The development and evaluation of a uniform hospital cost accounting information system, by Gary R. Fane

 Title Page
 Table of Contents
 List of Tables
 List of Figures
 I. Introduction
 II. The cost accounting system
 III. Development of the uniform...
 IV. Cost accounting system...
 V. Conclusions and recommendations...
 Appendix A. Preliminary list of...
 Appendix B. General functional...
 Appendix C. Partial list of final...
 Appendix D. Comparison of participating...
 Appendix E. Recommended chart of...
 Appendix F. Selected cost centers...
 Appendix G. Examples of data collection...
 Appendix H. Step-down procedur...
 Appendix I. Cost system output...
 Appendix J. Evaluation interview...
 Appendix K. Selected information...
 Biographical sketch
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Material Information

Title: The development and evaluation of a uniform hospital cost accounting information system, by Gary R. Fane
Physical Description: x, 229 leaves. : illus. ; 28 cm.
Language: English
Creator: Fane, Gary R., 1940-
Publication Date: 1974


Subjects / Keywords: Hospitals -- Accounting   ( lcsh )
Cost accounting   ( lcsh )
Accounting thesis Ph. D   ( lcsh )
Dissertations, Academic -- Accounting -- UF   ( lcsh )
Genre: bibliography   ( marcgt )
non-fiction   ( marcgt )


Thesis: Thesis -- University of Florida.
Bibliography: Bibliography: leaves 222-228.
General Note: Typescript.
General Note: Vita.

Record Information

Source Institution: University of Florida
Holding Location: University of Florida
Rights Management: All rights reserved, Board of Trustees of the University of Florida
Resource Identifier: aleph - 000580731
oclc - 14079024
notis - ADA8836
System ID: UF00075290:00001

Permanent Link: http://ufdc.ufl.edu/UF00075290/00001

Material Information

Title: The development and evaluation of a uniform hospital cost accounting information system, by Gary R. Fane
Physical Description: x, 229 leaves. : illus. ; 28 cm.
Language: English
Creator: Fane, Gary R., 1940-
Publication Date: 1974


Subjects / Keywords: Hospitals -- Accounting   ( lcsh )
Cost accounting   ( lcsh )
Accounting thesis Ph. D   ( lcsh )
Dissertations, Academic -- Accounting -- UF   ( lcsh )
Genre: bibliography   ( marcgt )
non-fiction   ( marcgt )


Thesis: Thesis -- University of Florida.
Bibliography: Bibliography: leaves 222-228.
General Note: Typescript.
General Note: Vita.

Record Information

Source Institution: University of Florida
Holding Location: University of Florida
Rights Management: All rights reserved, Board of Trustees of the University of Florida
Resource Identifier: aleph - 000580731
oclc - 14079024
notis - ADA8836
System ID: UF00075290:00001

Table of Contents
    Title Page
        Page i
        Page ii
    Table of Contents
        Page iii
        Page iv
        Page v
    List of Tables
        Page vi
    List of Figures
        Page vii
        Page viii
        Page ix
        Page x
    I. Introduction
        Page 1
        Page 2
        Page 3
        Page 4
        Page 5
        Page 6
        Page 7
        Page 8
        Page 9
        Page 10
        Page 11
        Page 12
        Page 13
        Page 14
        Page 15
        Page 16
        Page 17
        Page 18
    II. The cost accounting system
        Page 19
        Page 20
        Page 21
        Page 22
        Page 23
        Page 24
        Page 25
        Page 26
        Page 27
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        Page 30
        Page 31
        Page 32
        Page 33
        Page 34
        Page 35
        Page 36
        Page 37
    III. Development of the uniform cost accounting system
        Page 38
        Page 39
        Page 40
        Page 41
        Page 42
        Page 43
        Page 44
        Page 45
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        Page 47
        Page 48
        Page 49
        Page 50
        Page 51
        Page 52
        Page 53
        Page 54
        Page 55
        Page 56
        Page 57
        Page 58
        Page 59
    IV. Cost accounting system evaluation
        Page 60
        Page 61
        Page 62
        Page 63
        Page 64
        Page 65
        Page 66
        Page 67
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        Page 79
        Page 80
        Page 81
        Page 82
        Page 83
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        Page 86
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        Page 89
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        Page 91
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        Page 93
        Page 94
        Page 95
        Page 96
        Page 97
        Page 98
        Page 99
        Page 100
        Page 101
        Page 102
        Page 103
        Page 104
        Page 105
        Page 106
        Page 107
    V. Conclusions and recommendations for future research
        Page 108
        Page 109
        Page 110
        Page 111
        Page 112
        Page 113
        Page 114
        Page 115
        Page 116
    Appendix A. Preliminary list of cost centers
        Page 117
        Page 118
        Page 119
        Page 120
        Page 121
    Appendix B. General functional questionnaire - all cost centers and specific functional questionnaires
        Page 122
        Page 123
        Page 124
        Page 125
        Page 126
        Page 127
        Page 128
        Page 129
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        Page 132
        Page 133
        Page 134
        Page 135
        Page 136
        Page 137
        Page 138
        Page 139
        Page 140
        Page 141
    Appendix C. Partial list of final cost centers
        Page 142
        Page 143
        Page 144
    Appendix D. Comparison of participating hospitals' charts of accounts (selected accounts)
        Page 145
        Page 146
        Page 147
        Page 148
        Page 149
    Appendix E. Recommended chart of accounts (selected accounts)
        Page 150
        Page 151
        Page 152
        Page 153
        Page 154
        Page 155
        Page 156
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        Page 159
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        Page 161
        Page 162
        Page 163
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        Page 166
        Page 167
        Page 168
        Page 169
        Page 170
        Page 171
        Page 172
        Page 173
        Page 174
        Page 175
        Page 176
    Appendix F. Selected cost centers by category
        Page 177
        Page 178
        Page 179
    Appendix G. Examples of data collection forms
        Page 180
        Page 181
        Page 182
        Page 183
        Page 184
        Page 185
        Page 186
        Page 187
        Page 188
        Page 189
        Page 190
        Page 191
    Appendix H. Step-down procedure
        Page 192
        Page 193
        Page 194
    Appendix I. Cost system output (reports)
        Page 195
        Page 196
        Page 197
        Page 198
        Page 199
        Page 200
        Page 201
        Page 202
        Page 203
        Page 204
        Page 205
        Page 206
        Page 207
        Page 208
        Page 209
        Page 210
        Page 211
        Page 212
        Page 213
        Page 214
        Page 215
    Appendix J. Evaluation interview guide with responses
        Page 216
        Page 217
        Page 218
    Appendix K. Selected information regarding participating hospitals and cost accounting system evaluators
        Page 219
        Page 220
        Page 221
        Page 222
        Page 223
        Page 224
        Page 225
        Page 226
        Page 227
        Page 228
    Biographical sketch
        Page 229
        Page 230
        Page 231
Full Text







A dissertation could never be accomplished without the encourage-

ment, guidance, and assistance of many individuals. For guidance and

assistance I am indebted to my dissertation committee, Dr. D. D. Ray,

Chairman, Dr. Ralph H. Blodgett, Dr. John M. Champion, and Dr. W. W.

Menke. An especial note of gratitude goes to Dr. D. D. Ray, Chairman,

for the many extra hours of counseling he provided, and to Dr. John M.

Champion whose expertise in the health care field was most beneficial

to the completion of this work.

To Mrs. Etta Cashwell, Mrs. Janice Hawley, and Miss Becky Medlin,

a note of appreciation is extended for the technical assistance

provided concerning table design, and the many hours of typing and


Finally, for all the encouragement, patience, and quiet accept-

ance of the most difficult situations during the whole period of

graduate study, I will never be able to find words to express my

gratitude to Sandy, Greg, and Mitch.


ACKNOWLEDGMENTS . . . . ... . . ii

LIST OF TABLES . . . . ... .. .. vi

LIST OF FIGURES . . . . ... ...... vii

ABSTRACT . . . . ... ........ viii

I. INTRODUCTION . . . . ... ...... 1

Purpose of Research
Statement of General


Statement of Specific Problem 5
Justification for the Study 8
Related Literature 9
Summary 14
Notes 16


Definition of Terms
Current Industry Cost Accounting
Current Hospital Cost Accounting
Uniform Cost Accounting System

System Model


Introduction 38
Method Used to Develop the Uniform Cost
Accounting System 38
Evaluation and Results of the System
Development Method 44
Summary 58
iNo tes 59



Introduction 60
Method Related to Procedural Aspects and
Discussion of Results 61
Method Related to Output Evaluation and
Discussion of Results 81
Evaluation by Hospital Managers 81
Requirements of External Users 87
General Cost Information Requirements
Compared to System Output 103
Summary 105
Notes 106


Recommended Future Research















. 117

. 122

. 142

. 145

. 150

. 177

. 180

. 192

. 195

. 216

. .




BIOGRAPHICAL SKETCH ... ......... .... ..... 229


1. Direct Expense Comparison . . . .

2. Adjusted Direct Expense Comparison . . .

3. Full Cost Comparison . . . .

4. Hospital Cost Summary Report . . . .

5. Comparative Hospital Cost Summary Report
Direct Expenses . . . . .

6. Comparative Hospital Cost Summary Report
Adjusted Direct Expenses . . . .

7. Comparative Hospital Cost Summary Report
Full Cost . . . . . .

8. Selected Information About Participating Hospitals. .

. 77

. 79

. 80

. .203

. .205

. .209

. .213

. .220

I a


1. Simplified manufacturing cost accounting system model .... .25

2. Expanded manufacturing cost accounting system model ... .26

3. Complete manufacturing cost accounting system model. .27

4. Programatic cost accounting model . . . 31

5. Cost accounting data uses . . ... .. .34

6. Proposed hospital cost accounting system model. ... .35

7. Example of step-down cost allocation procedure. . .. .65

8. Example of a completed Hospital Cost Report . ... .67

9. Example of a completed Comparative Hospital Cost Report .. .71

10. A partial copy of the Hospital Cost Summary Report. . .76

11. Example of a completed Hospital Cost Report. . . .196

12. Example of a completed Comparative Hospital Cost Report .. 199

Abstractof Dissertation Presented to the Graduate Council
of the University of Florida in Partial Fulfillment of the Requirements
fo, the-Degree of Doctor of Philosophy- S 7



Gary R. Fane

March, 1974

Chairman: D. D. Ray
Major Department: Accounting


The purpose of this research project was to develop and to evalu-

ate a uniform hospital cost accounting information system. The system

developed will generate cost accounting and statistical data based on

comparable information provided by the individual hospitals which can

be used to aid community-or area-wide hospital planning.

