Healthcare Finance An Introduction to Accounting

However such cost classifications require the

This preview shows page 168 - 170 out of 745 pages.

However, such cost classifications require the specification of a likely range of volumes. In dealing with the future, there is always volume uncertainty—the number of patient days, number of visits, number of enrollees, number of labo- ratory tests, and so on. However, healthcare managers often have some idea of the potential range of volume over some future time period. For example, the business manager of Northside Clinic, an urgent care clinic open seven days a week, might estimate that the number of visits next year could range from 12,000 to 14,000 (about 34 to 40 per day). If there is little likelihood that an- nual utilization will fall outside of these bounds, then the range of 12,000 to 14,000 visits defines the clinic’s relevant range . Note that the relevant range pertains to a particular time period—in this case, next year. For other time periods, the relevant range might differ from its estimate for the coming year. Fixed Costs Some costs, called fixed costs , are more or less known with certainty, regard- less of the level of volume within the relevant range . For example, North- side Clinic has a labor force of well-trained permanent employees who are capable of handling up to 14,000 patient visits. This force would be increased or decreased only under unusual circumstances. Thus, as long as volume falls within the relevant range of 12,000 to 14,000 visits, labor costs at the clinic are fixed for the coming year, regardless of the number of patient visits. Other examples of fixed costs include expenditures on facilities, diag- nostic equipment, information systems, and the like. After an organization has acquired these assets, it typically is locked into them for some time, regardless of volume. Of course, no costs are fixed over the long run. At some point of in- creasing volume, healthcare businesses must incur additional fixed costs for new facilities and equipment, additional staffing, and so on. Likewise, if volume de- creases by a substantial amount, an organization likely would reduce fixed costs by shedding part of its facilities and equipment and reducing its labor force. Fixed cost A cost that is not related to the vol- ume of services delivered. For example, facilities costs (within some relevant range).
Image of page 168

Subscribe to view the full document.

H e a l t h c a r e F i n a n c e 150 SELF-TEST QUESTIONS Variable Costs Whereas some costs are fixed regardless of volume (within the relevant range), other resources are more or less consumed as volume dictates. Costs that are directly related to volume are called variable costs . For example, the costs of the clinical supplies (e.g., rubber gloves, tongue depressors, hypodermics) used by the clinic would be classified as variable costs. Also, some of the di- agnostic equipment used in the clinic may be leased on a per-procedure basis, which converts the cost of the equipment from a fixed cost to a variable cost.
Image of page 169
Image of page 170

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern