H e a l t h C a r e Po l i c y a n d Q u a l i t y • R ev i ew Gentili Cost Accounting for the Radiologist
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Health Care Policy and Quality Review
Cost Accounting for the Radiologist Amilcare Gentili1 Gentili A
OBJECTIVE. Cost accounting is the branch of managerial accounting that deals with the analysis of the costs of a product or service. This article reviews methods of classifying and allocating costs and relationships among costs, volume, and revenues. CONCLUSION. Radiology practices need to know the cost of a procedure or service to determine the selling price of a product, bid on contracts, analyze profitability, and facilitate cost control and cost reduction.
C
Keywords: cost accounting, economics, finance, practice management DOI:10.2214/AJR.13.11549 Received July 10, 2013; accepted after revision December 18, 2013. 1 Department of Radiology, San Diego VA Healthcare System, UCSD, 3350 La Jolla Village Dr, San Diego, CA 92161. Address correspondence to A. Gentili ([email protected]).
This article is available for credit. AJR 2014; 202:1058–1061 0361–803X/14/2025–1058 © American Roentgen Ray Society
1058
ost accounting is the branch of managerial accounting that deals with the analysis of costs. Cost accounting aims to compute the cost of a product or service. Radiology practices need to know the cost of a procedure or service to determine the selling price of a product, bid on contracts, analyze profitability, and facilitate cost control and cost reduction. Managerial accounting looks at the future and is used to make decisions about how to proceed, in contrast to financial accounting, which looks at the past. The information generated by managerial accounting is for internal use of an organization and, for this reason, is less standardized and less regulated. The products of financial accounting are for public consumption—balance sheets, income statements, and statements of cash flow—and thus need to follow standard accounting practices [1–4]. Cost Definitions Cost and expense are often used interchangeably; however, in accounting, the cost is what we pay for acquiring a resource and it does not become an expense until that resource is used. Until a cost becomes an expense, it is considered an asset, such as inventory. When we buy a biopsy needle or catheter, it is a cost for buying an asset, but it is not an expense until it is used for a procedure or disposed. There are different methods of classifying costs depending on the objective of the cost analysis. Costs can be classified on the basis of the management function, the traceability, the behavior, and the relevance to decision making.
Management Function On the basis of management function, costs are divided into operating costs and nonoperating costs. Operating costs are costs associated with producing a product or service. For instance, costs associated with an interventional radiology procedure are operating costs. In contrast, nonoperating costs are costs associated with supporting the production of a product or service: The costs associated with borrowing money for the equipment in the angiography suite are nonoperating costs. Traceability On the basis of traceability, costs are divided into direct costs and indirect costs. Direct costs—Direct costs are costs incurred within an organizational unit or the costs of resources used to produce a good or service. For example, a CT technologist is a direct labor cost to the radiology department and contrast material is a direct supply cost. Indirect costs—An indirect cost is a cost that is assigned to a unit from outside. It is the cost of resources not used directly to provide a service. For example, housekeeping and hospital administration are indirect costs for radiology. Depending on the cost objective, the same cost can be considered direct or indirect. For instance, a housekeeper is an indirect cost for radiology but a direct cost for the housekeeping service; a radiology administrator is a direct cost to radiology but an indirect cost of a CT examination. Full cost—The full cost is the sum of all costs associated with the cost objective. Full costs consist of direct costs, which can be
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Cost Accounting for the Radiologist
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Fig. 1—Costs. A, Variable costs are proportional to volume. Example of variable cost is cost of supplies: contrast material, biopsy needles, catheters, and so on. B, Fixed costs are independent of volume over relevant range. Typical fixed cost for radiology is cost of imaging equipment. C, Total cost is sum of fixed costs and variable costs. D, Cost per unit decreases with increase in volume.