Rising health care costs have been a major problem in recent

years. A suggested approach to solving the problem has been to develop

regional or area-wide health care planning groups. Several recent in-

vestigations have concluded, however, that the comparable cost account-

ing data required to make regional decisions are not available. The

findings of the American Accounting Association's Committee on the

Accounting Practices of Not-For-Profit Organizations indicated the

lack of cost accounting throughout the not-for-profit sector generally.

That committee suggested an attempt be made to apply cost accounting

techniques as used in the profit-sector of the economy to the


not-for-profit sector. This research attempts to do that through the

development of a cost accounting system for a major segment of the not-

for-profit sector, the hospital industry, based upon the type of cost

accounting systems employed in the profit-sector. Additionally, such

a cost accounting system would provide comparable cost data to aid in

health care decision making.


In order to accomplish both objectives, the research was divided

into 4 major sections. First, models of cost accounting systems pres-

ently used in the profit-oriented sector and the hospital industry

were reviewed, compared, and contrasted. A new cost accounting system

model was proposed for the hospital industry.

Second, the elements necessary to make the proposed cost account-

ing system operational were defined and developed.

Third, data were collected from a group of community hospitals and

processed through the proposed cost accounting system.

Finally, the output of the system was evaluated to determine the

ability cf that output to aid decision making internally and exte'rnaliy.

This was accomplished by providing cost reports to a panel of eval-

uators consisting of hospital administrators and financial managers.

Further, the requirements of those external groups who use cost data

were examined, and the ability of the cost accounting system output to

meet those requirements was evaluated.


The conclusions are grouped into 3 major categories. The first

group of conclusions is concerned about the overall cost accounting

system. The system as proposed was developed. Cost data were pro-

cessed through the system in the manner indicated. All evaluators

agreed that the output was as anticipated and provided costs by prod-

ucts and by program.

Second, comparable output could only be achieved with comparable

input, and that was dependent upon proper definition of the elements

of the proposed system. All evaluators found that the activities for

which costs were collected were properly defined, and that the activity

measures selected properly reflected the output of each activity.

Further, where cost distributions were necessary, those distributions

were found to be appropriate.

Finally, the ability of the cost output to meet external user re-

quirements was reviewed. From published materials, a group of 4 re-

quirements of cost data for external users was developed. Those

requirements were: 1) specificity, 2) verifiability, 3) compa-

rability; and 4) consistency. The proposed cost accounting system

output was determined capable of meeting the 4 requirements, and as

such capable of being useful for external decision making, including

area-wide planning.




Purpose of Research

The purpose of this research project was to develop and to evalu-

ate a uniform hospital cost accounting information system. The system

developed will generate cost accounting and statistical data based on

comparable information provided by the individual hospitals which can

be used to aid community- or area-wide hospital planning.

Statement of General Problem

Health care expenditures in the United States have been increasing

dramatically over the past few years. In total dollar amounts the

figures have grown from $12 billion in 1949-50 to $75 billion in

1970-71.1 During the same period, total health care expenditures, as

a percentage of the gross national product, have risen from 4.6 percent

to 7.4 percent.2 Even though some of this increase may have been

brought about by welfare legislation which made it possible for people

to pay for services which previously had been, to some extent, rendered

without charge, the rate and amount of growth is still substantial.

This upward trend is expected to continue and it has been estimated

that by the early 1980's health care expenditures will have reached

$200 billion.3

Perhaps this steady increase in costs would not seem out of line

if the major portion of the increased outlay had been to provide more


or improved health care service. There is some doubt that such has

been the case. According to one researcher, 47 percent of the increase

in health care spending between 1949-50 and 1970-71 was consumed by

rising prices.4 While the cost-of-living index was rising by 61 percent

during this period, the index of medical care prices was rising twice

as fast: 125 percent.5 Even more significant was the increase in

hospital daily charges at that time: 398 percent.6

Another recent research study indicates that this rapid rise in

hospital charges may be attributed to price increases, the addition of

newer and more advanced technical services, and an expansion of already

existing services.7 This study indicates also that as much as 40

percent of the price increase may be due to "increased services per

discharge."8 Even allowing for this factor, hospital daily charges

have increased approximately 200 percent during the period 1950-70, a

rate far in excess of the price increase of the general cost-of-living

index and the index of medical care prices. Since almost one-half9

of all health care expenditures are paid directly to hospitals, the

importance of controlling costs in the hospital becomes significant.

The rapid increase in hospital costs has generated considerable

interest at the legislative, community, and individual level regarding

programs aimed at controlling costs. One manifestation of this concern

is the area-wide regional planning groups that have been formed. It is

the intent of these planning groups to oversee the entire "pool" of

health resources within a given geographical area and attempt to plan

for the orderly and economical growth of medical service within that

area. To date, most efforts at regional planning have been through

volunteer agencies. Somers, however, has suggested that the planning

groups be made regulatory agencies with extensive administrative

powers.10 Some states have already recognized the importance of

regional planning groups through "certificate of need" legislation.11

This approach means that area planning groups must issue a "certificate"

indicating a "need" for a proposed addition to medical facilities before

a hospital may embark upon an expansion program. For a hospital to

expand facilities or services without the certification would mean

incurring the risk of losing all state and Federal moneys, i.e., Medicare

and Medicaid payments. Recent amendments to the Social Security Act

have strengthened the planning groups' position in this matter.12

The area-wide planning concept is a basic philosophical change

concerning the way in which hospitals finance both their daily operations

and their capital expansions. Historically, individual institutions

determined their resource requirements and obtained them in the best

manner possible, regardless of the effect on the total community's

health resources. This individual approach had, at its base, hospital

goals that were not always compatible with efficient operations. A

recent study indicates that the 4 major goals of a hospital's administra-

tion are to: 1) remain solvent; 2) maintain or increase the quality

of service; 3) promote harmony within the institution; and 4) promote

growth of services and facilities.13 The research concluded, in part,

that until recently, demand and ability to pay for hospital services

were severely limited. This results in a constant struggle to keep costs

in line with income ceilings. Today, however, with a rising standard of

living and third-party-payers, hospitals can meet solvency goals and

improve their Financial positions. This in turn has allowed the adminis-

trations to concentrate on the quality, harmony, and growth goals, and

in each case to carry out actions that have enhanced the individual

hospital's position, but have contributed to the rapid rise in costs

noted earlier.14

Many health economists, politicians, and consumer groups support

some form of area-wide health planning as a solution to this problem.

Various plans have been proposed. Each plan considers the total health

resources of a community as a "pool" from which to meet total health

needs. Even the plan causing the least change from existing practices

would result in severe curtailment of the individual hospital's autonomy.

It would mean that a single hospital management would: 1) no longer

be singularly responsible for its future since all expansion plans would

require review and approval; 2) new services could not be provided

unless approved; 3) the ability to generate additional working capital

might be impaired since no new profitable service could be implemented

without demonstration of need for such service. This is an extreme

change from present practice.

At the other end of the spectrum, the individual hospital would

cease to exist as an entity. It would become part of a national health

organization. The only input the hospital would have would be to submit

an operating and capital budget to a regional director. The budget

would be considered along with all the other hospitals from the same

designated area and funded according to the manner in which that indi-

vidual hospital contributed to the overall plans for the area.

Regardless of whether either one of the 2 extreme plans or some

compromise plan is instituted, there is a growing concern that control

of rising costs and proper allocation of resources can be accomplished

only through better area-wide resource management.


Statement of Specific Problem

With a more comprehensive view of health care planning, cost

accounting and statistical information are necessary to help facilitate

decision making on a community or regional basis. Virtually all

studies completed to date, however, have concerned themselves with

the cost information needs of individual hospitals.15

While the cost accounting systems developed are useful to internal

management, several investigative committees have concluded that there

is not enough comparability among available data to make valid judg-

ments concerning the problems of effective utilization of resources

commiitted to a group of community/area hospitals. One of the earlier

studies which concluded this was the New York Governor's Committee on

Hospital Costs. That committee concluded:

...the financial and statistical reporting of
hospitals is insufficiently detailed, clear
and uniform to permit the identification of
the components of cost analysis of the causes
of rising costs, and to serve as dependable
bases for evaluation and planning.16

In 1967, the Secretary of Health, Education, and Welfare,

John W. Gardner, appointed an Advisory Committee on Hospital Effective-

ness (Barr Committee) to examine the evidence and advise him of actions

that might be taken to improve performance in 4 principal areas of

health service involving hospitals. Recommendation 7 made by the Barr

Committee reads:

...(a) In every state there shall be a
state agency with specific responsibility
for setting up a system for accumulating,
processing, and publishing detailed infor-
mation on the operations of health care
institutions; taking into consideration
the kinds of data that will be most useful
to third-party-payers and most useful to
institutional managements in judging com-
parative performance [emphasis added]....

The Barr Committee continued by stating:

The recommendation for state and national
systems for reporting operating data from
health care institutions is based on the
conviction that pressures for improved
management performance can be produced by
making comparative data on managements
visible throughout the community [emphasis

More recently, the United States Chamber of Commerce released

its study on health care problems and made several policy proposals.

Policy proposal VI-(1) states: "All hospitals, extended care facili-

ties, and nursing home facilities [should] adopt uniform accounting

practices, financial reporting and cost-finding systems.'19 This

recommendation was supported by the comment that:

Discussions with top flight hospital
administrators revealed that there is a
real need for all community, nonprofit
hospitals to follow uniform accounting
practices and reporting techniques and
cost-finding procedures. Cost per-
patient-day varies widely among hospitals
in the same community. Many nonprofit
hospitals report sizeable net income.
At present, business, the largest single
private purchaser of health care services,
does not know what it is getting for its
money, and the only way to find out is to
get a look at the figures.20

The current criticisms of the nonavailability of necessary cost

data should not be unexpected if the environment in which the hospital

has been operating is briefly considered. Hospitals recently have been

able to secure the resources needed, due to beneficial reimbursement

arrangements. Virtually all third-party-payers have allowed hospitals

to pass all cost increases through by perpetuating rate schedules that

allowed recovery of full costs regardless of what the full costs might

be. Consequently, hospital administrations generally did not have to

review cost increases nor was there much incentive to attempt to

contain those cost increases. Only after July 1, 1966, the effective

date of the Medicare legislation, did it become necessary to try to

define costs. Controlling costs was still not necessary until mid-1972,

when Phase II economic regulations became effective.

