Question

In healthcare today, we have different types of pricing strategies. We have a full-cost pricing strategy and a marginal-cost pricing strategy. Describe the differences between these two different costing strategies and give your recommendation on which one would be best for a hospital and why.

Answer 1

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For a hospital or healthcare marginal cost pricing strategies are recommended

o​​​​​​​nly the variable costs are considered in calculating the cost of the product, while the fixed costs are charged against the revenue of the period. There are differences between product and process costing. It is easier to cost a product as most of the costs can be directly or indirectly allocated to the product. Accounting cost in case of a product is quite close to its cost.

It is difficult to carry out process costing. The difficulties include the following:-

• a.Most salaries and supplies are department specific. However, there is an element of cost that services department provide to each other and they need to be allocated.

• b. A department has a variety of resources used for providing variety of service processes. Patients’ consumption of these resources varies widely and suitable method of their appropriation needs to be found.

• c. Difficulties are experienced in valuing the resources consumed, when they are used by different processes and none of the methods provide fully satisfactory solutions.

Generally charges by health care institutions are equated with costs. Distinguishing between two, Finkler emphasised that charges, are not equal to, nor necessarily a good approximation of, what a hospital pays for the resources it consumes in providing services .