traced directly to a department, product, or service, such as labor and supplies, and indirect costs, also called overhead costs, which cannot be traced directly to a department, product, or service, such as the cost of heating and air-conditioning. Average cost or cost per unit—The average cost or cost per unit is the full cost divided by the number of products or services. Because the average cost depends on the volume produced, it is not known until we stop to provide a service or produce a product. Behavior Cost can be classified by behavior in relation to the volume of products or services as one of the following: variable costs, fixed costs, semivariable costs, or marginal costs. Variable costs—Variable costs are costs that vary directly with changes in volume. An example of a variable cost is the cost of supplies: contrast material, biopsy needles, catheters, and so on (Fig. 1A). Fixed costs—Fixed costs remain unchanged as the volume of services changes
over a relevant range of activity (Fig. 1B). A typical fixed cost for radiology is the cost of the imaging equipment. Total cost—The total cost is the sum of the fixed costs and variable costs (Fig. 1C). Costs per unit—The cost per unit is the total cost divided by the number of units produced (Fig. 1D). In most cases, the cost per unit varies with the number of units produced. If there is no fixed cost, the cost per unit does not change with volume and is equal to the variable cost, but in most cases fixed costs exist and the cost per unit decreases with the increase in the number of units produced. Making the assumption of $100,000 fixed equipment costs and $100 per unit variable cost, the cost per unit decreases from $1100 for 100 units, to $200 for 1000 units, to $110 for 10,000 units. Step-fixed or semivariable costs—Step-fixed or semivariable costs are costs that are fixed over ranges of activity that are less than the relevant range. Assume that the lease of a scanner is $100,000 a year and that it can perform up to 5000 procedures a year. For 1–5000 pro-
cedures we need a single scanner, which costs $100,000. For 5001–10,000, we need two scanners for a cost of $200,000, and for 10,001– 15,000 we need three scanners (Fig. 2). Marginal cost or incremental cost—The marginal cost or incremental cost is the additional cost incurred as the result of providing additional units of service. The marginal cost is used for short-term decision making. If performing 10 CT examinations a day costs $200 per examination, which is $100 in fixed costs and $100 in variable costs, and if we can perform one more examination in a day without needing to buy a new scanner or hiring a new technologist, then the cost of the extra examination is much less than $200. The extra examination costs only $100 for the variable costs (supplies). Relevance to Decision Making Controllable costs—Controllable costs are the costs that can be influenced by the manager, such as overtime labor costs. Uncontrollable costs—Uncontrollable costs are the costs that are not easily influenced by the manager, such as utility costs.
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Gentili
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A Differential costs—Differential costs are the difference in costs when evaluating multiple alternatives. Sunk costs—Sunk costs are costs that have already been incurred and should not be included in planning for the future. For instance, the costs already incurred in opening a new imaging center are sunk costs and should not be included in the decision to keep the imaging center open if it is unprofitable. Opportunity costs—The opportunity cost of a choice is the value of the best alternative forgone when a choice needs to be made between several mutually exclusive alternatives given limited resources. The opportunity cost of spending $1 million in opening an imaging center is the amount of money that sum could have earned in another investment. Relevant costs—Relevant costs are costs that are specific to management’s decision when evaluating alternatives. Costs that should be excluded as not relevant are sunk costs and future costs because they do not differ between alternatives. For instance, the costs of keeping the imaging center open are relevant costs. However, the costs already incurred in opening a new imaging center are sunk costs and should not be relevant in the decision to keep the imaging center open. Actual costs—Actual costs are known only in retrospect. They are the historic costs for a product or service. Standard costs—Standard costs are estimated costs used for budgeting purposes and for comparisons. Actual costs and standard costs are used in variance analysis, which breaks down the variation between actual costs and standard costs into various components (volume variation, material cost variation, labor cost variation, and so on) to understand why costs were different from what was budgeted and take appropriate action to correct the situation. For example, a radiology practice may determine that the standard cost for an interventional radiology pro-
1060
Fig. 2—Step-fixed or semivariable costs and cost per unit. A, Step-fixed or semivariable costs change in discrete increments. Example of step-fixed cost is cost of imaging equipment once certain volume is reached and additional piece of equipment is needed. B, Cost per unit is lowest just before increment in step-fixed costs.
