The direct cost in the hospital is the charges that the hospital financial management can trace to a specific service, a type of department, or product within the hospital. On the other hand, indirect cost is the overhead cost, which is not traceable to any specific product, department, or service in the hospital ( Papadaki&Popesko, 2016). There are many ways to achieve such an allocation. The first is an hourly allocation. In this situation, they use the time of treatment to determine the resource consumed. By dividing the yearly indirect cost of patient treatment by the minute the doctor takes, they can get direct patient charges. The assumption, in this case, is that patient has an equal indirect cost ( Becker et al., 2018). Next is the allocation of marginal mark-up. “The cost accountant will raise the direct costs with the help of a mark-up percentage in assuming that all patients in the hospital system have had similar indirect costs distributed over to the direct costs” ( Szewieczek, 2017). Another plan that the hospital financial management utilizes is the Bottom Up costing. The bottom-up costing approach involves the generation of the expenses associated with the patient treatment on an accurate clinical cost recording system to determine the cost of the patient charges ( Nowicki, 2011). Lastly, they can also use the Hospital cost accounting system to integrate the resources and their value from different department databases and calculate the cost for each patient.
The degree of profit utilization or revenue generation depends on the success of the service the hospital gives to the patients by reaching its full use. When the volume utilization is down, the revenue generation of service or product tends to decrease. However, as the services approach the full volume utilization due to demand, the revenue generation also increases ( Szewieczek, 2017). Therefore, Utilization rates are related to both volume and generated revenues because when the utilization rate is high, then the profit margin for that company will also be high.
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References
Becker, C., Leidl, R., Schildmann, E., Hodiamont, F., &Bausewein, C. (2018). A pilot study on patient-related costs and factors associated with the loss of specialist palliative care in the hospital: first steps towards a patient classification system in Germany. Cost-Effectiveness and Resource Allocation , 16 (1), 35.
Papadaki, Š.,&Popesko, B. (2016). Cost analysis of selected patient categories within a dermatology department using an ABC approach. Global journal of health science , 8 (6), 234.
Szewieczek, A. (2017). Selected problems of cost allocation in hospital–the relationship between business model and cost structure. Economics , 4 , 5th.
Nowicki, M. (2011). Introduction to the financial management of healthcare organizations . Chicago, IL: Health Administration Press.
