What is Healthcare Cost Accounting? How Do Hospitals and Other Healthcare Organizations Use It?

It can occur on a spreadsheet or a scrap of paper. Or with a misplaced digit or a mistyped decimal point. A harmless accounting error becomes a harmful mistake. A simple discrepancy turns into a disaster. That’s what happened to a hospital network in Naperville, Illinois, which overestimated how much money insurers and patients owed its health system. The scope of that error? A $92 million overpayment. The network’s software, lacking the precision of specialized healthcare accounting software, grossly overvalued the costs of healthcare products and didn’t correctly calculate how much to collect.

That hospital network isn’t the only organization that’s struggled with healthcare cost accounting. No, far from it. Healthcare leaders don’t just determine the value of healthcare products and services but the various components that comprise them. Cost accounting is complicated, often convoluted, because there are so many financials to consider. This complexity underscores the need for robust healthcare finance software. These include:

• Establishing the price of healthcare products and services at a determined level. (Price setting.)
• Collecting actual costs and assembling those costs into a format that allows healthcare leaders to balance budgets. (Cost control.)
• Liaising with insurers and patients when collecting those costs. (Negotiations.)
• Analyzing costs with digital tools for cost-efficiency, decision-making, and departmental accountability. (Data analytics.)

Even for the most seasoned healthcare leaders, cost accounting is just as critical as the healthcare supply chain that underpins it. It’s more than numbers on a screen or calculations in a logbook. That’s because cost accounting has a direct correlation to high-quality patient care. When healthcare organizations don’t correctly cost, patients don’t receive the products and services they require. That misplaced digit or mistyped decimal point could put lives at risk. An effective healthcare ERP system can mitigate these risks by providing accurate and comprehensive financial management.

Contents

• What is Healthcare Cost Accounting?
• How Does Healthcare Cost Accounting Work?
• What are the Benefits of Healthcare Cost Accounting?
• The Challenges of Healthcare Cost Accounting
• Why You Need a Modern Healthcare Cost Accounting Solution
• Conclusion

What is Healthcare Cost Accounting?

Healthcare cost accounting - also sometimes called hospital cost accounting - means identifying the costs of any product, service, or activity at a specific time in a healthcare organization like yours. Technically, it’s different from costing, which evaluates the costs incurred on those products, services, and activities. However, financial teams often use these terms interchangeably. In a healthcare context, cost accounting or costing prescribes how a hospital, medical facility, rehabilitation center, retirement home, public health agency, or other organization determines its costs.

On the surface, cost accounting works the same in healthcare as it does in other sectors. It’s the burden of cost accountants and financial managers and overseen by leaders, and it’s one of those responsibilities that other employees seldom think about. An effective healthcare ERP system can assist in making this process much more manageable and accurate.

How Does Healthcare Cost Accounting Work?

For decades, policymakers have beckoned hospitals and other healthcare organizations to be more transparent in their pricing so patients know the cost of a product or service before getting it. A complicated labyrinth of legislation stipulates cost accounting transparency in healthcare, allowing patients to access pricing information and make more informed decisions about the cost and value of the healthcare they receive. 

Cost accounting in healthcare is the crux of price transparency.

However, healthcare leaders have been reluctant to make pricing information transparent because it increases price competition among healthcare providers, lowering revenues for hospitals and other medical facilities. Regardless, since January 2021, healthcare organizations are required to make costs transparent for consumer review. 

Hospital cost accounting includes a sequence of processes for determining cost value. Primarily, healthcare leaders work out fixed and variable costs of products and services to identify profitability. Here, the use of an ERP for the healthcare industry can be particularly beneficial for comprehensive financial management.

Cost accountants and healthcare financial managers typically: 

• Liaise with healthcare service providers to manage the costs of products and services.
• Communicate those costs to patients and insurance companies.
• Use digital tools to allocate costs to products and services.
• Analyze cost drivers that increase profitability.