Second, hospitals have attempted to offer, as quickly as possible,

the services which have been developed by the nation's vast health

research industry. Given the legal and social structure of the medical

care industry, the physicians generally have been able to exert major

pressure in order to install the latest techniques and equipment. As

a result, many expensive and underutilized facilities have been dupli-

cated within a community in order to placate the medical staffs of the

various hospitals.

Even if understanding the environmental factors just mentioned

would somewhat temper the earlier criticisms, the fact remains that

the environment is changing. Along with that change comes the need to

understand cost patterns and attempts to control costs. Governmental

regulatory agencies and consumer groups are requiring more information

to allow them to review adequately and to compare hospital costs and

rates on a comm.unity-wide basis. The problem, however, stems from the

fact that no information system presently available can provide the

comparable data required.

Justification for the Study

Based upon the preceding discussion, there is a need to provide

comparable cost information for area-wide planning purposes. Addition-

ally, there is a more general problem.

The American Accounting Association's Committee on Accounting for

Not-For-Profit Organizations was critical in its recent report of the

efforts made by the accounting profession to provide meaningful guid-

ance in the adaptability of accounting practices and techniques used

in the profit-oriented sector to the not-for-profit sector.21 One of

the areas of accounting practice scrutinized by the committee was cost

accounting. More specifically regarding cost accounting techniques

the committee stated: "Cost accounting has long been recognized in

the profit-oriented environment as a useful tool in promoting efficien-

cy. This committee emphasizes that it (cost accounting) can be used

to plan future and control current operations of not-for-profit

organizations."22 In the group's summary of recommendations it stated:

"The potentials of cost accounting techniques have scarcely begun to

be realized in the not-for-profit field."23 Later in a detailed list

of recommendations the committee concluded that: "Cost accounting

systems) be designed to provide for the collecting and reporting of

costs by management responsibilities, by budget programs, and by appro-

priately determined units of service outputs. The system should permit

determination of total operational expenses for appropriate accounting


Over the years the hospital industry has generally been considered

nonprofit. Of the 7,123 hospitals in the United States, 6,265 are non-

profit institutions.25 In fact, the earlier cited committee report

recognized hospitals as a major segment of the not-for-profit sector

and devoted several paragraphs to discussing the particular problems

of hospitals. The report states: "The larger hospitals have developed

costs for determining prices for services but have seldom developed

those (costs) necessary for control by hospital management. The

emphasis has been on 'easy' or 'acceptable' methods rather than on the

best methods of cost calculations."26 This study will help resolve

this particular problem relating to hospitals, and at the same time

provide insight into the larger, more general problem of applying

proven accounting techniques of the profit-oriented sector to the not-

for-profit sector.

In summary, there are 2 major reasons for undertaking this study.

First, to resolve the problem resulting from the lack of an area-wide

cost accounting information system that can generate comparable data

for area-wide decision making, and second, to demonstrate that ac-

counting practices and techniques as developed for use in the profit-

oriented sector of the economy can be successfully adapted to the

not-for-profit sector.

Related Literature

There is an expanding body of literature concerning hospital

costs. For purposes of this study the majority of the pertinent

research studies and publications have been completed by accountants

and/or professional hospital organizations. Before reviewing the ac-

counting literature, it is necessary to differentiate between "cost

accounting" and "cost-find ng," the 2 principal methods used for col- '

electing cost information. The latter refers to a procedure used to

rearrange past financial accounting information into the desired

configuration through special studies called cost analysis or cost-

finding. The former method refers to a system which allows for the

continuous collection of accounting data in the desired configuration

as part of the financial accounting system. This method is called cost

accounting. It is the purpose of this study to develop such a system.

The understanding of the difference between the two is important in

evaluating the literature.

What accounting writers have contributed to the subject under

study is limited. Several writers have attempted to treat the entire

not-for-profit field in a single publication, and as such have been

very limited in their discussions of the special problems related to

the hospital. Tenner,27 Mikesell and Hay,28 and Kerrigan,29 follow

this pattern. The subject of hospital accounting is treated rather

superficially and the emphasis upon hospital cost accounting is negli-

gible. The few discussions of costs are relegated only to limited

mention of cost-finding and analysis.

Seawell,30 Taylor and Nelson31 and Hay32 have written exclusively

upon the subject of hospital financial management and control. Seawell

and Hay both deal primarily with cost-finding techniques, however, and

only mention the development of a cost accounting system in a general

manner. Taylor and Nelson dealt at length with the problems of devel-

oping a cost accounting system. Their work seems superior to the

others in that a system is devised that integrates the cost accounting

system with the general financial system so that "costs and operating

results are determined in an efficient manner and are reported cur-

rently when they are of value and can be readily used for management

control."33 All of these works, however, fall short of solving the

problems which prompted this study because the system they recommend

is designed for use by managers of individual institutions and do not

deal with interinstitutional comparison of cost accounting data. The

studies by Seawell and Hay have the added problem of relying on cost

analysis as a basis for their cost information. To date there have

been no standards developed defining acceptable cost analysis work.

Vatter34 has made the only known attempt to develop standards for cost

analysis in the not-for-profit sector. The system developed by Taylor

and Nelson has many of the basic elements of an integrated cost ac-

counting system but it is dated. The work was completed prior to the

enactment of Medicare legislation. As a result, their system needs to

be reviewed in light of present cost requirements.

.It can be seen that the earlier cited criticism of the American

Accounting Association's Committee on Accounting Practices of Not-For

Profit organizations is well justified. What accountants have contrib-

uted to the subject matter is not significant. In particular, those

works related to the hospital accounting problems are dated and appear

to need substantial review before they can be applied to current

problems. In fact, the systems recommended in the majority of the

accounting works are based upon the earlier work of professional organ-

izations, and especially that of the American Hospital Association.

The major portion of the work accomplished to date has been by

professional and regulatory organizations. Those organizations in-

clude the American Hospital Association, state hospital associations,

nonprofit service corporations sponsored by state hospital associ-

ations, joint state hospital associations, state Blue Cross associ-

ations, and certain state regulatory agencies.

The first efforts exclusively in the field of hospital accounting

were made by the American Hospital Association in 1922 with the publi-

cation of its first chart of accounts. Since that time the Association

has been the leader, on the national level, of developments in hospital

accounting. Their work has culminated in 3 recent publications: Chart

of Accounts for Hospitals,35 Uniform Hospital Definitions,36 and Cost

Finding and Rate Setting for Hospitals.37 These 3 works are used as

the basis for most hospital accounting today. Problems have arisen,

however, in attempting to define accounts uniformly. Also, different

responsibility structures within various hospitals have caused differ-

ing reporting patterns even though the same basic chart of accounts has

been implemented by all.

This particular weakness became apparent when the American

Hospital Association initiated a new program entitled Hospital Admin-

istrative Services.38 That particular program attempted to collect

accounting data classified as per the Association's chart of accounts.

The information collected was then measured using certain "activity

bases" and the resulting indications were used as a broad type of

standard allowing for interhospital evaluations. Each hospital's

individual changes to the basic chart of accounts has caused the

actual results to fall short of expectations.

As a mechanism for an individual hospital to use as the basis of

its accounting system, the American Hospital Association's publications

have provided basic leadership. As a tool for interhospital compari-

sons, the results have been less than successful. In addition, the

American Hospital Association has adhered to a cost analysis approach,

not a cost accounting approach, i.e., the only publication in the area

of costs has been the cost-finding manual. Hence, their work does not

extend into the cost accounting area, which is the major thrust of this

research study.

There are an increasing number of state organizations attempting

to cope with the hospital cost problem. Those states which have cost

collection systems such as Connecticut,39 New York, and Pennsylvania

have adhered to the American Hospital Association's basic chart of

accounts. Certain modifications have been made for each of the pro-

grams, but the approach has been basically the same as the national

organization's approach. Other state programs, of which Florida and

California40 are examples, have dealt with the application of indus-

trial engineering techniques to individual hospital problems. Pri-

marily, man-hours, not cost data, are generated for each subscribing

institution within the state. Often such information, as in the case

of the Florida Program, is not used for interhospital comparisons.

Finally, other programs such as the MICHA programs used by the Mental

Health Institute of Michigan and Rhode Island, deal only with indirect

cost allocation problems.41 Very little of the information regarding

these systems has been formally published. Where not referenced in the

preceding discussion, information concerning any of the state programs

can be obtained by writing to the various State Hospital Associations.

The literature of the practicing professionals has done nothing

to advance the knowledge of cost accounting techniques within the

hospital industry. While many recognize the necessity of such systems,

none have indicated a method by which one could be implemented. There

have been attempts at discussing cost accounting practices for indi-

vidual departments within hospitals, but nothing concerning an

institutional system or a system that can be applied to all hospitals

within a community.

Generally, it can be concluded that the related literature does

virtually nothing to explain how a cost accounting system can be

developed and implemented within a group of community hospitals.


This chapter had indicated that the problem of rapidly increasing

costs and decreasing availability of resources confronts the hospital

today. In an effort to more efficiently utilize the limited resources

and justify increased resources, a new system of review, the regional

management, and/or community level review, is gaining prominence. In

order to accomplish this type of review, a new cost accounting system

is necessary that can provide the required information. It was then

stated that the purpose of this study is to develop and evaluate such

a cost accounting system.

A review of the related literature indicated few hospitals have

attempted to install cost accounting systems, primarily implementing

cost-finding techniques as suggested by the American Hospital Associ-

ation and/or various state level organizations. Nothing has been done

toward establishing a community-wide cost accounting system. In ad-

dition, accountants, who have the necessary skills to provide leader-

ship in this endeavor, apparently have failed to do so.

The next chapter will compare and contrast the types of cost

accounting systems presently used by industrial concerns and by hospi-

tals. A cost accounting system will be proposed for hospitals along

the same lines as the industrial model. The balance of the research

will be divided into 2 major sections: system develo,'.'nerit and system


Chapter III will outline the system development procedure. The

procedure outlined was completed for the participating hospitals by

Health Systems Management, Inc. The researcher provided guidance in

developing the procedure and assisted in performing a substantial por-

tion of the various procedural steps. For that effort the researcher

was reimbursed by Health Systems Management, Inc. Personnel of Health

Systems Management, Inc. assisted in the activity analysis step, and

the activity definition phase of the data analysis step of the system

development procedure. The cost accounting system developed is the

property of the participating hospitals.

