, however, Sunshine Indemnity Insurance Company, the managed care organization (MCO), denied the contract request for the upcoming year.

    In shock, the clinic’s CEO asked the clinic’s administrator to work with its legal team to develop a defensible estimate of economic damages that would occur as a result of the lost contract. The clinic intended to bring suit against the MCO for breach-of-contract.

    However, the administrator is not an attorney and is loathe to-enter the fray. After consideration however, he decided to assist in filing the Statement of Claim (SOC) because he realized that changes in patient services (unit) volume would be a valid economic surrogate. He then requested the following information from his controller, in order to develop a change in economic profit [damages] estimate.

    – Change in patient visits (unit) volume
    – Fees (price) per patient (unit)
    – Marginal (incremental) cost per patient (unit)
    – Change in current fees (prices)
    – Patient volume (units) affected

    KEY ISSUES:

    1) Fee (price) per patient (units) may be obtained from the fee schedule used by the MCO to pay HOMC.
    2) Marginal (incremental) costs per patient (unit) are approximated using variable costs.
    3) Higher cost payors exist because lower patient volumes raise the average cost per patient (unit) due to existing fixed costs.

    How is administrator’s financial work-product, to estimate monetary damages and assist the legal team, explained?

    Any thoughts on this sample case model after reading this chapter in the BMP 3.0?
    Gary

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