In healthcare, like other sectors, there are four cost accounting methods:

1. Standard cost accounting, the simplest method, where accountants delegate an average cost to each direct cost associated with a product or service. 
2. Activity-based cost accounting, where accountants identify how fixed and variable costs correlate with the direct cost of a product or service.
3. Throughput accounting (TA) or super-variable costing, where accountants only consider direct material costs (the cost of the raw materials used to manufacture a product) as capable of being inventoried. 
4. Cost-Volume-Profit (CVP), where accountants work out total fixed and variable costs based on the number of products and services produced to determine profitability.

What are the Benefits of Cost Accounting in Healthcare?

Cost accounting lets you determine the value of the products and services that flow through healthcare supply chains. You can collect, record, and analyze the value of those products and services for quality, compliance, and healthcare management outcomes. The process involves financial reports, balance sheets, invoices, cash flow analyses, and records from patients and insurance companies. This documentation, either in digital or physical form, occupies various locations like ERP systems, hospital accounting software, or paper filing cabinets. However, the most successful healthcare leaders use dedicated cost accounting tools. (More on that later.)

The Challenges of Healthcare Cost Accounting

Cost accounting can be a complicated beast with many tangled tentacles, like that healthcare network in Naperville discovered. Systems that can’t correctly cost products and services might cause healthcare organizations to overcharge patients and insurance companies and undercharge suppliers and service providers for products and services. A simple computer error might not result in anything as extreme as a $92 million overpayment. However, outdated and incapable systems do significant financial damage to healthcare organizations and render it impossible for cost accountants and healthcare financial managers to do their jobs. Basic accounting tools and rudimentary ERP systems aren’t capable of advanced cost accounting, especially in the healthcare sector, where cost and pricing decisions intertwine with patient care. 

There are also challenges when healthcare leaders can’t analyze cost data in systems correctly. That typically happens when a cost accounting system is too complex, and users lack the knowledge to interpret the data contained with it. Other times, antiquated or inferior systems don’t display cost data efficiently, leaving healthcare leaders unable to execute cost accounting processes. In these scenarios, an advanced healthcare ERP system might just be the ideal solution.

Cost accounting is an ongoing challenge, but the technology created to simplify it can be just as problematic.

Why You Need a Modern Healthcare Cost Accounting Solution

Most healthcare leaders have outgrown basic accounting tools and traditional ERP systems. Others have invested in specialized cost accounting software but find these systems too complex for data analysis. So leaders need to find a solution that balances the ease-of-use of a conventional ERP with the functionality and integration that only comes from a dedicated cost accounting system. 

Multiview provides that solution. It’s a fully managed healthcare ERP platform that aggregates clinical data from your medical record systems and serves as a single source of truth for cost accounting and other financial management objectives. Built for healthcare leaders like you, Multiview provides a 360-degree view of your cost accounting processes in real-time so you can:

• Drive better decisions about the cost and value of healthcare products and services. 
• Analyze electronic medical record (EMR) and electronic health record (EHR) data.
• Create financial forecasts and budget approval workflows.
• Generate deep data insights into your health system accounting processes.
• Access financial performance data from one centralized hub.

Multiview currently supports over 150 health systems in 42 states. 

Conclusion

With ever-increasing pricing transparency legislation and the risk of million-dollar accounting errors, cost accounting has never been more relevant. However, healthcare leaders face an ongoing dilemma when digitizing this process: Use a basic accounting tool with little scope or a cost accounting system that’s too complex? The right healthcare accounting software strikes a happy balance, providing cost accountants and financial managers with the data they require without making life difficult.

Watch the KLAS Research Spotlight that conducted interviews with dozens of Multiview clients for their technology spotlight report on Multiview ERP solution.

Multiview is the healthcare ERP solution for optimizing cost accounting in hospitals, medical facilities, rehabilitation centers, retirement homes, public health agencies, and other organizations. Request a demo now.