B cedure is $1000. If one of the interventional radiologists routinely spends $1500 for each procedure (possibly because of increased use of supplies and technologist’s or nurse’s time), the interventional radiologist section chief may investigate this discrepancy and counsel this interventional radiologist. Cost Allocation A health care organization does not bill a patient separately for each indirect cost (e.g., heating and air-conditioning, housekeeping, administration). Instead these indirect costs from cost centers that do not generate revenues are allocated to departments that generate patient bills, such as radiology. The process of allocating these costs to departments that generate charges is called cost allocation. There are different methods of allocating costs: direct apportionment, stepdown apportionment, double apportionment, and multiple apportionment. Fig. 3—Direct apportionment involves onetime allocation of all costs from departments that have costs but do not generate revenue (nonrevenue) to departments that generate revenue. Step-down apportionment involves two-time allocation: one-time allocation of all costs from nonrevenue departments to other nonrevenue departments (1) followed by one-time allocation of all costs from nonrevenue departments to revenue departments (2). Double apportionment also involves two-time allocation: one-time allocation of all costs from nonrevenue departments to other nonrevenue departments and simultaneous allocation of all costs from revenue departments to other nonrevenue departments (1) followed by one-time allocation of all costs from nonrevenue departments to revenue departments (2). Multiple apportionment, like double apportionment, involves two-step allocation: multiple simultaneous allocation of all costs from nonrevenue departments to other nonrevenue departments and multiple simultaneous allocation of costs from revenue to other revenue department (1) followed by one-time allocation of all cost from nonrevenue departments to revenue departments (2).
Direct Apportionment Direct apportionment involves a one-time allocation of all costs from departments that have costs but do not generate revenue, cost centers, such as housekeeping, to departments that generate revenue, profit centers, such as radiology. The advantage of direct apportionment is ease of implementation, and the main disadvantage is that it does not take into account nonrevenue departments doing work for other nonrevenue departments (Fig. 3). Step-Down Apportionment Step-down apportionment involves a twotime allocation. A one-time allocation of all costs from departments that do not generate revenue to other departments that do not generate revenue followed by a one-time allocation of all costs from departments that do not generate revenue to departments that generate revenue. The advantage is consideration of the costs of nonrevenue departments do-
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Multiple Apportionment Multiple apportionment, like double apportionment, involves a two-step allocation. During the first step, multiple simultaneous allocation of all costs from departments that do not generate revenue to other departments that do not generate revenue and multiple simultaneous allocation of costs from departments that do generate revenue to other departments that do generate revenue, followed by a one-time allocation of all costs from departments that do not generate revenue to departments that generate revenues. The advantage of multiple apportionment is that it is the most accurate but requires complex calculations (Fig. 3). Break-Even Analysis Break-even analysis is used to determine how many units need to be produced to cover the fixed costs. The break-even quantity (BEQ) is how many units need to be produced to cover the fixed costs: Fixed Costs BEQ = Price − Variable Costs Fixed Costs BEQ = Contribution Margin The contribution margin is equal to the difference between prices collected and variable costs. The contribution margin rep-
Break-even point
Break-even point Profit Total cost
Costs ($)
Double Apportionment Double apportionment involves a two-time allocation. A one-time allocation of all costs from departments that do not generate revenue to other departments that do not generate revenue and simultaneous allocation of all costs from departments that do generate revenue to other departments that do generate revenue, followed by a one-time allocation of all costs from departments that do not generate revenue to departments that generate revenue. The advantages are consideration of costs of nonrevenue departments doing work for other nonrevenue departments and consideration of costs of revenue departments doing work for other revenue departments. For these reasons, it is more accurate but requires more complex calculations (Fig. 3).
Cost Accounting for the Radiologist Revenues Costs ($)
ing work for other nonrevenue departments; the disadvantage is that it does not consider the cost of revenue departments doing work for other revenue departments (Fig. 3).
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Fig. 4—Break-even analysis in fee-for-service environment and capitated care environment. A, In fee-for-service model, revenues increase with volume; once break-even point is reached, any increase in volume will generate profits. B, In capitated care model, revenues are constant; once break-even point is reached, any increase in volume will generate losses.
