Activity-Based Costing in Healthcare: Research Paper

Activity-Based Costing in Healthcare

Activity-based costing (ABC) helps allocate prices, leading to more accurate pricing decisions than other accounting methods. Arguably, price allocation is essential due to fluctuations caused by market dynamics such as demand and supply. A market’s demand and supply incorporate other information such as competition, control measures, supplier relations, and economic policies, among others, with any of these factors poised to cause a sudden price change. Therefore, a hospital’s management needs to pay attention to selling prices as they affect profitability, revenues, and production, thus necessitating the use of ABC. Similarly, ABC is crucial in healthcare as it aligns all departments and hospitals in the system and breaks down virtual walls between separate health facilities, improving care and cost transparency.

Healthcare needs activity-based costing due to its efficiency in departmental alignment and leanness to improve patient-based satisfaction. For example, Rob DeMichiei (2016) stipulates that ABC requires alignment across departments and hospitals to ensure consistency of overall system priorities. The author observes that many hospitals in healthcare have strategic priorities that do not align with the system, resulting in waste, operational inefficiencies, and unnecessary clinical variations (DeMichiei, 2018). Further, creating and standardizing service lines across the entire health system inculcates good decision-making for patients and organizations, but separate care centers make it difficult (“Activity-Based Costing,” 2013). ABC breaks down such virtual barriers, promoting cost transparency and improved patient care. Therefore, the healthcare system needs to promote compatibility in cost-cutting and service delivery, which ensures more quality services. ABC not only finds better ways of allocating and eliminating overhead costs, but it also enables patients’ satisfaction in healthcare (Vasilić, Jelić, Papić, Zakić, & Ljubanović-Ralević, 2017). As such, ABC provides more accuracy in product and service costing and allows management to eliminate inefficiencies, thereby increasing the quality of patient care.

ABC significantly improves the level of care in hospitals as it promotes interdepartmental cohesion and cost transparency. Consequently, healthcare systems must ensure that they curb escalating costs in caregiving while maintaining quality services. Therefore, ABC is the best methodology to use as it reduces unnecessary clinical variation and operational inefficiencies that are inconsistent with the overall priorities of the system.

References

Activity-based costing. (2013). Retrieved from https://www.cgma.org/resources/tools/essential-tools/activity-based-costing.html

DeMichiei, Rob. (2016). Service lines and activity-based costing reveal the true cost of care for UPMC. Retrieved from https://www.healthcatalyst.com/success_stories/activity-based-costing-in-healthcare-upmc

Vasilić, M., Jelić, D. B., Papić, R., Zakić, V., & Ljubanović-Ralević, I. (2017). The use of activity-based costing in pricing decisions-the example of prune production. Retrieved from https://www.researchgate.net/publication/321050963