1.Discuss four major concerns of using the cost-to-charge ration method
Hospitals, doctors and dentists use cost to charge ratio in the process of estimating costs. It is assumed the presence of a relationship between costs and charges, which is decided by industry norms. Cost -to charge an assumption of costs comprise of a specific proportion of charges. For instance, all in-direct costs of labour comprise a certain percentage of the charges.
The method is preferred because of its simplicity. However, the approach has the main disadvantages, including the fact that it is a very industry-specific cost allocation method. Cost to charge method cannot be easily applied in any other organization apart from healthcare organizations. The method may not be accurate if it was based on a study, and the actual service mix departs from the study ratio, then the cost to charge method would be erroneous (Zelman et al., 2009) . Also, besides where the composition of fixed and variable cost has changed the cost to charge technique may prove as an inaccurate way of cost allocation. In instances where the ratio determined is used for all procedures undertaken in the healthcare institution, there is a likelihood of the method to overestimate or underestimate costs of different procedures. As a result of these concerns about cost-to charge method, big and complex health institutions adopt different approaches for cost allocation such as activity-based costing or step-down approach.
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2. What is the relationship between the concepts cost allocation basis as used in step- down method and cost driver as used in ABC?
Cost allocation is the process of identifying and assigning indirect costs to cost objects through the use of an apportionment base named the cost driver. A cost driver initiates a variation in the price of an activity and in ABC, a cost driver influences indirect costs of maintenance, labour and other variable costs and is used to refer to an allocation base.
Therefore, the relationship between cost apportionment basis and cost driver is that both are used in allocating costs arising from cost centres (Zelman et al., 2009) . Besides, both have the objective of accounting for the variations in the costs of performing certain activities.
3.What is the difference between a cost object’s direct cost and its fully allocated cost? Include an example.
Direct cost is a charge that can be tied to the production process and traced to a cost object which can either be a service or a good or even a department. A fully allocated cost A fully allocated cost is determined through a combination of indirect and direct costs. For example, the cost of raw materials and labour are direct costs and assuming that cost $4 and $10 respectively, with an indirect cost of $5. Then, a fully allocated cost is the summation of these costs thus will be $4+$10+$5 = $19.
4.What are the advantages and disadvantages of ABC relative to the step-down method of cost allocation?
ABC is an approach used to estimate the costs of a product or a service through a process of computing the costs of the production events. In contrast, the step-down process allocated the service department costs to other service and operating departments. ABC method is a more accurate approach of estimating the price of products and leads to improved pricing decisions which are difficult to perform in step down method. ABC deepen how managers understand cost drivers and overhead costs and are then able to pick the high cost and low value-adding activities which are then removed or reduced. ABC enables a thorough examination of all operating costs and finds better and improved methods of eliminating and allocation of overhead costs which is not supported under the step-down method. Moreover, activity-based costing integrates well with cost management techniques such as scorecards thus playing a role in the reduction of operational costs and improved profitability.
On the other hand, it is not possible to allocate all production overheads in an organization as proposed by ABC approach. The approach may not apply to small firms with few and low overheads. Also, there is a likelihood of a mismatch between the cost activities of a company and the cost drivers, which makes it difficult to apply the ABC method.
5.Name the units of service which cost-based payers may pay providers.
The units of service are retrospective and prospective. The retrospective scheme allows providers of service an advantage over payment terms. The amount paid is according to what provider stipulates as the cost of service after rendering the service.
Prospective service payment follows a stipulated service schedule. (Wolman et al., 2000)
6. How do copayments and deductibles reduce risk?
These are features of many insurance plans, involving payment on the insured, while the amount and frequency are not the same. Copayments refer to the fixed amounts that are met for the covered medical services, with the insurance company’s remaining balance covered. Different services attract different pays despite being within the same plans. However, they are regarded as less routine when they have to do with services regarded as non-essential.
On the other hand, deductibles refer to the fixed amount paid by the patient annually before the onset of their health insurance costs coverage. Beneficiaries pay coinsurance after meeting deductible for all the services that the plan covers. They continue paying coinsurance until their out of pocket maximum is met. When an insurer limits the deductibles, it is thus difficult to present a fraudulent bill for payment.
7.Steerage programs are programs for motivating employees and dependents into choosing
Healthcare providers of better value. The two types of steerage include active and passive steerage. Active steerage entails direct contact by physicians or patients for direction regarding approved services requests to cover preferred providers. Passive steerage is dependent on facilities costs and data detailing the information of the payor. Providers desire “steerage” because they are discounted for the patients who attended from the taxpayer. They also get referrals for their services, making it easier to receive the cash payment.
8.Who bears the risk under a flat system? Why?
The risk is borne by the healthcare provider since it is relative the actual care provided. The reason is because the providers are paid a prearranged sum which may have been passed by market circumstances.
9.How do HMOs uses determine their premiums?
Premiums are estimated by multiplying the number of expected encounters in the population by the exact cost of each encounter. Each encounter is allocated a given calendar month by dividing the result in step one by 12.
10. what would the PMPM cost of the HMO be?
PMPM = number of expected encounters * (estimated cost of each encounter / 12)
= (25 * 4.5 * 950) / 12
= 106875 / 12 = $8906.25
What would have to be charged to the patient/employer if the HMO had administrative costs equaling 10 percent of its costs and it wanted a profit margin of 7 percent?
MI cost = $950
Administrative costs = 10 per cent of 950
10% * 950 = 95
Profit margin = 7% * 1045 = 73.15
Total cost = 1045 + 73.15 =1118.15
PMPM = (25*4.5*1118.15) / 12 = $10482.56
References
Activity-based costing (ABC) . CGMA. (2020). Retrieved 6 July 2020, from https://www.cgma.org/resources/tools/essential-tools/activity-based-costing.html#:~:text=Activity%2Dbased%20costing%20provides%20a,to%20reduce%20or%20eliminate%20them
Wolman, D., Kalfoglou, A., & LeRoy, L. (2000). Medicare laboratory payment policy (pp. Chapter 6, pp 116 - 122). National Academy Press.
Zelman, W., McCue, M., Millikan, A., & Glick, N. (2009). Financial Management of Health Care Organizations: An Introduction to Fundamental Tools, Concepts, and Applications (2nd ed., pp. Chapter 12, PP 418 - 438). John Wiley & Sons.
