Why Cost Analysis Matters to HIM
As healthcare organizations move toward value-based payment models, HIM professionals increasingly contribute data and analytical support for cost analysis initiatives. RHIA candidates should understand the major cost accounting methods used to determine the true cost of delivering care.
Ratio of Cost to Charges
The ratio of cost to charges method estimates a department's or service's cost by applying a cost-to-charge ratio, derived from the hospital's overall cost report, to the gross charges generated. While simple to calculate, this method assumes a uniform relationship between cost and charges across all services, which can distort accuracy when charge structures vary widely between departments.
Relative Value Units
Relative value units assign a weighted value to services based on the relative resources required to perform them, such as physician work, practice expense, and malpractice risk components used in the resource-based relative value scale. This method allows more granular cost comparison between services of varying complexity.
Activity-Based Costing
Activity-based costing traces costs to the specific activities involved in delivering a service, such as nursing time, supply usage, and equipment use, then assigns those activity costs to individual patients or service lines. This method produces the most granular and accurate cost picture but requires significant data collection infrastructure to implement.
Applications in Decision Making
- Evaluating whether a service line is financially sustainable under current reimbursement rates
- Supporting negotiations with payers by demonstrating the true cost of care delivery
- Informing capital investment decisions by comparing projected costs and revenues of new service lines
- Identifying cost variation between providers performing similar procedures
Break-Even Analysis
Break-even analysis determines the volume of services needed to cover fixed and variable costs, helping leaders decide whether a proposed program or piece of equipment can be financially justified given expected patient volume and reimbursement rates.
Exam Tip
Be able to distinguish fixed costs, which remain constant regardless of volume, from variable costs, which change with volume, since this distinction underlies most cost analysis calculations tested on the exam.