Chapter IV will discuss the system evaluation phase of the pro-

ject. That portion of the research project was completed entirely

by the researcher.

Finally, Chapter V will indicate conclusions reached and

recommended areas for future research.


1. Alfred M. Skolnik and Sophie R. Dales, "Social Welfare Expendi-
tures, 1929-71," Social Security Bulletin, December, 1971,
p. 11.

2. Ibid., p. 11.

3. Edmund K. Faltermayer, "Better Care at Less Cost Without
Miracles," Our Ailing Medical System, (New York: Harper &
Row, 1969), p. 16.

4. Dorothy P. Rice and Barbara S. Cooper, "National Health Expendi-
tures, 1969-71," Social Security Bulletin, January, 1972', p. 9.

5. U. S. Department of Commerce, Statistical Abstract of the United
States. Washington, D. C.: U. S. Government Printing Office,

6. Ibid., p. 63.

7. Richard A. Elnicki, "Effect of Phase II Price Controls on Hospital
Services," Health Services Research, Summer, 1972, pp. 106-117.

8. Ibid., p. 113.

9. Dorothy P. Rice and Barbara S. Cooper, "National Health Expendi-
tures, 1929-71," Social Security Bulletin, January, 1972, p. 7.

10. Anne R. Somers, Health Care in Transition: Directions for the
Future, (Chicago: Hospital Research and Education Trust,
19717, pp. 121-122.

11. John F. O'Leary, J. D., "Certificate of Need Legislation: The
Case For and Against," Viewpoint, 1971, pp. 1-8. This particu-
lar article gives a good overview of the certificate of need
legislation questions and a concise summary of what states have
enacted certificate of need legislation and those states with
legislative action pending.

12. Commerce Clearing House, Medicare and Medicaid Guide, H.R. 1,
Social Security Amendment of 1971, Number 42, June 1, 1971,
pp. 78-80 and pp. 302-305.


13. Rockwell I. Schulz and Jerry Rose, "Can Hospitals be Expected to
Control Costs?" Inquiry, Volume X, Number 2, June, 1973, p. 3.

14. Ibid., p. 4.

15. For recent hospital accounting information system studies and
models which deal primarily with internal management decision-
making, see: C. T. Andrews, Financial and Statistical Reports
for Administrative Decision-Making in Hospitals, Unpublished
Doctoral Dissertation, Indiana University, 1968.
M. W. Veuleman, An Inquiry Into the Adequacy of Cost Informa-
tion Systems of Selected Arkansas Hospitals, Unpublished
Doctoral Dissertation, University of Arkansas, 1971. Carnegie-
Mellon Institute and Washington University of St. Louis are
both working independently on information systems for a model
hospital. Searle, Inc., has a model information system, called

16. Report of the Governor's Committee on Hospital Costs, Marion
Folsom, Chairman (Albany, New York, Office of Public Health
Education, New York State Health Department, 1965), p. 9.

17. Secretary's Advisory Committee on Hospital Effectiveness Report,
John A. Barr, Chairman, (Washington: Government Printing
Office, 1968), p. 22.

18. Ibid., p. 23.

19. Improving Our Nation's Health Care System: Proposals for the
Seventies, (Washington: Chamber of Commerce of the United
States, 1971), p. 17.

20. Ibid., p. 18.

21. Committee on Accounting Practice of Not-For-Profit Organizations,
"Report of the Committee on Accounting Practice of Not-For-
Profit Organizations," The Accounting Review; Supplement to
Volume XLVI, 1971, pp. 80-163.

22. Ibid., p. 125.

23. Ibid., p. 92.

24. Ibid., p. 134.

25. Hospitals Guide Issue, Part II, August 1, 1971, p. 487.

26. Committee on Accounting Practice of Not-For-Profit Organizations,
"Report of the Committee on Accounting Practice of Not-For-
Profit Organizations," The Accounting Review; Supplement to
Volume XLVI, 1971, p. 130.

27. Irving Tenner, Municipal and Governmental Accounting, 3d Edition,
(Englewood Cliffs, New Jersey: Prentice-Hall, Inc.), 1955.
See especially Chapters 19 and 21.

28. R. M. Mikesell and Leon E. Hay, Governmental Accounting, 4th
Edition, (Homewood, Illinois: Richard D. Irwin, Inc.), 1969.
See especially Chapters 20 and 21.

29. Harry D. Kerrigan, Fund Accounting, (New York: McGraw-Hill),
1969. See especially Chapter 20.

30. L. Vann Seawell, Hospital Accounting and Financial Management,
(Berwyn, Illinois: Physicians' Record Company), 1964.

31. Philip Taylor and Benjamin 0. Nelson, Management Accounting for
Hospitals, (Philadelphia: W. B. Saunders Company), 1964.

32. Leon E. Hay, Budgeting and Cost Analysis for Hospital Management,
2d Edition, (Bloomington, Indiana: Pressler Publications),

33. Taylor and Nelson, op. cit., p. 30.

34. William J. Vatter, "Excerpts from Standards for Cost Analysis,"
Federal Accountant, September, 1970, pp. 64-87.

35. American Hospital Association, Chart of Accounts for Hospitals,
Chicago, 1966.

36. American Hospital Association, Uniform Hospital Definitions,
Chicago, 1960.

37. American Hospital Association, Cost Finding and Rate Setting for
Hospitals, 1968.
38. American Hospital Association, Hospital Administrative Service
(HAS), Guide for Uniform Reporting, Chicago, July, 1972.

39. Connecticut Hospital Association, Connecticut Hospital Association
Accounting Manual, (New Haven, Connecticut: Connecticut
Hospital Association), 1970.

40. California Hospital Association Commission for Administrative
Services in Hospitals (CASH), Management Leadership in an
Age of Change, Sacramento, California.

41. For details concerning MICHA, see Andrew McCosh, "Computerized
Cost Finding Systems," Hospital Financial Management, 'ov-LbeO'r,
1969, pp. 18-21, or send inquiry to MICHA, Incorporated,
Ann Arbor, Michigan.




According to the comments of one of the American Accounting

Association's Committees, "cost accounting, coupled with performance

standards, has made much of modern management possible."l Initially

used to accomplish only the function of product costing for inventory

valuation and income determination, cost accounting today encompasses

the more general aspects of management control and has been titled

managerial accounting. Product costing is only one of many uses of

cost accounting information today. Benninger2 indicates the level of

sophistication of current cost accounting when he enumerated the uses

to which cost data are put. They include: 1) planning and budgeting;

2) cost control; 3)) employee motivation; 4) financial statements

preparation 5) management motivation; 6) product pricing; 7) special

decisions; and 8) uniform industry pricing.3 Additionally, the cost

accounting systems have been fully integrated into the financial

accounting systems.

While industry has been developing and refining such accounting

systems, the nonprofit sector has lagged far behind. The health care

industry has a need for cost data as the previous chapter indicated.

It has probably done more than most segments of the nonprofit sector

to provide some such cost information through the efforts of the

American Hospital Association. Those efforts have been cost-finding,

however, not cost accounting. As a result, cost data are collected and

analyzed, usually only annually, after the year has been completed.

There has been no effort to integrate existing cost systems with finan-

cial accounting systems. The Committee on Accounting Practices of the

Not-For-Profit Organizations recommended:

1. Each NFP organization incorporates into its
information system appropriate cost accounting
records, techniques, and accounts so that
information useful to management and external
users will be produced and reported on a timely

2. The cost-accounting systems be designed to
provide for the collecting and reporting
of costs by management responsibilities,
by budget programs and by appropriately
defined units of service outputs.

3. The cost-accounting system be integrated
into the over-all accounting system and
employed on a continuing basis....4

It has been noted that a major problem in developing cost ac-

counting systems for nonprofit institutions has been the inability to

identify output. One research group has indicated that "the problem

is one of identifying meaningful concepts of cost association and

allocation so that assignments of administrative costs become something

more than an exercise in arbitrary calculations."5 Horngren calls this

the identification of a "cost object" and states: "He (the manager)

needs the cost of something. It may be a product, a group of products,

a plant, a territory, a machine-hour, a labor-hour, an operating

division, a customer, an order, or a project."5 These are easier to

define for prcduct-oriented concerns. It is somewhat more difficult

for service-oriented agencies but it can be accomplished. Since non-

profit organizations deal with both products and services, the

principles as established in the profit-oriented sector of the economy

should be applicable to the not-for-profit units as well.

The foregoing discussion indicated the organization of this

chapter. First, the general cost accounting system as presently used

by industry will be reviewed. Second, the current cost-finding system

employed in the hospital industry will be discussed. Finally, a cost

accounting system model will be developed for the hospital industry

that is similar in nature to the one presently employed by industrial

firms. Before turning to the cost accounting system discussion, terms

frequently employed throughout this study will be defined.

Definition of Terms

The following terms will have the indicated meaning when used

throughout this study.

Cost Center

A cost center is defined as the smallest segment of activity or

area of responsibility for which costs are accumulated.7 Since the

cost center is the basis of the system developed, some concepts which

are useful in understanding the full implication of the cost center

approach, are listed below.

First, physical size of area has nothing to do with the establish-

ment of cost centers, i.e., one supervisor might be responsible for a

large area of space and numerous employees while another supervisor is

only responsible for a small space and a few employees. An example

might be the comparison of the Housekeeping Department cost center

responsible for cleaning all floors, and the Laundry and Linen Depart-

ment cost center responsible for mending torn linen. The former would

have a large number of personnel working in a large area while the

latter would require only a small room and 2 or 3 employees. Both,

however, would be considered cost centers.

Second, a cost center is not identical with a department. In some

cases it may be, but in others the department may be so large and com-

plex that it would be divided into several cost centers, Nursing

Services Department would be an example. It is divided into smaller

organizational groups such as Nursing Services-Medical, Nursing

Services-Surgical, Nursing Services-Pediatrics, and Nursing Servic;s-

Operating Suite.

Third, cost centers should not overlap. There should be no

function jointly managed by 2 different supervisors.

Fourth, different cost centers may or may not include similar

operations. If an organization is so large that one function is accom-

plished by 2 identical groups, each group under a different supervisor,

then there are 2 cost centers.

