THE RELEVANCE OF COST ACCOUNTING IN COMPANIES

A TERM PAPER PREPARED BY

ADEOTI, RAHEEM ADEMOLA12/BA/AC/1217DEPARTMENT OF ACCOUNTINGFACULTY OF BUSINESS ADMINISTRATIONUNIVERSITY OF UYO, UYO

TO BE SUBMITTED TO

MR MBOBO ERASMUS MBOBOLECTURER IN-CHARGEACC-242 COST & MANAGEMENT ACCOUNTINGDEPARTMENT OF ACCOUNTINGUNIVERSITY OF UYO, UYO

DATE: DECEMBER, 2014.INTRODUCTION:Cost accounting is a method in which all cost incurred in carrying out an activity or accomplishing a purpose are collected, classified and recorded. This data is thereby summarized and analyzed to arrive at a selling price or to determine where savings are possible. In a highly competitive market, service providers are continually looking for ways to manage their costs and increase productivity. Although cost accounting was originally developed for the manufacturing industry, it has proven useful in the service industry as well. Cost accounting provides an accurate picture of the connection between specific costs and specific outputs because it traces resources as they move through the company. By adopting cost accounting for your service business, you can learn where resources are being wasted and which resources are most profitable. Cost accounting in healthcare has never been more important, but is often considered too difficult, expensive or resource intensive for many healthcare organizations. Additionally, other critical applications such as EMRs have been the primary focus and resource drain over the last decade. However, our industry is undergoing significant change and pressure is coming from all stakeholders to lower the cost of healthcare. For those organizations without a cost accounting system, and there are many, perhaps up to 50 percent, it's time to make it a priority.Healthcare organizations need to correlate the cost of care with quality outcomes to effectively balance the delivery of quality patient care at a reasonable cost. Reimbursement is evolving towards value-based payment models that reward high quality and lower cost with shared savings. These payment models often include an element of risk, potentially substantial, in one form or another. Entering into a risk-sharing arrangement without understanding the details of your cost to deliver patient care exposes an organization to unnecessary financial risk. Additionally, without a credible cost accounting system in place, hospitals are limited in their ability to identify cost drivers, implement and track cost education opportunities, utilize flexible and encounter-based budgeting, effectively negotiate payer contracts or successfully participate in ACOs. These are some of the many reasons cost accounting should be in every hospital, small to large, across the country.

COST ACCOUNTING DEFINEDA cost accounting system is a system for recording, analyzing and allocating cost to the individual services provided to patients (e.g., medications, procedures, tests, room and board). Organizations without a cost accounting system rely on rudimentary methods such as the ratio of-cost-to-charge. One RCC method utilizes Medicare's cost report that is founded on a step-down cost allocation methodology. This methodology, designed for reimbursement, is not based on sound cost accounting principles and is not a substitute for a cost accounting system.The other RCC method is even less accurate, using total department cost as a percent of total patient revenue and applying that percentage across all department services. Given current technology and limited patient specific cost data, the most credible and cost effective allocation method is a hybrid approach: advanced cost accounting. The charge and description master is utilized as the activity driver and relative value units as the "primary" basis for allocating costs. In addition, actual direct costs, time-based values, industry RVUs and non-chargeable activities are integrated where possible, providing the most comprehensive and credible approach.

COST ACCOUNTING IS A TEAM SPORTImplementing cost accounting is a "team sport" requiring expertise from across theorganization. Clinical department managers or proxies play a key role in providing "technical estimates" of resource consumption levels when developing RVUs. The RVUs play the leading role as to where expenses are allocated and ultimately determine the accuracy of the individual CDM level unit costs. From my experience, this is the most critical and resource-intensive phase of the entire implementation process, and where there is a potential for less than desirable outcomes.

COST ACCOUNTING IMPLEMENTATION TIMELINE

CONCLUSION:Healthcare organizations need to correlate the cost of care with quality outcomes to effectively balance the delivery of quality patient care at a reasonable cost. Reimbursement is evolving towards value-based payment models that reward high quality and lower cost with shared savings. These payment models often include an element of risk, potentially substantial, in one form or another. Entering into a risk-sharing arrangement without understanding the details of your cost to deliver patient care exposes an organization to unnecessary financial risk.RVUs play a primary role in advanced hospital cost accounting methods and require involvement from across the organization. Even though the scope of the effort can appear significant, effectively executing the eight strategies previously outlined will dramatically reduce the time and resource investment required. Utilizing all 8 strategies will streamline implementation, lesson the impact on clinical departments, ensure unit cost credibility, and typically shorten theimplementation from one year or more to under six months.Additionally, without a credible cost accounting system in place, hospitals are limited in their ability to identify cost drivers, implement and track cost reduction opportunities, utilize flexible and encounter-based budgeting, effectively negotiate payer contracts or successfully participate in ACOs. These are some of the many reasons cost accounting should be in every hospital, small to large, across the country.