Accounting systems matter in healthcare

Accounting theory is more important to healthcare than most people think.  A highly oversimplified example of a typical healthcare accounting decision illustrates this.

Consider a hospital that treats two diseases: A and B.  There are 2,000 cases per year of each.  There are two machines that can treat A and B.  Machine X costs $1,000,000 and can treat 5,000 cases per year of either disease.  Machine Y costs $100,000 and can treat 10,000 cases per year of disease B.

It's fairly clear that the lowest cost approach is to buy just machine X.  But, this will be challenged strongly by the cost accounting side.  Machine X costs $200/treatment of disease B, while machine Y costs only $10/treatment.  Clearly the hospital must be wasting money.

In this simplified case it's easy to explain why the cost accounting approach leads to the wrong decision.  But in the complexity of the real world this does lead to many wrong decisions.

Accounting has been used for thousands of years, and there are different kinds of accounting that are used for answering different questions.  The earliest accounting was simple inventory tracking.  This was in use thousands of years ago and continues to be useful.  It is used throughout healthcare to answer basic questions like "how many pills are in that bottle?".

The most common form of accounting for the overall hospital is the cost accounting system that was devised in the past century to answer basic questions like "should we lend them money? will they be able to make the payments?"  The accounting standards are uniform across most organizations because lenders and borrowers need to use the same accounting methods so that comparisons are valid.

Unfortunately, the cost accounting systems used to make operational decisions have been layered on top of these accounting systems with arbitrary allocations of costs.  These systems do not incorporate consideration of demand, capacity, or bottlenecks.  That is a severe problem.  You see this result in bad operational decisions in all sorts of manufacturing and service organizations.  Instead of rewarding decisions that eliminate bottlenecks and decisions that match capacity with demand, they reward decisions that match the arbitrary cost allocation rules.  In the simple example above, cost allocation would indicate that both machines X and Y should be purchased because cost allocation systems do not reflect the demand and capacity factors.

There are systems that attempt the include demand, capacity, and bottleneck effects.  One such is throughput accounting.  There are others.  Switching to this kind of accounting is a major change, but it will be needed to make the kinds of decisions that are needed to control healthcare costs.

Comments

[Kevyn Hagemann]

Accounting is something that's going to help an individual or a group in making sure that the money goes where it's supposed to go. Keeping track of those transactions is the key to a chance of gaining a profit. Lose track of that or even make the slightest mistake, and you'll end up in chaos. Be careful in your decisions because this involves money.

[fairhavenhorn]

The actual transactions are rather few in this example. Equipment purchases usually result in one monthly transaction for a loan that covers dozens of pieces of equipment. There is one monthly electricity bill for the entire hospital. There is one monthly transaction for the service contract for all the equipment from that vendor. There are some other transactions for salaries, etc.

The relationship between these transactions and imputed costs and billing are all the result of choices of accounting theory.

[Jamie Shellman]

Accounting is a very useful field that helps every industry do things easier such as computations and inventory checking. Every industry has its own kind of accounting preferences. When it comes to healthcare cost accounting is really the best that fits. Over the years the field has been useful and still useful. And it is even getting better with advanced technology that makes everything run swiftly.

[healthcare records management]

As a business owner I can't imagine going through a single week without our accounting, in the healthcare field I can only imagine how important it is to keep track on where your money is and what's used for.

[Broad Financial]

Well in any business we need to consider that there are equipment that needed in order to run our business. We should study in every angle if this is just a waste of money or a way for success ,thats the time accounting comes in.

[Pas Cher Moncler]

I just sent this post to a bunch of my friends as I agree with most of what you’re saying here and the way you’ve presented it is awesome.