The impact of various accounting approaches on U.S. healthcare reimbursement systems

Davis, D.C., David, S.W., & Schmelzle, G. (2013, Aug). The impact of various accounting approaches on U.S. healthcare reimbursement systems: Ethical and managerial implications. Journal of Management Policy and Practice, 14(4), 123-136.

  1. Analysis of hospital as a revenue center

The U.S health care system and the role of accounting can be evaluated in phases in which the objectives of healthcare system have evolved. In the 1950s through the 1970s the system did not feature in the third insurance as a work benefit. The increasing number of potential patients’ overtime with the ability to offer payments to hospital services increased the market incentives offered by the hospitals. As a result, more services at expensive rates and better care was provided since the real costs and benefits became accounted for by the insured. Medicare and Medicaid introduction in the system for the elderly brought a distinction between two categories of population and the government and insurance agencies mainly paid for the medical services. Accounting approaches under the scenario depict that there is a gap between service costs and consumer remuneration a case referred to as “Baumol’s Disease” (Davis & Schmelze, 2013).

  1. Analysis of hospital as cost and profit center

In the 1980’s to 1990’s, inflation rates on healthcare expenditures rose tremendously, and there was a need for a more relevant accounting system in healthcare. Cost containment and controls were necessary so as to shift fiscal burdens to a lower state. Reimbursement by Diagnostic Related Groups (DGRs) emerged with a credible system developed. A case mix that comprises of the general health and a diagnostic case mix with the elderly and the youths comprised in the mix. The costs associated with the delivery of healthcare are both the direct costs and the indirect costs. The hospitals aim to maximize profits through the revenues from a particular mix led to an inability to determine the direct costs associated with it. Profit or loss in the hospital became determined through calculation of an average length of days and variance from the mean depicted either a loss or profit. The cost-profit approach adopted the DRG system (Davis & Schmelze, 2013). DRGs wide application in the health care policy making and estimation of the costs and profits associated with a healthcare system makes it be the most popular system used for accounting purposes.

  1. The DRG system concepts

The DRG accounting system in healthcare attempts to identify the highest revenue potential and compare it with the associated cost so as to give accurate measures of losses or profits. DGR as an accounting system poses some weaknesses in the healthcare system. One of the consequences of the DGR is that the hospital services became unbundled with different schedules of payments within the total reimbursement system. The independence of the system in this way became altered under the DRG. Despite these limitations, accounting researchers critique DRG as a performance measurement tool in healthcare industry and the basic concepts of the measurement system has been in use in America and other countries such as Germany, Great Britain and Australia (Davis & Schmelze, 2013). A similar performance measure is the Resource-Based Relative Value Scale (RBRVS) that measure physician performance and the cost of production.

  1. The Cost Control performance measure analysis

The healthcare systems in the same country tend to have a variation in the costs of Medicare. The U.S healthcare system offers differing degrees of aggressive care. In cities such as Manhattan, patients receive highly aggressive care than patients in areas such as Rochester. The variation does not make those in conservative areas worse than those in better living standards. The prices made by the two groups vary and thus cost differences arises. Accounting techniques used to account for such differences is through creating price leverage between regions (Davis & Schmelze, 2013). Involvement of IT in cost control helps in making the system more effective and reliable. Activity-based costing is also a good measure of cost control, and this is attainable through the creation of various cost pools. The patient’s welfare maximization, however, must be a priority in the healthcare industry (Blackmore,  Mecklenburg & Kaplan, 2011).