describe the ways in which healthcare financial managers use financial resources and cost classifications to allocate indirect costs to direct costs when determining patient charges

After completing this week’s readings, including, “Anticipating Utilization Trends in an Evolving Market ,” describe the ways in which healthcare financial managers use financial resources and cost classifications to allocate indirect costs to direct costs when determining patient charges. Also, explain how utilization rates are related to volumes and revenue generation.

Peer Response 1:

Paula Stroshine posted

Discussion 3: Cost Accounting

Health care financial managers use financial resources and cost classifications to allocate indirect cost to direct cost when determining patient charges. The first concept to be discussed is the operating cost which provides services to the patient that visits the emergency room (Nowicki, 2018). The emergency room will need equipment so that the financial manager would have to borrow money and this concept is called non operating cost (Nowicki, 2018). The concept of direct cost is directly traced to a department including supplies and labor. Indirect costs are the overhead costs (Nowicki, 2018). Here is an example of how indirect cost can be allocated to the direct cost.

In the vascular surgery area where cardiac catheterizations procedures are performed the direct cost would be the medications, machines to do the procedure, and the clinical staff to perform the surgery. The indirect cost includes the cleaning personal, the lighting, and the appropriate temperature for the machinery used in the procedure. The financial manager for the department would include the indirect cost for each procedure in the budget which includes the time that it takes to clean the operating room after the procedure and the time the electricity and the lighting was needed. This would be included in the budget. In the end the patient will go to the telemetry ward over night to be monitored for any complication.

The nurse manager on the ward accepts the patient from the cardiac catheterization unit for observation status. Patient volumes on the wards have decrease and observation status is just one-way utilization decreases the admission rates, but it has controversies (Feng, Wright & Mor, 2012). The observation status may not work for all patients that need hospitalization.

Nurse managers must be familiar with the budgeting process. This is difficult since you cannot count the quality of care in the ward or clinic budget. Hospitals and healthcare organizations must prepare for utilizations declines with the health care reforms. inpatient volumes have already declined, hospitals are merging, and outpatient utilization has increased (Samaris, 2013). The nurse manager must watch the census and staff the ward accordingly. Nurses may be asked to take low census days. Furthermore, nurse managers and financial manager work together to bring the budget together for that unit.

Feng, Z., Wright, B. & Mor, V. (2012). Sharp rise in medicare enrollees being held in hospitals for observation raises concerns about causes and consequences. NCBI, 31(6), 1251-1259. doi:10.1377hlthaff.2012.0129

Nowicki, M. (2018). Introduction to the financial management of healthcare organizations (7th ed.). Chicago: Health Administration Press.

Samaris, D. (2013). What’s new on our blog anticipating utilization trends key adapting in an evolving market. Healthcare Financial Management, 26-27.


Peer Response 2:

Renata Jankowski posted

Healthcare financial managers utilize several methods of cost classification when performing accounting and management functions at their facility. Identifying costs can be done through their traceability (Nowicki, 2018). While direct costs can be traced directly to department, product, or service, indirect costs cannot be traced to one specific area or cause. These are considered overhead costs, such as the heating or cooling throughout a facility. Another way financial managers can classify costs is through behavior as it relates to the volume of products or services. This includes variable and fixed costs, semi-variable costs, and marginal costs (Nowicki, 2018).

Healthcare organizations don’t send a bill for every product or service they sell; instead they utilize cost allocation, which is the process of assigning indirect costs, and also some direct costs, across different departments that do generate charges or profits (Nowicki, 2018). This process ensures that patients only pay for the costs of the services and products they receive. An example of allocating costs for an extra service that an organization provides is the use of the interpretation services through language line solutions. Before being connected to a certified interpreter, the program requests a 4 digit billing code that is unique to each unit. The payment for this service is not passed on to the patient; instead the cost is subtracted from that unit’s budget when the service is used by its staff. This helps the organization offset certain costs with differed distributions. Healthcare organizations must utilize organizational charts, as well as a commensurate chart of accounts, in order to identify who is responsible for each functional area and which area or department is considered a cost center and/or a revenue center. Even though all departments are cost centers, only the departments that make a profit are considered revenue centers (Nowicki, 2018).

Healthcare financial managers must also understand how different volumes and payment outcomes will affect their organization. Utilization declines can be seen in the inpatient setting due to healthcare reform and changing demographics, while outpatient utilization is showing increases due to the expansion of health coverage under the Affordable Care Act. According to Samaris (2013) “reducing utilization can help organizations decrease costs and increase their eligibility for narrow or tiered networks” (p.26). Hospitals and health systems need to demonstrate that they can reduce costs significantly by driving utilization out of the system in order to participate in the highly selective networks (Samaris, 2013). Lower utilization can be achieved by reducing unnecessary readmissions through initiatives such as home care or short-term rehabilitation centers, when patient is unable to be discharged home safely. The case managers in the hospital work tirelessly from the time the patient arrives on the unit to expedite their safe discharge. Also, while working in an inpatient setting myself, I have witnessed the decline in the volume of patients. My oncology unit in particular suffered a decline, as more cancer treatments are now being offered on an outpatient basis. This change in volume has led to bed reduction and the conversion of semi-private rooms into completely private rooms, in an effort to increase patient satisfaction and reduce costs .




Nowicki, M. (2018). Introduction to the financial management of healthcare organizations. (7th ed.) Chicago, IL; Health Administration Press.

Samaris, D. (2013). Anticipating utilization trends key to adapting in an evolving market. Healthcare Financial Management, (4). Retrieved from


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