Activity-based costing proves time is money
Activity-based costing proves time is money
If Medicare reimbursement is indeed moving toward prospective payment or capitation, home health agencies might consider activity-based costing (ABC) as a means to better manage their budgets.
Learning this financial approach also can aid directors in negotiating managed care contracts.
The Visiting Nurse Service of New York (VNS-NY), the largest nonprofit home care agency in the United States, has been using activity-based costing in conjunction with HCFA’s Community Nursing Organization (CNO) demonstration project. Activity-based costing allows VNS-NY to break down nursing costs according to the time spent on various home health services.
Taking the approach that time is money, activity-based costing looks at every detail of a business or service and considers what each truly costs. Of course, this will vary from agency to agency, but the approach gives a clear picture of your expenses.
Ruth Mitchell, RN, MS, the CNO site director for VNS-NY, explains it this way:
"If you own a bakery, you look at your books and see what the costs are of rent, utilities, salaries, materials. These are expenses.
"But, you also look at how much it costs to bake one layer of a cake, how much it costs to put on the icing, and how much it costs to deliver the cake. What are the costs of materials, labor, utility bills? There’s even a delivery-truck expense, and the box costs something, plus the salary of the driver."
ABC started in manufacturing
Although activity-based costing may be a new approach to accounting at hospital-based home care agencies, it has been around for some time. Mitchell says the idea started in manufacturing "to help organizations get a picture of what their true costs of making a product are." The same applies with service organizations, like home care.
To arrive at costs, says Mitchell, you must keep track of clinical and administrative activities. "You look at the activity and determine its expense."
Hospital Home Health will explore ABC accounting in greater detail in future issues. We will talk with agencies whose experience can help other directors understand ABC and apply it to their agencies’ specific needs.
Stay tuned.
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