Chapter 6 UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT, 6th ed

UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT

Problem 6.7 – Direct Cost Allocation Method

St. Luke’s Hospital has three support departments and four patient services departments. The direct costs to each of the support departments are as follows:

Patient Services Departments

Department Direct Support Department Costs Patient Services Revenue Space (square feet) Number of Full-Time Equivalent Employees Salary Dollars Allocation Rate Routine Care Intensive Care Obstetrics Services Other Services Total

Support:

General Administration $4,000,000 8,000 15 $2,500,000

Maintenance $5,000,000 10,000 75 3,500,000

Employee Benefit $4,000,000 7,000 50 3,000,000

Total $13,000,000 25,000 140 $9,000,000

Patient Services:

Routine Care $40,000,000 500,000 700 $18,000,000

Intensive Care 7,000,000 45,000 200 6,000,000

Obstetrics Services 4,000,000 35,000 150 4,000,000

Other Services 12,000,000 200,000 400 8,000,000

Total $63,000,000 780,000 1,450 $36,000,000

Grand Total $63,000,000 805,000 1,590 $45,000,000

Assume that the hospital uses the direct method for cost allocation. Furthermore, the cost driver for general administration is patient services revenue, the cost driver for maintenance is space utilization, and the cost driver for employee benefits is the number of full-time equivalent employees.

a. What are the appropriate allocation rates?

General Administration $- per dollar of patient services revenue

Maintenance $- per square foot

Financial Services $- per full-time equivalent employees

b. Allocate the hospital’s overhead costs to the patient services departments.

Chapter 6 UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT, 6th ed

Problem 6.7 – Direct Cost Allocation Method

St. Luke’s Hospital has three support departments and four patient services departments. The direct costs to each of the support departments are as follows:

Patient Services Departments

Department Direct Support Department Costs Patient Services Revenue Space (square feet) Number of Full-Time Equivalent Employees Salary Dollars Allocation Rate Routine Care Intensive Care Obstetrics Services Other Services Total

Support:

General Administration $4,000,000 8,000 15 $2,500,000

Maintenance $5,000,000 10,000 75 3,500,000

Employee Benefit $4,000,000 7,000 50 3,000,000

Total $13,000,000 25,000 140 $9,000,000

Patient Services:

Routine Care $40,000,000 500,000 700 $18,000,000

Intensive Care 7,000,000 45,000 200 6,000,000

Obstetrics Services 4,000,000 35,000 150 4,000,000

Other Services 12,000,000 200,000 400 8,000,000

Total $63,000,000 780,000 1,450 $36,000,000

Grand Total $63,000,000 805,000 1,590 $45,000,000

Assume that the hospital uses the Step-down method for cost allocation, with patient service revenue as the cost driver for general administration, space as the cost driver for Maintenance, and salary dollars as the cost driver for employee benefits. Assume also that the employee benefits department provides most services to other support departments, followed closely by general administration. The maintenance department provides the least services to the other support departments.

a. What are the appropriate allocation rates?

Initial Allocation of EMPLOYEE BENEFIT

Cost pool

Cost Driver (salaries)

Allocation Rate per dollar of salaries

Allocation to GENERAL ADMINISTRATION

Allocation to MAINTENANCE

Subsequent Allocation of GENERAL ADMINISTRATION

Cost pool

Employee Benefit Allocation

Total Cost Pool

Cost Driver (patient service revenue)

Allocation Rate per dollar of patient service revenue

Allocation to MAITENANCE

Subsequent Allocation of MAINTENANCE

Cost pool

Employee Benefit Allocation

General Administration Allocation

Total Cost Pool

Cost Driver (space)

Allocation Rate per square foot

b. Allocate the hospital’s overhead costs to the patient services departments.

UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT

 

 

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UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT

Introduction

Healthcare finance management is a field that has grown by leaps and bounds over the past few decades. It involves understanding how different types of healthcare facilities operate, and then taking steps to keep them running smoothly. In this article, we’ll explore what healthcare financial management is all about and why it’s so important for both providers and patients alike.

