5 Cost Accounting Tips for a Medical Practice

November 24, 2020

Although it is a newer concept, cost accounting can be very beneficial for medical practices of all sizes. Because the demand to lower the cost of health care is becoming more urgent, it can be helpful to streamline the process of eliminating unnecessary expenses by understanding and implementing this type of accounting system. 

What is cost accounting?

A cost accounting system focuses on recording, classifying, and allocating the expenses of a company to help determine the actual cost of services and products. The idea is when the exact uses of funds are known, costs of services and products can not only be clearly defined but also reduced. This accounting method can also help pinpoint the profitability of specific ventures or expenditures so more well-informed decisions can be made about future purchases or endeavors.

According to Becker’s Hospital CFO Report, the main obstacle to overcome when trying to implement a cost accounting system is creating an accurate Relative Value Unit without being overwhelmed or confused by the math. Because the RVU ultimately helps to determine the costs associated with the charge description master, which can be extensive and complex, it is important to establish clear, correct RVUs before proceeding further. It is also crucial to have the cooperation of everyone involved with the practice since efficient communication of data can be a large part of the process. 

5 ways to make cost accounting work for a medical practice

There are differences between how a traditional company and a medical practice operate, but an accounting method like this can work particularly well in a service industry where costs are tied more to time and expertise than products. Here are some tips to help your medical practice implement an effective cost accounting system. 

1. Delegate to responsible team members

Rather than having one person attempt to figure out all the RVUs alone, it can be helpful to get other staff members involved. Especially for larger practices with multiple departments, tasking a tenured, capable staff member from each department with compiling specific RVUs can speed the process up quite a bit. Even for smaller practices, enlisting the assistance of staff members who are familiar with the services and products can help establish these amounts more accurately. When deciding who to select for the assignment, take into consideration factors such as how well the employee knows the CDM codes, resource consumption, and operating procedures. 

2. Ensure the correct CDM codes are being used

Aside from their importance for cost accounting, correct CDM usage is beneficial for patients and medical practices alike to ensure proper billing and insurance charges. Because CDM codes play a significant role in defining the RVUs, CDMs used incorrectly can result in inaccurate numbers. Charges are also becoming increasingly automated, and some software does not require individual service codes to be entered manually. Before relying on CDM codes to help generate RVUs, it can be important to revisit how the codes are being applied to get the most accurate RVUs possible. According to the Healthcare Financial Management Association, respondents to a survey reported the area that most needed improvement was statistics and RVUs. This shows team members are aware of a deficiency and may welcome additional training in this area. 

3. Utilize all available techniques and data

It is not necessary to develop all the RVUs from scratch. For some services and products, there will be information such as actual cost, industry-standard RVUs, and staffing ratios that allow the RVU to be determined quickly. In many cases, the actual cost of products is known or can be determined easily by contacting the vendor rep. Some factors, such as time spent on a service or clinical skill level required, are also fairly objective and can be used to develop a standardized RVU. In many cases, a minimum cost for these factors already exists, and all that is left to do is determining how much the margin needs to increase to meet the fiscal needs of the practice. 

4. Prioritize

There should naturally be a large difference in dollar amount between your most costly and least costly RVUs. Instead of determining them by department, alphabetically, or using some other method, it can be a good idea to start with the RVUs that cost the most. Whether they cost more because of the time or resources involved, or because they are used the most frequently, these are often the RVUs that determine the profitability of the practice. For example, if your RVUs are below the national benchmark average, but you have a high patient volume, you may need to take a look at the efficiency of your practice in order to grow. 

5. Get the math right

Arriving at an accurate RVU is more complicated than simply taking the purchase costs and adding subjective charges to get a number. The base price of a product or service is not merely the cost associated with acquiring the item or performing the service. Other factors that add to the initial cost must be added to determine the true value. The following variables must be taken into account:

  • Labor costs
  • Building lease costs
  • Equipment costs
  • Office supply costs
  • Malpractice and insurance premium costs
  • Time
  • Necessary clinical skill

These are costs that need to be incorporated into the RVUs to keep a practice profitable. It is also important to adjust for a geographic variance. It is absolutely possible to calculate RVUs manually, and for smaller practices, this can be the least expensive choice. Especially for practices with tenured, experienced team members able to help with determining RVUs, it can be a way to encourage staff involvement and elevate thinking. Larger practices may want to consider investing in software or calculation programs and automating the process as much as possible.

Discover more practice management best practices

Cost accounting is just one of many ways to improve the health of your medical practice. At Doctor Genius, we understand the importance of retaining clients after acquiring them. That is why we not only help with marketing but also offer ways to ensure your practice stays healthy in the current environment. To learn more about how we can help, call us at 877-477-2311 to speak with a team member today.

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