Finally, cost centers are not strictly distinguished according to

the supervising individual, but according to the supervisory occupation.

An emergency room is a single cost center, yet it may be supervised by

a different individual on each shift.8

Activity Base

This term indicates the unit of measure for the level of activity

that takes place within a cost center. The activity base relates to

and approximates resource utilization within a cost center based upon

the output of that particular cost center. Examples are laboratory

tests for clinical laboratory cost centers, hours of housekeeping ser-

vice provided for housekeeping cost centers, and patient days for

nursing cost centers.

Patient Service Cost Centers

This term defines those cost centers that provide services di-

rectly to the patient. There are 2 types of direct patient service

cost centers.

Patient location cost center. Those cost centers where the pa-

tient is physically located for the receipt of services. This includes

nursing areas, outpatient clinics, emergency rooms, and operating rooms.

Primary service cost centers. Those cost centers that provide

professional support services to the patient location cost centers.

They include such cost centers as clinical laboratory, radiology, inha-

lation therapy, and physical therapy. These cost centers represent

those activities that distinguish a hospital from a nursing home or

other such types of "maintenance" institutions.

Support Service Cost Center

Those cost centers that provide supportive services to the patient

services cost centers. There are 2 types of support service cost


Professional support service cost center. Those cost centers

that provide support to the professionals delivering health care at the

patient location cost centers. These include such cost centers as

medical records, admitting, and nursing supervision.

Hotel support service cost center. Those cost centers that pro-

vide institutional services. These include such cost centers as house-

keeping, dietary, maintenance, and administration. 9

Distribution Method

Costs of the support service cost centers within the hospital

must be distributed to the direct patient services cost centers if an


approximate full unit cost of the patient service is to be determined.

In order to accomplish the reapportionment of costs from the support

service to the patient location cost centers, some factor common to

both the amount of service used by the patient location cost center,

and to fluctuations in support service cost center costs, should be

selected as a basis for the distribution.10 Each direct patient ser-

vice cost center should absorb its share of the support service cost

center costs, based upon the amount of services it used. In the case

of housekeeping, the direct patient service cost center would be

charged based upon the number of hours of housekeeping services re-

quired to clean the direct patient service cost center.

With these basic terms defined, it will now be possible to turn

to a discussion of the cost accounting system to be developed during

the course of the research.

Current Industry Cost Accounting System Model

In its simplest form, manufacturing firms today generally employ

some version of the model represented by the schematic in Figure i.

Stage I is an acquisition process. Raw materials needed to make

the product are purchased. At Stage II those raw materials are con-

verted into a product as a result of operations performed by laborers

working directly with the raw materials. Assisting the direct laborers

are various employees performing indirect activities. These indirect

activities are commonly referred to as overhead.

The simplified model infers that there is only one type of material

converted into a single product by direct laborers performing only one

operation, aided by one indirect service. In reality, the process is

much more complicated. Various products may be manufactured by using

Stage I

Stage II

Stage III

Fig. l.--Simplified manufacturing cost accounting system model.

many different materials and performing numerous operations upon the

materials. An expanded schematic might appear as follows in Figure 2.

Stage I Raw Materials < Purchase
of Goods
S 1. Machinists
Stage II Work-in-Process 2. Assembly Purchase
3. Painters of Goods &

I Head
Stage III Finished Goods

Fig. 2.--Expanded manufacturing cost accounting system model.

In the expanded model, the multiple lines from raw materials to

work-in-process indicate many types of materials being moved into pro-

duction. At Stage II, the purchases of labor services are indicated

for the various types of labor services required to convert the materi-

als into products. Finally, the multiple lines from work-in-process

to finished goods represent a diverse number of final products manu-

factured. In the expanded model, all indirect services used to support

the conversion process are lumped together.

The identification of the various indirect services and the addi-

tion of than to the expanded cost accounting system model transform the

expanded model into the complete model. It might appear as Figure 3.

Stage I

Stage II

Stage III

Fig. 3.--Complete manufacturing cost accounting system model.

The evolution of managerial accounting from cost accounting can

be traced through the 3 models. The simplified version allowed for

only the costing of product at a gross level. The expanded model pro-

duced information that could be used to plan, control and evaluate,

in detail, the direct or prime costs involved in the manufacture of

various products. A better product costing method also was achieved.

Finally, with the addition of detailed information concerning the

indirect services, full product costing was achieved. More importantly,

the model now provided data that could measurably aid management

planning, control, and evaluation. Since each of the labor operations

and indirect services is normally supervised by a different individual,

a responsibility accounting system evolved. By being able to collect

costs in a detailed fashion, planning and control functions are placed

upon a responsible individual who is later evaluated based upon adher-

ence to the plan. At the same time, by aggregating data, product

costing is achieved.

Being able to define the responsibility centers within an organi-

zation, those individuals who supervise them, and the costs of operating

each has made modern cost accounting an executive control device.

Current Hospital Cost Accounting Model

Presently various types of cost data are required by external

parties. Usually that information is required annually. Consequently,

hospitals generally have tended to wait until year-end, then rearrange

the financial accounting data by means of cost analysis to accommodate

the cost requesting agencies. The result of this annual cost-finding

exercise is the assignment of all costs to one of several programs.

While there may be many ways to classify the various programs, Berman

and Weeks11 have developed a programatic format that seems to be all

inclusive and which will be used as the basis for this discussion.

Accordingly, the activities of a hospital are divided into 4 major

programs which are listed below.

Basic production. This program component includes all direct and

indirect costs of producing a service. This includes labor, materials,

depreciation, and the appropriate portion of support service cost

center costs. The cost of providing a service may be calculated de-

partmentally or on a per diem basis such as daily room charges. The

sum of all such service production costs represent "Basic Production


Nonproduction. This program component includes all direct and

indirect costs associated with providing activities not related to

service production. This includes labor, materials, depreciation, and

the appropriate portion of support service cost center costs which are

required to support such activities as community health programs,

education programs, and research programs.

Capital needs. This program component includes interest paid for

monies required to provide either working or plant capital. Also

included are those expenses which are necessary to complete the fi-

nancing transactions such as legal fees and other debt service charges.

Revenue reduction. This program component includes all bad debts

written off, discounts allowed, and all direct and indirect costs of

free services provided.

For this research, the Basic Production program is divided into

2 programs. One is called Routine Service and consists of those direct

and indirect costs associated with providing room, board, and nursing

services. The second component is the Professional Support Service

which is required to provide patient care.

When the various program components are summed, the following is

the result.

Routine Service
+Professional Support Service
Basic Production Cost
+Nonproduction Cost
Accounting Cost
+Capital Cost
Financial Cost
+Revenue Reduction.
Full Cost

The programs have been defined as outlined above for a reason.

Under most cost reimbursement schemes, all of the Basic Production

costs are reimbursable. Only a limited amount of the Nonproduction

and Capital costs are al able, however. Research costs can only be

recovered to the extent that they relate directly to patient care.

Many educational programs such as resident and intern instruction are

reviewed closely before any reimbursements are allowed. Interest

expense can only be recovered to the extent that it exceeds interest

earned on monies invested. Finally, the items appearing in the

Revenue Reduction component are entirely nonallowable.

A schematic of the programatic model just outlined might appear

as Figure 4 below.

Moving from left to right, the program costs become less allowable

or subject to closer scrutiny under the various reimbursement schemes,

until the final module, Revenue Reductions, is entirely nonallowable.

In practice, then, it is the object to include as many costs as possi-

ble in the Basic Production component.


Routine Service
Direct & Indirect
Costs of Providing
Room, Board, and
Nursing Service

Basic Production

Direct & Indirect
Cost of Providing
Support Services

Accounting Costs

i. Education
. Research


Financial Cost

Working & Plant


Full Cost

Capi tal



I. -________________

Fig. 4.-- Programatic cost accounting model. Current hospital cost accounting model.

- --



-- --- -~--


At this point, one exception should be noted. Usually those items

representing Revenue Reductions are not considered expenses or expired

costs of the current period. This model, however, implies that the

costs of operation must be recovered. If some are not so recovered

due to a bad account or a courtesy discount, it is incumbent upon the

management to raise the necessary resources in some other fashion.

Consequently, the model includes a component which recognizes the

necessity to recoup the resources which are consumed but for which no

reimbursement is received, and calls the model a Full Cost model.

j While this method of cost analysis allows for an evaluation of

program costs which can be used for rate setting and reimbursement

purposes, it fails to achieve the significance of the cost accounting

system model which was outlined in the previous section. First, it is

an historic evaluation of the operations. Often it is too late to take

Corrective action once the year has ended. Second, it does not allow

for product costing on a current basis. To know what Basic Production

component costs are after a year's operation is of little use in

helping determine what rates should have been charged during that

period of time. Also, unless the historical program costs are manipu-

lated to reflect expected events, there is little evidence to indicate

that they can be useful planning tools for future rate setting policies.

Third, since the structure is one of a programatic nature, the responsi-

bility lines often are blurred and what information is presented is

lacking in its ability to provide for the control and evaluation

aspects found in the industry model. Finally, this approach is only

significant when it is assumed that ultimately total allowable costs

will be recouped, as in the case of the year-end Medicare adjustment.

This approach, however, is being challenged by those who propose

prospective rating, a plan whereby hospitals would be reimbursed by

third-party-payers based upon budgeted or anticipated expenses.

As previously indicated, the major difficulty of establishing the

profit-sector model in the not-for-profit sector has been the problem

of output or product identification. Berki12 explains the various

attempts that have been made to resolve this problem in the hospital

industry. Of the 6 different approaches outlined, one relates to the

identification and weighting of service outputs. Service outputs are

defined in 2 ways. An all inclusive output index is used such as a

patient-day, weighted by whether it is an adult, pediatric, or nursery

type of day. At the other extreme is the identification of the

service or output of each hospital department. In this scheme the

weighting is implicit since for the medical departments the units of

suggested service is either in terms of the numbers of operations,

treatments, or procedures, or the time dimension of service. It is

the latter concept that was used in this research to develop the cost

accounting system.

Uniform Cost Accounting System

Any uniform cost accounting system needs to allow for the cost

data to be displayed several different ways. The current hospital

cost accounting model indicates that program costs are needed. To

reap the more general benefits of planning and control, the data must

be capable of being displayed along organizational lines in order to

allow for responsibility accounting. Finally, the same data must also

be able to provide information for product costing purposes. Figure 5

is a diagram of the relationships of the basic cost data to the ulti-

mate purposes to which it is put.


