Question

Explain why cost management and cost allocation is important information for a healthcare manager?

Answer 1

Cost Management means managing the costs that are incurred or are to be incurred. It includes determining- Whether it is actually necessary to incur such costs? How can it be avoided or reduced? Are there any alternative options available? What are the likely returns by incurring the costs? And do the returns justify the quantum of costs incurred?

Cost Allocation means allocating i.e. distributing the total costs incurred, between different products or departments or branches or time periods or by any other logical way.

Cost Management and Allocation both are extremely important for almost every industry or sector to take right decisions, to improve effeciency of the organization, to reduce the waste of resources, to determine performance of different products or departments or branches compared to each other, to set right price of the product to ensure recovery, etc.

As far as Healthcare Manager is concerned, he can get benefit of Cost Management and Allocation in many ways such as:

(1) He can determine the validity of the costs that are incurred and take right decision on whether to continue incurring such cost or to avoid. For example, if there are any extra nurses or compounders and are not required.

(2) He can go through the different options and evaluate them and choose the best option. For example, some instruments or machines might be rented but purchasing them instead would result in cost benefit.

(3) Allocating the cost among different units, in case the hospital has more than one units, can help determine the performance of each unit and right decision can be taken regarding continuance of such units. For example, one of the units, lets say Dental Department is using many heavy electric equipments where as the number of patients visiting that department are very low, and the costs are not recovered fully, then in such case, its better to shut down that department.

(4) Correct Pricing is equally important as reducing costs, and Cost Management and Allocation helps in determining them. For example, in the same example given in (3) above, lets say the number of patients are not very low but they are some patients, and costs are barely recovered, but the amount charge from the customers is competetive with other hospitals and some increment in fees won't affect the number of patients, then in such case it is advisable to change price appropriately instead of shutind it down completely.

So, this were the few different ways in which Cost Management and Allocation can help the manager in taking proper decisions. There can be many different occasional situations in which it will be helpful.