Chapter 19: ABC Management

Medical Activity Based Cost Management

[Demonstrating the Cost Effectiveness of Medical Care] 

By David Edward Marcinko

Be at the pains of putting down every single item of expenditure whatsoever every day, which could possibly be twisted into a professional expense, and remember to lump in all the doubtfullsHilaire Belloc 


Astute physician-executives are becoming aware of the need to demonstrate the cost effectiveness of medical care since this can be an important competitive advantage over other providers.

Whether this scenario occurs in the office, emergency room or hospital setting, hard numerical business information is required. Such information may be obtained by using the managerial accounting tools known as: Activity Based Cost Management (ABCM) and the Clinical (Critical) Path Method (CPM).

Here’s how:

In the traditional financial accounting practice system, costs are assigned to different procedures or services based on average volume (quantity). So, if a general surgical service is doing more “surgical procedures” (high volume) than primary care “medical services” (low volume), more indirect overhead costs will be allocated to the surgical portion of the practice.

ABCM and CPM on the other hand, determine the actual costs of resources that each service or procedure consumes. But, because primary care actually requires more service resources than surgery, ABCM will assign more costs to the medial (low volume) practice.

The idea is to get a handle on how much every task costs by factoring in the labor, technology and office space to complete it. In this way, the next time a discounted managed care contract is offered, or your medical office or hospital department is over budget, you will know how to accept or reject the contract, or solve the variance problem.

More here: BOOK ORDERS [Pre-Release]:

Dictionary of Health Economics and Finance:


2 thoughts on “Chapter 19: ABC Management

  1. Key Negotiation Cost Concepts

    Once a new managed care contract’s reimbursement methodology is understood, the key is knowing practice costs. But, some costs are not just direct and proportionate.

    Adding another staff member, for example, is a step cost; you can actually lose money if their capacity is under utilized while still requiring full salary.

    Another managed care contract evaluation component is understanding the timing and amounts of current cash inflow and outflow.

    Dr. Gary L. Bode; CPA, MSA, CMP

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