-- ^---- ,--------
Cost Reimbursement Planning
Rate Justification Control
Pricing Evaluation

Fig. 5.--Cost accounting data uses.

A slightly modified version of the profit-sector cost accounting

system model is outlined below in Figure 6. That particular model was

used as the basis for the cost accounting system designed during the

course of this research.

-Figure 6 differs from Figure 3 in 2 respects. First, the assign-

ment of total overhead is accomplished differently in each model. The

hospital model applies overhead on a more detailed basis than the

industry model. The latter generally uses 1 rate to apply overhead

to products. The former, by virtue of having a separate cost center

\, for each overhead item, charges overhead to the various products based

Supon each supportive service's unit rate times the amount of that

service consumed.

Second, there are no clearly defined stages of production in the

hospital model as there is in the industry model. Each hospital cost

center primarily provides services, either supportive in nature and to


Stage I

Stage II

Stage III

Fig. 6.--Proposed hospital cost accounting system model.

Indirect Labo
andd Material

P-ofessional Hotel
Support Service Support Service
Cost Centers Cost Centers

both patient location and other support service cost centers, or

directly to patients in patient location cost centers. If a comparison

were to be made, Stage I might be equivalent to the purchase of indi-

rect labor and materials by the Support Service Cost Centers. Stage II

might be compared to the production of service by the Patient Service

Cost Centers. This service production, however, is made with the aid

of the outputs of the various Support Service Cost Centers and the addi-

tion of more direct labor and materials. Stage III might be the same

as the provision of the services to the patient or physician. The

direct parallel between the two is not easily seen, however.


In this chapter, the types of cost accounting systems found in the

industrial, profit-oriented sector were compared to the cost accounting

system currently used by the hospital industry. The weaknesses of the

current hospital cost accounting system were indicated. Finally a cost

accounting system for hospitals similar to the current profit sector

cost accounting system was outlined. It will be the purpose of the

remainder of this research to develop and evaluate such a system as it

applies to the hospital industry. Chapter III will discuss the system

development phase of the research. Chapter IV will discuss the system

evaluation phase of the research. Both will begin with statements

about the methods used to develop the system and evaluate the system,

respectively. The latter portion of each chapter will discuss the

results of applying the particular method.



1. Committee on Accounting Practices of Not-For-Profit Organizations,
The Accounting Review, Supplement to Volume XLVI, 1971, p. 133.

2. L. J. Benninger, "Utilization of Multi-Standards in the Expansion
of an Organization's Information System," Cost and Management,
January-February, 1971, pp. 23-28.

3. Ibid., p. 25.

4. Committee on Accounting Practices of Not-For-Profit Organizations,
The Accounting Review, p. 134.

5. Committee on Concepts of Accounting Applicable to the Public
Sector, 1970-71, "Report of the Committee on Conepts of
Accounting Applicable to the Public Sector 1970-71," The
Accounting Review, Supplement to Volume XLVII, 1972, p. 99.

6. Charles T. Horngren, Cost Accounting: A Managerial Emphasis, 3d
Edition (Englewood Cliffs, New Jersey: Prentice-Hall, Inc.,
1972), p. 22.

7. Ibid., p. 691.

8. Stanley B. Henrici, Standard Costs for Manufacturing, 3d Edition
(New York: McGraw-Hill, 1960), Chapters 1 and 2.

9. Richard Elnicki, "Hospital Productivity Measures," paper delivered
to Committee on Health Services Industry, Economic Stabiliza-
tion Program, Phase II, Washington, D. C., May 15, 1972.

10. Horngren, Cost Accounting: A Managerial Emphasis, pp. 395-399.

11. Howard J. Berman and Lewis E. Weeks, The Financial Management of
Hospitals, (Ann Arbor, Michigan: Bureau of Hospital Admini-
stration, School of Public Health, University of Michigan,
1971), pp. 148-167.

12. Sylvester E. Berki, Hospital Economics, (Lexington, Massachusetts:
Lexington Books, 1972), pp. 31-48.




The preceding chapter included a discussion of the types of cost

accounting systems that are currently used by: 1) industries in the

profit-oriented sector of the economy; and 2) by the hospital industry.

A new cost accounting system, to be used by hospitals, was developed.

The recommended cost accounting system was based upon the industry

version. Figure 6, Chapter II, represents the proposed cost accounting

system model.

It will be the purpose of this chapter to indicate how the pro-

posed cost accounting system was transformed from the conceptualized

model into an operating cost accounting system. The first part of this

chapter will explain in detail each step of the method used to develop

the cost accounting system. The latter part of the chapter will dis-

cuss the results of using the method selected.

Method Used to Develop the Uniform Cost
Accounting System

A review of Figure 6, Chapter II, shows that at the base of the

proposed cost accounting system is the requirement that it be possible

to determine costs for each patient service and support service cost

center. The locus of cost planning, cost accumulation, and cost

control is the cost center. In order to develop a cost accounting

system that would accommodate the required data collection and manipu-

lation at the cost center level, several steps were required. They

were: 1) identify cost centers; 2) develop a questionnaire to be

used in completing an activity analysis; 3) test the questionnaire;

4) perform an activity analysis; 5) use the activity analysis to

develop a system framework, uniform cost distribution methods, and

uniform activity bases; and 6) develop report formats. Each step

will be discussed in detail below.

Identify Cost Centers

At the core of any accounting system is the framework which allows

for the systematic accumulation of the data which are to be analyzed.

That framework usually follows organizational lines. The same was true

for this study, except it was necessary to divide the hospital organi-

zation into extremely small parts. Those small segments have been

defined as cost centers.

The first step of the procedure, then, was to identify all the

possible cost centers that might be found within a hospital. The

recommended charts of accounts of the American Hospital Association

and the Connecticut Hospital Association were initially reviewed for

guidance in completing this task. Additionally, departmental handbooks

published by the American Hospital Association's Hospital Administra-

tive Services Program were reviewed.

Identifying what cost centers might be found within a hospital

was just the beginning. It also had to be determined that a hospital

had one of the identified cost centers. If so, then it had to be estab-

lished that the same activities were being performed within the same


cost centers of the various hospitals to insure that the cost data

collected would be comparable. The accomplishment of this required a

survey of the tasks performed in each cost center. This survey was

called an activity analysis. The activity analysis was accomplished

by conducting a structured interview with each cost center supervisor.

A questionnaire was to be used as the guide for the interview.

An exhaustive search of the literature revealed that nothing had

been published which described such an activity analysis, and that no

questionnaire had been developed that could serve as a guide in devel-

oping the type of questionnaire needed for this research. The next

step, then, was to develop such a questionnaire.

Develop Questionnaire

Since no data gathering instrument was available, one was devel-

oped. The Graduate Program in Health and Hospital Administration at

the University of Florida was engaged in a research project for which

such a questionnaire would also be useful. As a result, John M.

Champion, Chairman of the Graduate Program in Health and Hospital

Administration, the faculty, and selected graduate students provided

direction and assistance in developing a set of questions for each

identified cost center. The questions were divided into 2 groups.

The first group contained questions aimed at determining general infor-

mation about each cost center. The questions were used to determine

such information as staffing patterns, work hours, reporting practices,

and reporting frequencies. This group of questions was placed on one

questionnaire and titled "General Functional Questionnaire." Every

cost center supervisor was required to respond to the general questions.


The second group of questions was aimed at determining what

specific activities were being carried out within individual cost

centers. A separate set of questions was developed for each cost

center. This second part of the questionnaire was titled "Specific

Functional Questionnaire."

Source materials for this phase of the research included

McGibbony's Principles of Hospital Administration.1 United States

Department of Labor's Job Descriptions and Organizational Analysis for

Hospitals and Related Health Services,2 Goldstein and Horowitz's

Restructuring Paramedical Occupations: A Case Study,3 Brown's

Hospitals Visualized,4 and various American Hospital Association

publications regarding selected departmental activity.5

Test Questionnaire

The purpose of developing the questionnaire was to use it as a

guide for interviews with the supervisors of each cost center. The

interviewing would take place in several hospitals. In order to com-

plete the activity analysis within the time frame of this project, a

team of 4 interviewers was selected. Prior to sending the 4 inter-

viewers into community hospitals to collect the information, some

training of those individuals was desirable. Additionally, since the

questionnaire used as the interview guide was new, some testing of it

was necessary. Consequently, there were 2 reasons for conducting the

test. First, it was necessary for the interviewers to become better

acquainted with hospital organizations, personnel, and procedures.

The test period enabled the interviewers to attain some degree of pro-

ficiency in those skills required to question hospital supervisors

prior to the actual interviewing that would be required as part of the

research. Second, even though an extensive effort had gone into the

development of the questionnaire, there was the possibility that a

cost center might have been omitted or improperly identified. The test

would indicate such problems.

The test was conducted at the Shands Teaching Hospital and

Clinics, J. Hillis Miller Health Center, University of Florida. Shands

was selected because its teaching capabilities require a most complex

and up-to-date array of services. All cost centers identified in the

initial step of this procedure were found at Shands Teaching Hospital

and Clinics. The supervisors of those cost centers, by nature of the

complex teaching situation, had to remain abreast of current trends

in their particular field, and as such were able to indicate potential

problems in the construction of the questionnaire.

Perform Activity Analysis

After testing the questionnaire and making minor adjustments, the

next step was to perform the activity analysis. The Jacksonville

Hospital Council, Jacksonville, Florida, which consists of the Adminis-

trators of the 9 Jacksonville hospitals, initially volunteered their

institutions for the research. The 9 hospitals represented a range of

sizes from 66 beds to over 445 beds, and a variety of ownership

patterns: 2 were city-county owned, 4 were privately owned, and 3

were affiliated with religious organizations. Of the latter 3, 2 were

Protestant and 1 was Catholic. All 9 were nonprofit institutions.

After extensive meetings with the administrators of the various

hospitals and their respective boards of directors, 4 hospitals decided


not to participate. Those withdrawing were the 66-bed city-county

hospital and 3 of the privately-owned hospitals. Of the private

institutions withdrawing, one was a small 160-bed unit, one a medium-

sized 325-bed unit, and one a 72-bed specialty (pediatric) hospital.