TABLE 1: Profit, Expenses, and Revenue for Fee-for-Service and Capitated Care Models Item
Fee-for-Service Model
Capitated Care Model
Profit
Revenue – expenses
Revenue – expenses
Expenses
(Fixed costs) + (variable cost per unit × volume)
(Fixed costs) + (variable cost per unit × volume)
Revenue
Collected Charges × volume
Revenue is fixed
resents the portion of revenue that is not consumed by variable costs and contributes to the coverage of fixed costs and profits. Once the fixed costs are completely covered, the contribution margin represents profits. Break-even analysis is different depending on whether one is operating in a fee-for-service environment or in a capitated environment (Fig. 4). Independent of the operating environment, profit is equal to revenue minus expenses, and expenses are equal to the fixed costs plus the variable cost per unit multiplied by the volume. With increasing volumes, the expenses increase. In a fee-for-service environment, revenue is equal to collected charges multiplied by volume. With fee for service, the higher the volume, the higher the revenue; thus, increasing volume is one of the main factors in increasing revenue. In a capitated care environment, the revenue is fixed, so controlling the volume and variable costs is essential to maintain profitability (Table 1). In a feefor-service environment, radiologists have no economic incentives for reducing utilization of imaging. In a capitated care environment, radiology is no longer a profit center but becomes a cost center. The role of the radiologist
may change from being mostly an interpreter of images to being a consultant who helps the referring physicians select the most appropriate and least costly imaging studies to reach the correct diagnosis. Conclusion This article reviews methods of classifying costs; methods of allocating costs; and relationships among costs, volume, and revenues. It is important for radiology practices to understand their costs. A clear understanding of the cost structure is essential to determine what are the minimum reimbursements necessary to maintain profitability. References 1. Finkler SA. Finance and accounting for nonfinancial managers. Chicago, IL: CCH, 2011:79–90 2. Nowicki M. Introduction to the financial management of healthcare organizations, 5th ed. Chicago, IL: Health Administration Press, 2011:132–170 3. Camponovo EJ. The business of radiology: cost accounting. J Am Coll Radiol 2004; 1:567–575 4. Saini S, Seltzer SE, Bramson RT, et al. Technical cost of radiologic examinations: analysis across imaging modalities. Radiology 2000; 216:269–272
F O R YO U R I N F O R M AT I O N
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Health Care Policy and Quality Review
Cost Accounting for the Radiologist Amilcare Gentili1 Gentili A
OBJECTIVE. Cost accounting is the branch of managerial accounting that deals with the analysis of the costs of a product or service. This article reviews methods of classifying and allocating costs and relationships among costs, volume, and revenues. CONCLUSION. Radiology practices need to know the cost of a procedure or service to determine the selling price of a product, bid on contracts, analyze profitability, and facilitate cost control and cost reduction.
C
Keywords: cost accounting, economics, finance, practice management DOI:10.2214/AJR.13.11549 Received July 10, 2013; accepted after revision December 18, 2013. 1 Department of Radiology, San Diego VA Healthcare System, UCSD, 3350 La Jolla Village Dr, San Diego, CA 92161. Address correspondence to A. Gentili ([email protected]).
This article is available for credit. AJR 2014; 202:1058–1061 0361–803X/14/2025–1058 © American Roentgen Ray Society
1058
ost accounting is the branch of managerial accounting that deals with the analysis of costs. Cost accounting aims to compute the cost of a product or service. Radiology practices need to know the cost of a procedure or service to determine the selling price of a product, bid on contracts, analyze profitability, and facilitate cost control and cost reduction. Managerial accounting looks at the future and is used to make decisions about how to proceed, in contrast to financial accounting, which looks at the past. The information generated by managerial accounting is for internal use of an organization and, for this reason, is less standardized and less regulated. The products of financial accounting are for public consumption—balance sheets, income statements, and statements of cash flow—and thus need to follow standard accounting practices [1–4]. Cost Definitions Cost and expense are often used interchangeably; however, in accounting, the cost is what we pay for acquiring a resource and it does not become an expense until that resource is used. Until a cost becomes an expense, it is considered an asset, such as inventory. When we buy a biopsy needle or catheter, it is a cost for buying an asset, but it is not an expense until it is used for a procedure or disposed. There are different methods of classifying costs depending on the objective of the cost analysis. Costs can be classified on the basis of the management function, the traceability, the behavior, and the relevance to decision making.
