Question

Discuss what is meant by the term cost allocation. Why is this important to a healthcare manager? Briefly identify and discuss direct, step-down, reciprocal, and activity-based methods.

Answer 1

Cost allocation can be considered to a process in which the costs are assigned or allotted to a specific health care service considering all the factors involved in the fulfillment of the service. In a health care system the cost allocation is performed considering the factors like the physician costs, administrative costs, service provision costs, medical costs etc.

The cost allocation is important for the health care system managers for the following reason. The managers of the health care system is responsible for the performance, profit generation, competitiveness etc of the organization. If only the costs are being analyzed effectively and allocated effectively the managers can achieve cost control, standardization in health care provision can be achieved effectively.

Direct, step-down, reciprocal, and activity-based methods etc are the cost allocation methods which can be adopted by the health care system managers.

Direct: According to this method the manager allocates the costs for each service according to the service performed by the department for a specific health care service. This is a simple and an accurate method of the cost allocation.

Step-down: Here the cost allocation process is performed in a sequential process. The health care service department which has incurred higher costs are allocated first and the remaining in the sequential order from higher to lower.

Reciprocal: In this method the cost allocation is done to the operations department considering the costs of the service department. Even though this cost allocation is more complex it makes the process more accurate.

Activity-based methods: This method is performed considering the activities involved in the health care service provision.