ABOUT HEALTHCARE FINANCIAL MANAGEMENT (HFM)

Healthcare financial management (HFM) is a subset of finance that covers both the financials of the hospital and its financial relationships with other healthcare organizations. It includes budgeting, forecasting, accounting and reporting; negotiating contracts; managing risk; maintaining compliance with applicable laws and regulations; managing internal control systems; developing strategic plans for growth or improvement as well as maintaining continuous improvement initiatives.

Healthcare Financial Management may be incorporated into your organization’s overall strategy as well as each department within IT or PMO in order to ensure that all functions are aligned with goals & objectives established by leadership team/executive committee or boards in order to achieve maximum performance within specified time frame at minimal cost while reducing bureaucracy so that employees can focus on doing their jobs rather than wasting time dealing directly with administrative issues related directly back into IT which could lead into greater misunderstandings between departments resulting from lack thereof communication between them due lack understanding about what needs done first before moving onto next step later on down line

HFM IN ACTION

HFM is a complex field, and it’s important to understand what your role in HFM looks like. There are many different parts that go into making healthcare work for patients, health systems, and employees alike.

• Financial management: This is the part of HFM that helps organizations budget effectively and be financially stable. It includes allocating resources such as cash flow management or risk mitigation strategies through investments in new technologies or processes (e.g., information technology).

• Operational planning: The operational planning department works with other departments such as finance or procurement so they can plan out their operations effectively so they can meet goals set by senior leadership teams at all levels within an organization including from top executives down through middle managers all way down into entry level positions who are working under direct supervision from experienced professionals who have been trained specifically on how best practices should be followed when performing certain tasks related directly back onto improving quality outcomes while also reducing costs over time due only having one person focused solely on providing excellent customer service rather than having multiple ones competing against each other trying win favoritism over each other just because someone else failed miserably at doing something right here lately!

WHERE TO FIND MORE INFORMATION

There are many resources available to help you understand and implement HFM. Here are a few:

• The Institute for Healthcare Informatics (IHI) provides information about healthcare informatics on its website, including links to resources for learning more about HFM. You can also find out more about IHI’s efforts to promote the use of HFM through its Healthcare Informatics Committee and related committees at its annual conference in January 2019.

• The Association for Healthcare Information and Management Systems (AHIMS) also has an extensive list of links related to healthcare finance management as well as other topics related to clinical practice such as reimbursement strategies and quality improvement initiatives; these are compiled into an online encyclopedia called Clinical Data Management: A Guidebook For Effective Implementation Through Evidence-Based Practice (CDPEB).

THE BOTTOM LINE ON HFM

Healthcare financial management is a complex and evolving field. It’s essential to the success of healthcare organizations, but it can be challenging and rewarding in its own right as well. If you’re interested in pursuing a career in HFM, here are some things you should know:

• Healthcare financial management is not just about collecting data from your patients and vendors; it’s also about helping people understand how their health concerns affect their finances. This requires an understanding of both the patient’s needs (like insurance coverage) and his or her wallet (his/her ability to pay).

• The role of HFM professionals changes over time as new technologies emerge—and with them comes new opportunities for growth within this field!

Takeaway:

You’ve just learned about the basics of healthcare financial management, but what exactly is it?

HFM is the practice and profession of managing healthcare organizations’ finances. Healthcare executives have a responsibility to ensure that their organizations are financially healthy and prepared for any future challenges. They must understand how to manage their budgets, identify cost savings opportunities, minimize risk exposure in the face of changing regulations and reimbursement structures—and more! And if you want to get started on this journey yourself (or if you’re already an HFM veteran), here’s some information that can help:

• Find out what other people who work with health systems think about HFM—and whether they agree with yours! To get started with this resource-rich community discussion forum on health system finance topics hosted by HFM Partner Network members Accenture Health & Life Sciences LLP (AHSL), please visit www.healthsystemfinanceforum.com/login

Conclusion

Healthcare financial management is a key part of the overall healthcare system. It can help to reduce costs and improve quality while ensuring that resources are being used in an efficient manner. The information provided in this article should help you learn more about this topic and how it applies to your organization. If you have any other questions or would like some additional clarification on anything mentioned above, please feel free to reach out!