Management Function On the basis of management function, costs are divided into operating costs and nonoperating costs. Operating costs are costs associated with producing a product or service. For instance, costs associated with an interventional radiology procedure are operating costs. In contrast, nonoperating costs are costs associated with supporting the production of a product or service: The costs associated with borrowing money for the equipment in the angiography suite are nonoperating costs. Traceability On the basis of traceability, costs are divided into direct costs and indirect costs. Direct costs—Direct costs are costs incurred within an organizational unit or the costs of resources used to produce a good or service. For example, a CT technologist is a direct labor cost to the radiology department and contrast material is a direct supply cost. Indirect costs—An indirect cost is a cost that is assigned to a unit from outside. It is the cost of resources not used directly to provide a service. For example, housekeeping and hospital administration are indirect costs for radiology. Depending on the cost objective, the same cost can be considered direct or indirect. For instance, a housekeeper is an indirect cost for radiology but a direct cost for the housekeeping service; a radiology administrator is a direct cost to radiology but an indirect cost of a CT examination. Full cost—The full cost is the sum of all costs associated with the cost objective. Full costs consist of direct costs, which can be
AJR:202, May 2014
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Cost Accounting for the Radiologist
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Fig. 1—Costs. A, Variable costs are proportional to volume. Example of variable cost is cost of supplies: contrast material, biopsy needles, catheters, and so on. B, Fixed costs are independent of volume over relevant range. Typical fixed cost for radiology is cost of imaging equipment. C, Total cost is sum of fixed costs and variable costs. D, Cost per unit decreases with increase in volume.
traced directly to a department, product, or service, such as labor and supplies, and indirect costs, also called overhead costs, which cannot be traced directly to a department, product, or service, such as the cost of heating and air-conditioning. Average cost or cost per unit—The average cost or cost per unit is the full cost divided by the number of products or services. Because the average cost depends on the volume produced, it is not known until we stop to provide a service or produce a product. Behavior Cost can be classified by behavior in relation to the volume of products or services as one of the following: variable costs, fixed costs, semivariable costs, or marginal costs. Variable costs—Variable costs are costs that vary directly with changes in volume. An example of a variable cost is the cost of supplies: contrast material, biopsy needles, catheters, and so on (Fig. 1A). Fixed costs—Fixed costs remain unchanged as the volume of services changes
over a relevant range of activity (Fig. 1B). A typical fixed cost for radiology is the cost of the imaging equipment. Total cost—The total cost is the sum of the fixed costs and variable costs (Fig. 1C). Costs per unit—The cost per unit is the total cost divided by the number of units produced (Fig. 1D). In most cases, the cost per unit varies with the number of units produced. If there is no fixed cost, the cost per unit does not change with volume and is equal to the variable cost, but in most cases fixed costs exist and the cost per unit decreases with the increase in the number of units produced. Making the assumption of $100,000 fixed equipment costs and $100 per unit variable cost, the cost per unit decreases from $1100 for 100 units, to $200 for 1000 units, to $110 for 10,000 units. Step-fixed or semivariable costs—Step-fixed or semivariable costs are costs that are fixed over ranges of activity that are less than the relevant range. Assume that the lease of a scanner is $100,000 a year and that it can perform up to 5000 procedures a year. For 1–5000 pro-
cedures we need a single scanner, which costs $100,000. For 5001–10,000, we need two scanners for a cost of $200,000, and for 10,001– 15,000 we need three scanners (Fig. 2). Marginal cost or incremental cost—The marginal cost or incremental cost is the additional cost incurred as the result of providing additional units of service. The marginal cost is used for short-term decision making. If performing 10 CT examinations a day costs $200 per examination, which is $100 in fixed costs and $100 in variable costs, and if we can perform one more examination in a day without needing to buy a new scanner or hiring a new technologist, then the cost of the extra examination is much less than $200. The extra examination costs only $100 for the variable costs (supplies). Relevance to Decision Making Controllable costs—Controllable costs are the costs that can be influenced by the manager, such as overtime labor costs. Uncontrollable costs—Uncontrollable costs are the costs that are not easily influenced by the manager, such as utility costs.
