Because Medicare reimbursements only take patient days into consideration, Medicare is charged a disproportionately large share of admitted patients. Additionally, Medicare reimbursement for a certain medical procedure is based on a formula developed by the Health Care Financing Administration (HCFA), which is dependent on the physician’s time and the complexity of the procedure. Because some of the costs for a given procedure may not be related to the physician’s time or complexity rating, the Medicare formula does not always accurately reflect the costs involved. Source: Yuchang Huang and Alison L. Kirby, “Distorted Medicare Reimbursements: The Effect of Cost Accounting Choices,” Journal of Management Accounting Research, Fall 1994, pp. 128-143.
pending, semi-assisted living, assisted living and short-term care. Each is offered in a studio or one-bedroom apartment, save for the separate standard of living, which is also offered in a two-bedroom apartment. These nine combinations of level of care and department type have different prices and are considered cost objects in Bellhaven. Currently, Bellhaven has 56 residents, spread over the nine cost objects. Services at Bellhaven include: resident care, unit cleaning, grounds and facility maintenance, food service, resident activities, and transportation. Each of these six services are the activities that were used at Bellhaven to design an ABC model to determine the cost and profitability of each of the nine cost objects. The generators of the cost of each activity are the number of hours worked by employees in each of these activities. The ABC application rates are determined from the hours available in each of the service units and the ABC costs are calculated for each cost object. Figure 5.16 illustrates the costs per resident within each of the nine cost objects. ABC analysis provides Bellhaven with useful information to price its services and identify activities in which they can reduce costs or add value. A special feature of the Bellhaven analysis is the calculation of the cost of unused capacity. Since Bellhaven maintains enough staff to cover the community’s 70 units, it is important to track the cost of underutilization.