Appendix K lists those five hospitals participating along with selected

volume indicators concerning each.

Even though the hospitals remaining numbered 5, they accounted for

72 percent of all beds and 74 percent of all admissions for the city

of Jacksonville. The size of this volume coupled with the variety of

sizes and ownership patterns represented were felt to be significant

enough to make the results meaningful. A system that could meet the

requirement of providing comparable data for decision-making purposes

among the members of this heterogeneous group should be able to accom-

modate any mix of hospitals.

The administration of the questionnaires by means of structured

interviews was completed over a 3-month time period. During that time,

the supervisor of each defined cost center was interviewed by one of the

four members of the interview team.

Data Analysis

The information gathered via the activity analysis was studied to

aid in the definition of each cost center's activities. The defini-

tions for the cost centers which resulted from the data analysis became

the basis for the system framework (chart of accounts), uniform activ-

ity bases, and uniform distribution methods. The activity bases were

determined after reviewing both the activity analysis and current meas-

urement practices as recommended by the American Hospital Association in

Uniform Hospital Definitions6 and the Connecticut Hospital Association

Accounting Manual.7 The chart of accounts, distribution methods, and

activity bases will be discussed later in this chapter.

Design Cost Reporting Format

The final step of the system development portion of the research

project was to design the forms to be used for collecting the cost and

statistical data, and reporting the results. Examples of the forms

will be presented and discussed when the results of the method appli-

cation are reviewed later in this chapter.

All 6 of the steps that were completed to move from the conceptual

cost accounting system model to the operating cost accounting system

have been outlined in some detail above. The next section discusses

the results of completing each step of the procedure.

Evaluation and Results of the System
Development Method

Since each of the 6 steps was discussed separately in the pre-

ceding section, each will be evaluated separately in the following


Identify Cost Centers

Appendix A is a preliminary list of the cost centers identified.

Initially, approximately 250 cost centers were identified, but they

were consolidated into the 107 shown on the preliminary list. The

consolidations were based upon the level and nature of the activity

within the cost centers. It was estimated that the cost to collect

information for all 250 cost centers would exceed the value of gaining

the information, particularly since some of the 250 cost centers were

small in terms of the expected number of employees and dollar expendi-

tures. The criteria for consolidating were to have a separate cost

center if: 1) the expected number of employees in a cost center

numbered more than 2; and 2) the expected dollar expenditures were

more than $100. There were some exceptions to these guidelines, but

the criteria were adhered to generally.

The analysis of which cost centers should or might be found

within a hospital was developed a priori. It would be the purpose of

a later step, the activity analysis, to substantiate or refute such

an assumption. Having completed the preliminary list of cost centers,

the questionnaire development step was next.

Develop Questionnaire

Appendix B contains a copy of the General Functional Questionnaire

that was used in the interviews with each cost center supervisor. The

same appendix also contains copies of several of the Specific Func-

tional Questionnaires. Those Specific Functional Questionnaries

presented are meant to be representative of the type of questions

developed and used for gathering information from specific cost

centers. The complete set of questionnaires is located in the offices

of the Graduate Program in Health and Hospital Administration, Univer-

sity of Florida.

Test Questionnaire

The results of the testing of the questionnaires at Shands

Teaching Hospital and Clinics were encouraging. Only one new cost

center was added, Cardiac Catherization Laboratory. All other re-

mained essentially unchanged. The 4 interviewers gained experience

&nd were prepared to complete the activity analysis.

Activity Analysis

The 4 interviewers required approximately 5 working days each to

complete the activity analysis in each hospital. By contacting each

cost center supervisor a great amount of detail was generated. A

repeat of this research might be more efficient, and yield substan-

tially the same results, if the number of interviews were reduced.

The activity analysis of all cost centers was important for this ini-

tial project, but for future research, it would probably be more

important to know the activity for those cost centers which provide

unique services, i.e., Central Sterile, Patient Accounting, and Admin-

istration are fairly standard. Consequently, using the cost centers

defined during this research as a base, the Administrator, Assistant-

Administrator, and Department Managers might be able to indicate for

which cost centers an activity analysis might not be necessary. As

such, a substantial amount cf time could be saved during this phase

of the research.

Data Analysis

It was during this step of the system development procedure that

the elements required for the operation of the system were developed.

The elements were 1) a system framework (chart of accounts);

2) activity bases; and 3) distribution methods. The development of

cach will be discussed below, but, first, the effect of the activity

analysis upon the number of and definition of cost centers will be

,; viewed.

As previously indicated, Appendix A represented the preliminary

of 107 cost centers that were expected to be found within the

hospitals. The test at Shands Teaching Hospital and Clinics resulted

in the addition of one more cost center. By the time the interviews

were completed in all 5 hospitals the changes were of a greater mag-

V nitude. Appendix C is a partial list of the cost centers identified

during the activity analysis which needed to be defined and accounted

for separately in the cost accounting system. A comparison of the

total final list with the preliminary list in Appendix A indicates sub-

Sstantial change. The total number of cost centers ultimately identified

increased to 252. This was primarily the result of expanding the number

of cost centers recognized within the Nursing Service., the Clinical

Laboratory Department, and the Housekeeping Department. These increases

were offset somewhat by eliminating a few of the original cost centers

and consolidating others. The net effect, however, was the increase

cited. The final result of studying the information obtained during

the activity analysis was the identification of 252 activities con-

sidered significant enough to require separate definition. Each activi-

ty so defined became a cost center. After determining and defining the

cost centers, the balance of the analysis phase was used to develop the

3 elements of the cost system. The development of each will now be


System framework. Every accounting system must have a framework

which allows the data collected to be logically organized. That frame-

work is a chart of accounts. Every hospital participating in this

research had a chart of accounts, and all of the hospital controllers

indicated that their charts were in conformance with the American

Hospital Association's Recommended Chart of Accounts. As a result,

it was first planned to use that particular chart as the basis for the

collection framework required by this research. A thorough review of

each of the hospitals' charts, however, indicated such an action would

be impossible. First, the chart recommended by the American Hospital

Association allows individual hospitals considerable latitude in the

interpretation and adoption of the chart. This resulted in the hospi-

tals assigning the same numbers to different activities, and, con-

versely, different numbers to the same activity. Appendix D is a

partial copy of the analysis of the hospitals' charts which indicates

the extent of the problem. If the only difficulty had been the latter

one, an easy solution could have been reached. The former difficulty,

however, rendered the use of that particular chart hazardous at best,

since accounting data were being collected for heterogeneous activities

in the same account.

Second, some activities of major proportion were not indicated in

the charts of some of the hospitals. For example, a major expense is

involved as a result of admitting people to the hospital for care.

However, 2 of the hospitals were not collecting costs for that partic-

ular activity.

Finally, the charts which were being used did not provide for the

collection of detailed enough information to allow for costing at the

level of activity indicated. This shortcoming was two-fold. First,

there was not enough flexibility to permit an account for each cost

center. Second, the amount of data which could be collected concerning

each cost center (activity) was severely limited.

For the 3 reasons indicated above, it was determined that a new

chart of accounts should be developed. The new chart followed the

general numbering scheme of the one recommended by the American Hospi-

tal Association, but it allowed for the necessary detail. Further, by

explicitly defining each activity, the collection of information for

heterogeneous activities in the same account was significantly reduced.

Each cost center identified through the activity analysis was assigned

a primary account number. There are 252 indicated primary account:,

with the flexibility to increase that number to 400 if other activities

should be identified for which it is deemed necessary to collect cost


The chart of accounts constructed here uses a 6-digit number to

identify each account and type of expenditure. The first 3 digits are

the primary account numbers. They are organized by department and

activity within the department. Each identified cost center has been

assigned a primary account number from one of the following groups.

600-699 Nursing Services
700-799 Other Professional Services
800-899 General Services
900-949 Fiscal Services
950-999 Administrative

The fourth digit identifies primary subclassifications. They are:

0 Salaries and Wages
1 Employee Benefits
2 Fees
3-5 Supplies
6-7 Purchased Services
8-9 Other

The fifth and sixth digits identify secondary subclassifications.
They are:

.001-.099 Job Categories
.100-.199 Type of Employee Benefit
.200-.299 Type of Fee
.300-.599 Type of Supply
.600-.799 Type of Service Purchased
.800-.999 Other Subclassifications

Appendix E contains illustrative material from the recommended

chart of accounts. The format of each account description is standard-

ized and included 6 major items of information. Those items are:

1. Account number and title. Each cost center has been assigned
an account number and title.

2. Function. This indicates the activity and/or activities to
be accounted for in the particular account.

3. Expenses. This indicates those expenses that should be
accumulated in the particular account.

4. Activity Base. This indicates the statistics used to measure
the level of activity within the particular account.

5. Distribution. This indicates the method to be used to
distribute costs from the support service cost center accounts
to the patient service cost center accounts.

6. Sub-Account. This indicates what account number should be
used if a more detailed collection of cost information is

It can now be demonstrated how the chart of accounts is used to

classify cost accounting data. A head nurse who works in a Nursing

Service-Medical cost center would have her salary recorded to account

number 610.010. The 610 represents the Medical Nursing Service cost

center (primary account) and the .010 indicates a head nurse's salary.

Group life insurance paid by the hospital for this particular head

nurse would be charged to account number 610.110. Any medical supplies

used on this head nurse's floor would be charged to account number

610.300. Consequently, the total direct cost of the Nursing Service-

Medical cost center would be accumulated in account number 610. The

various subclassifications indicate the type of expense.

Activity base. A common denominator is required in order to

measure the level of activity within an account and to provide compara-

bilit.y of the activity levels for 2 or more hospitals. That common

denominator is the activity base. As defined earlier, it is important

that it reflect the output of a cost center and fluctuate as that out-

put fluctuates. The latter fact becomes important for cost distribu-

tion purposes.

While the activity analysis was helpful for developing the

activity bases, most activity bases selected tend to conform to current

American Hospital Association and Medicare guidelines. The base which

was selected in some instances, however, represents a statistic that

is not currently being collected. For example, the recommended activ-

ity base for the laboratory cost centers relative unit values of the

laboratory tests performed is a case in point. At present, few

hospitals collect this information. Instead, the number of unweighted

laboratory tests are summarized without considering the complexity of

the various tests or whether those tests were completed manually or


The bases selected, when applied consistently and uniformly to

the corresponding cost centers, represent a measure of the level of

activity which allows for comparative analysis. It also provides a

means of internal control for managers. An activity base has been

indicated for each cost center. The activity bases for those cost

centers (accounts) displayed as part of the standardized chart of

accounts format can be seen in Appendix E.

