ABC Accounting — Activity Based Cost Accounting in Healthcare

Activity-based costing abbreviated as ABC is a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each.

In the healthcare industry, ABC Accounting (Activity Based Cost Accounting) is used to estimate the cost element of products, health services, and activities within the healthcare organization. This helps the hospital or healthcare organization to optimize areas within their administrative system. In other industries like production and manufacturing, ABC accounting helps them identify and eliminate those products and services that are unprofitable and lower the prices of those that are overpriced a process known as the “product and service portfolio aim”. It also allows these industries identify and eliminate production or service processes that are ineffective and allocate processing concepts that lead to the very same product at a better yield (process re-engineering aim). In a business organization, the ABC methodology assigns an organization’s resource costs through activities to the products and services provided to its customers. ABC is generally used as a tool for understanding product and customer cost and profitability based on the production or performing processes. As such, ABC accounting has predominantly been used to support strategic decisions such as pricing, outsourcing, identification and measurement of process improvement initiatives.

There are software and programs that have been created to help healthcare organizations carry out ABC accounting. The main features of these software programs are:

  • Ability to leverage actual patient resource utilization data from the EMR and other departmental sources—not just charge codes—provides actionable insights into the real drivers of cost variation
  • Ability to integrate and aggregate multiple data sources—including EMR clinical, financial (e.g., claims, GL, payroll, supply chain), patient satisfaction, operational, and other data sources—is the building block for the most robust costing data set in the market
  • Support of multiple cost accounting methodologies provides flexibility and continually enhances the methodology based on business needs and available data
  • Manufacturing-style cost engine allows you to allocate to numerous processes per department type
  • Embedded costing content (drivers, algorithms, rules and best practices) provide transparency on how patient costs are generated
  • Automated and embedded data quality and cost validation algorithms save time and reduce errors

Programs similar to ABC Accounting

Lean accounting methods: Lean Accounting is the general term used for the changes required to a company’s accounting, control, measurement, and management processes to support lean manufacturing and lean thinking. … Lean improvements showing cost increases as a result of the way standard costing applies to labor and overhead costs. Lean accounting methods have been developed in recent years to provide relevant and thorough accounting, control, and measurement systems without the complex and costly methods of manually driven ABC. However lean accounting is a snapshot concept for capturing just partial derivatives or differentials of selected cost functions. Lean accounting takes an opposite direction from ABC by working to eliminate peculiar cost allocations rather than apply complex methods of resource allocation. Lean accounting is primarily used in lean manufacturing. The approach has proven useful in many service industry areas including healthcare, construction, financial services, governments, and other industries.

The Application of Theory of Constraints: The Application of Theory of constraints (TOC) is analyzed in a study that shows interesting aspects of productive coexistence of TOC and ABC application. Identifying cost drivers in ABC is described as somewhat equivalent to identifying bottlenecks in TOC. However, the more thorough insight into cost composition for the inspected processes justifies the study result: ABC may deliver a better-structured analysis in respect to complex processes, and this is no surprise regarding the necessarily spent effort for detailed ABC reporting.