Determining the Cost of Care for U.S. Healthcare Providers: A Hybrid Approach

Abstract

Many US healthcare providers can’t easily calculate the cost of treating patients. They use simple calculations such as the cost-to-charge ratio (CCR) which Medicare uses for reimbursement purposes and the ratio-of-cost-to-charge (RCC) which allocates costs to patients based on revenue generated from revenue centers. Healthcare providers are unique, provide different services, and use different resources for treatments. A-one-size-fits-all costing system can’t work for all sizes and different specialty practices. Scholars suggested many costing methods that can be used in different healthcare practices, such as the unit cost analysis, the standard costing method, the gross-costing method, the chart of accounts, the resource-based relative value units (RBRVS), the step-down cost accounting (SDCA), and the activity-based costing (ABC). The purpose of this article is to recommend a costing method that can be easily learned and applied by different size healthcare providers. The proposed hybrid costing approach can help providers calculate the cost of care by capturing the cost of routine and standard exams, treatments, services, and procedures using the process costing system, and capture all other costs that are unique to each patient using the job order costing system. Adequately determining the cost of care will help healthcare leaders improve planning and budgeting for target income and achieve organizational efficiency and effectiveness.