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Gentili
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A Differential costs—Differential costs are the difference in costs when evaluating multiple alternatives. Sunk costs—Sunk costs are costs that have already been incurred and should not be included in planning for the future. For instance, the costs already incurred in opening a new imaging center are sunk costs and should not be included in the decision to keep the imaging center open if it is unprofitable. Opportunity costs—The opportunity cost of a choice is the value of the best alternative forgone when a choice needs to be made between several mutually exclusive alternatives given limited resources. The opportunity cost of spending $1 million in opening an imaging center is the amount of money that sum could have earned in another investment. Relevant costs—Relevant costs are costs that are specific to management’s decision when evaluating alternatives. Costs that should be excluded as not relevant are sunk costs and future costs because they do not differ between alternatives. For instance, the costs of keeping the imaging center open are relevant costs. However, the costs already incurred in opening a new imaging center are sunk costs and should not be relevant in the decision to keep the imaging center open. Actual costs—Actual costs are known only in retrospect. They are the historic costs for a product or service. Standard costs—Standard costs are estimated costs used for budgeting purposes and for comparisons. Actual costs and standard costs are used in variance analysis, which breaks down the variation between actual costs and standard costs into various components (volume variation, material cost variation, labor cost variation, and so on) to understand why costs were different from what was budgeted and take appropriate action to correct the situation. For example, a radiology practice may determine that the standard cost for an interventional radiology pro-
1060
Fig. 2—Step-fixed or semivariable costs and cost per unit. A, Step-fixed or semivariable costs change in discrete increments. Example of step-fixed cost is cost of imaging equipment once certain volume is reached and additional piece of equipment is needed. B, Cost per unit is lowest just before increment in step-fixed costs.
B cedure is $1000. If one of the interventional radiologists routinely spends $1500 for each procedure (possibly because of increased use of supplies and technologist’s or nurse’s time), the interventional radiologist section chief may investigate this discrepancy and counsel this interventional radiologist. Cost Allocation A health care organization does not bill a patient separately for each indirect cost (e.g., heating and air-conditioning, housekeeping, administration). Instead these indirect costs from cost centers that do not generate revenues are allocated to departments that generate patient bills, such as radiology. The process of allocating these costs to departments that generate charges is called cost allocation. There are different methods of allocating costs: direct apportionment, stepdown apportionment, double apportionment, and multiple apportionment. Fig. 3—Direct apportionment involves onetime allocation of all costs from departments that have costs but do not generate revenue (nonrevenue) to departments that generate revenue. Step-down apportionment involves two-time allocation: one-time allocation of all costs from nonrevenue departments to other nonrevenue departments (1) followed by one-time allocation of all costs from nonrevenue departments to revenue departments (2). Double apportionment also involves two-time allocation: one-time allocation of all costs from nonrevenue departments to other nonrevenue departments and simultaneous allocation of all costs from revenue departments to other nonrevenue departments (1) followed by one-time allocation of all costs from nonrevenue departments to revenue departments (2). Multiple apportionment, like double apportionment, involves two-step allocation: multiple simultaneous allocation of all costs from nonrevenue departments to other nonrevenue departments and multiple simultaneous allocation of costs from revenue to other revenue department (1) followed by one-time allocation of all cost from nonrevenue departments to revenue departments (2).
Direct Apportionment Direct apportionment involves a one-time allocation of all costs from departments that have costs but do not generate revenue, cost centers, such as housekeeping, to departments that generate revenue, profit centers, such as radiology. The advantage of direct apportionment is ease of implementation, and the main disadvantage is that it does not take into account nonrevenue departments doing work for other nonrevenue departments (Fig. 3). Step-Down Apportionment Step-down apportionment involves a twotime allocation. A one-time allocation of all costs from departments that do not generate revenue to other departments that do not generate revenue followed by a one-time allocation of all costs from departments that do not generate revenue to departments that generate revenue. The advantage is consideration of the costs of nonrevenue departments do-
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AJR:202, May 2014
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Multiple Apportionment Multiple apportionment, like double apportionment, involves a two-step allocation. During the first step, multiple simultaneous allocation of all costs from departments that do not generate revenue to other departments that do not generate revenue and multiple simultaneous allocation of costs from departments that do generate revenue to other departments that do generate revenue, followed by a one-time allocation of all costs from departments that do not generate revenue to departments that generate revenues. The advantage of multiple apportionment is that it is the most accurate but requires complex calculations (Fig. 3). Break-Even Analysis Break-even analysis is used to determine how many units need to be produced to cover the fixed costs. The break-even quantity (BEQ) is how many units need to be produced to cover the fixed costs: Fixed Costs BEQ = Price − Variable Costs Fixed Costs BEQ = Contribution Margin The contribution margin is equal to the difference between prices collected and variable costs. The contribution margin rep-
Break-even point
Break-even point Profit Total cost
Costs ($)
Double Apportionment Double apportionment involves a two-time allocation. A one-time allocation of all costs from departments that do not generate revenue to other departments that do not generate revenue and simultaneous allocation of all costs from departments that do generate revenue to other departments that do generate revenue, followed by a one-time allocation of all costs from departments that do not generate revenue to departments that generate revenue. The advantages are consideration of costs of nonrevenue departments doing work for other nonrevenue departments and consideration of costs of revenue departments doing work for other revenue departments. For these reasons, it is more accurate but requires more complex calculations (Fig. 3).
Cost Accounting for the Radiologist Revenues Costs ($)
ing work for other nonrevenue departments; the disadvantage is that it does not consider the cost of revenue departments doing work for other revenue departments (Fig. 3).
Variable costs
Total cost (unit cost × volume) Variable costs
Fixed costs
Revenues
Fixed costs Volume
Volume
A
B
Fig. 4—Break-even analysis in fee-for-service environment and capitated care environment. A, In fee-for-service model, revenues increase with volume; once break-even point is reached, any increase in volume will generate profits. B, In capitated care model, revenues are constant; once break-even point is reached, any increase in volume will generate losses.
TABLE 1: Profit, Expenses, and Revenue for Fee-for-Service and Capitated Care Models Item
Fee-for-Service Model
Capitated Care Model
Profit
Revenue – expenses
Revenue – expenses
Expenses
(Fixed costs) + (variable cost per unit × volume)
(Fixed costs) + (variable cost per unit × volume)
Revenue
Collected Charges × volume
Revenue is fixed
resents the portion of revenue that is not consumed by variable costs and contributes to the coverage of fixed costs and profits. Once the fixed costs are completely covered, the contribution margin represents profits. Break-even analysis is different depending on whether one is operating in a fee-for-service environment or in a capitated environment (Fig. 4). Independent of the operating environment, profit is equal to revenue minus expenses, and expenses are equal to the fixed costs plus the variable cost per unit multiplied by the volume. With increasing volumes, the expenses increase. In a fee-for-service environment, revenue is equal to collected charges multiplied by volume. With fee for service, the higher the volume, the higher the revenue; thus, increasing volume is one of the main factors in increasing revenue. In a capitated care environment, the revenue is fixed, so controlling the volume and variable costs is essential to maintain profitability (Table 1). In a feefor-service environment, radiologists have no economic incentives for reducing utilization of imaging. In a capitated care environment, radiology is no longer a profit center but becomes a cost center. The role of the radiologist
may change from being mostly an interpreter of images to being a consultant who helps the referring physicians select the most appropriate and least costly imaging studies to reach the correct diagnosis. Conclusion This article reviews methods of classifying costs; methods of allocating costs; and relationships among costs, volume, and revenues. It is important for radiology practices to understand their costs. A clear understanding of the cost structure is essential to determine what are the minimum reimbursements necessary to maintain profitability. References 1. Finkler SA. Finance and accounting for nonfinancial managers. Chicago, IL: CCH, 2011:79–90 2. Nowicki M. Introduction to the financial management of healthcare organizations, 5th ed. Chicago, IL: Health Administration Press, 2011:132–170 3. Camponovo EJ. The business of radiology: cost accounting. J Am Coll Radiol 2004; 1:567–575 4. Saini S, Seltzer SE, Bramson RT, et al. Technical cost of radiologic examinations: analysis across imaging modalities. Radiology 2000; 216:269–272
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