Distribution method. If the full-cost of services rendered is to

be calculated it is necessary to distribute the costs incurred by the

support service cost centers to the benefiting patient service cost

centers. In order to accomplish this it is necessary, first, to iden-

tify those cost centers that are support service cost centers, and

then to distribute costs from them to the benefiting patient service

cost centers. Appendix F is a partial listing of cost centers by cate-

gory which identifies all cost centers by type of service provided.

With few exceptions the method of distribution is a ratio devel-

oped from the activity base. For example, the Social Service cost

center, Account 752, has as an activity base the "number of consulta-

tions" held with patients ard patients' families. The distribution

method is to spread Social Service costs to patient service cost centers

base upon the ratio of consultations held with patients and patients'

families of each patient service cost center, to total consultations.

The costs of generating that output are distributed to the patient

service cost centers that supposedly benefit from such activities.

The distribution method for each support service cost center follows

this pattern with the exception of Medical Records-Research (Account

788), and all Data Processing cost centers (Accounts 936-938). Those

4 accounts require a special analysis in order to accomplish the dis-


Defining a distribution method for each account does not resolve

which of the recognized accounting procedures will be used to allocate

costs. There are a variety of ways in which this can be accomplished.

The American Hospital Association8 recognizes 4 major procedures.

First, there is the direct procedure which closes costs of the support

service cost centers directly and exclusively to the patient service

cost centers. This entirely overlooks the fact that one support

service cost center can provide service to another support service

cost center. Second, the step-down procedure provides for the

recognition of the relationships resulting when one support service

cost center provides service to another support service cost center.

Those cost centers providing service to the greatest number of other

centers are closed first. Once a cost center is closed, nothing more

can be distributed to it. Consequently, a cost center being closed

subsequent to one of the larger cost centers would not be permitted

to allocate any costs to the larger cost center, even if it had pro-

vided services to that cost center. Third, the double-distribution

procedure allows for one cost center to allocate its costs to any

other benefiting cost center on the first distribution. On the second

distribution the balances remaining in the support service cost centers

are closed directly to the patient service cost centers. This method

takes into account the interrelationships between cost centers.

Further, it can be accomplished by means of an iterative process that

allows numerous distributions, finally allocating directly to patient

service cost centers when the balance in the support service cost

centers reach some small, predetermined amount. The fourth, and last

procedure requires the development of a set of simultaneous equations

which represent the complex interactions among all cost centers. Once

the equations are defined, the solution can be calculated, usually with

the assistance of a computer.

Horngren9 explores rather extensively the direct, step-down, and

simultaneous equation method, and indicates that "little is known

empirically about the effects on decisions of alternative cost-alloca-

tion bases (procedures)."10 Implied is the inability to determine what

method might be the most accurate, most accurate being defined as the

distribution of costs to the area benefiting most. Horngren further

states: "The use of linear algebra (simultaneous equation method) may

make a difference in decisions upon occasion,"11 inferring that the

great effort required to develop the simultaneous equations might not

be worth the additional expense.

It is not the purpose of this research to indicate the one best

procedure for cost distribution. In fact, that would require a separate

project. What this brief discussion has done is indicate the various

acceptable distribution procedures in order to place in its proper

perspective the one chosen for this research the step-down procedure.

First, it does, to some extent, rectify the intercost-center relation-

ships problem. Second, while a double-distribution or algebraic method

might afford a more precise answer, the additional time required to

achieve a result using that method was deemed impractical for this

research, particularly when the "more accurate" assertion was neither

a fact, as the brief preceding discussion indicated, nor was it to be

tested within the scope of this research.

The distribution method for those support service cost centers

displayed as part of the standardized chart of accounts format can be

seen in Appendix E.

Design Data Collection and Report Formats

The last step of the procedure was to design the forms required

to collect the cost and statistical information, and the reporting

formats. Several different forms are necessary for the collection of

the cost and statistical data. Examples of each have been placed in

Appendix G. The purpose of each will be discussed below.

The first form titled "Data Collection Form," is used to collect

the basic cost and selected statistical information for each cost

center. One set of forms must be completed for each cost center. The

data on this form provides the basic input into the cost system. The

Data Collection Form, along with the instruction page provided is

self-explanatory. A significant amount of detailed cost information

is collected concerning the elements which make up each cost center's

total cost.

The next 3 forms in Appendix G are titled "Activity Measurement

Statistics," "Activity Measurement and Cost Distribution Statistics -

All Cost Centers," and "Activity Measurement and Cost Distribution

Statistics Patient Service Cost Centers." Data entered upon these

forms become the activity bases used for measurement and distribution


There are 3 separate groups of statistics required at this point

as indicated by the 3 different collection forms. This requirement

exists because of the various types of cost centers identified:

support service and patient service. Of the 2 types of support serv-

ice cost centers, professional and hotel, the hotel support service

cost centers provide service to other cost centers within the hospital.

For example, housekeeping and maintenance perform services for all

other hospital cost centers. Consequently, the statistics collected

on the "Activity Measurement and Cost Distribution Statistics All

Cost Centers" form are used as the activity base within the hotel

support service areas. Additionally, they also provide the means for

distributing the costs of providing such services to all areas within

the hospital that benefit from such services.

The professional support services, however, provide services to

the patient location areas only. To collect statistics which will be

the activity base for this group of cost centers, the form titled

"Activity Measurement and Cost Distribution Statistics Patient Loca-

tion Cost Centers" has been developed. The information collected

thereon will also serve as a basic input into the distribution method

for professional support service cost centers.

Finally, since it is the ultimate purpose to determine the full

cost of the patient service cost centers, both primary and patient

location, the distribution of costs stops at that point. No costs

will be distributed from patient service cost centers. As a result

the statistics collected from each of these cost centers will be used

only as an activity base. To collect the data required to accomplish

this, the form titled "Activity Measurement Statistics" has been


Finally, the report formats were designed. Based upon the type

of data that were collected and the manner in which it is processed

through the system, 4 reports were developed. Of these, 2 represent

detailed cost information which reflects the costs by element within

each cost center. Additionally, the summary reports reflect total

cost center costs at 3 different points within the model: 1) at

initial entry point; 2) after adjusting for depreciation, interest,

start-up, and insurance costs; and 3) after all distributions, or

at "full-cost." Appendix I contains completed copies of each report

which indicate the reporting format. A detailed discussion of each

is presented below.

Detailed reports. The 2 detailed cost reports are titled

"Hospital Cost Report" and "Comparative Hospital Cost Report." The

first of the 2 is designed to display detailed information concerning

the elements of cost of each cost center. Displayed are: 1) the

dollar cost of each element, 2) the percentage each element of expense

is to total cost center expense, 3) the expense per patient day of

each element of expense within the cost center, and 4) the expense

per activity base for each element of expense within the cost center.

A significant amount of detail is displayed for each cost center.

The "Comparative Hospital Cost Report" contains the same informa-

tion as the "Hospital Cost Report" except it is displayed on a compar-

ative basis. This allows for the comparison of cost elements within

the cost center, by hospital.

Both of the detailed reports display the cost information as

collected at the initial point of entry into the system, and prior to

any adjustments or allocations.

Summary reports. The 2 summary reports are titled "Hospital Cost

Summary Report" and "Comparative Hospital Cost Summary Report." The

first of these reflects total cost center costs for each cost center

within a hospital. The same 4 items, dollars of expense, percentage

of hospital total, cost per patient day, and cost per activity base,

are displayed on this report as they were on the detailed reports.

Additionally, this information is shown at 3 different points within

the model. First, the expenses as initially recorded are displayed.

This section is called the "Direct Expenses" section, and presents the

total cost center costs as displayed on the detailed reports. Second,

the direct expenses of each cost center are adjusted for depreciation,

interest, start-up, and insurance. This produces the "Adjusted Direct

Expenses," and this information is displayed in the same fashion as the

"Direct Expenses." Finally, after the costs of all support service

cost centers have been distributed, the "Full-Cost" portion of the

report is prepared.

The "Comparative Hospital Cost Summary Report" displays the infor-

mation from the "Hospital Cost Summary Report" on a comparative basis

for all hospitals.

The 4 reports called for as output of this cost accounting system

enable detailed information for a single hospital or a group of hospi-

tals to be evaluated, even for the smallest element of costs for any

of the cost centers. At the other extreme, comparative summary cost

accounting data are made available at 3 different points of processing

within the model.


This chapter has been concerned with identifying the steps of the

procedure which were required to develop the cost accounting system

recommended in Chapter II. Next, the results of applying that method

were discussed. Finally, the elements of the system were described and

provided in the appendices, along with the necessary forms and report-

ing formats. In essence, the elements required to move from the con-

ceptual cost accounting system model to an operating cost accounting

system were developed. At this point, it is assumed that the cost ac-

counting system developed will produce the desired comparable cost data.

It will be the purpose of the next chapter to test that assumption and

determine if that conclusion is warranted.


1. John R. McGibbony, M. D., Principles of Hospital Administration,
2d. edition, (New York: G. P. Putnam's Sons, 1969). Chapters
9-29 are detailed explanations of the responsibilities and
activities of a hospital's departments.

2. United States Department of Labor, Manpower Administration, Job
Descriptions and Organizational Analysis for Hospitals and
Related Health Services, (Washington, D. C.: Government
Printing Office, 1971).

3. Harold M. Goldstein and Morris A. Horowitz, Restructuring Para-
medical Occupations: A Case Study, (Boston: Department of
Economics, Northeastern University, 1972).

4. Ray E. Brown and Richard L. Johnson, Hospitals Visualized, 2d
edition, (Chicago: American College of Hospital Administra-
tion, 1957).

5. Hospital Administrative Services, Departmental Handbook-House-
keeping, Departmental Handbook-Nursing Services: Operating
and Recovery Rooms, Departmental Handbook-Dietary, Depart-
mental Handbook-Laundry and Linen, Departmental Handbook-
Nursing Services: Obstetrical Nursery, Delivery and Labor
Rooms, Departmental Handbook-Plant Engineering, (Chicago:
American Hospital Association, 1966), and American Hospital
Association, Management Review Program-Food Services Depart-
mnent, and Management Review Program-Nursery Service. (Chicago:
American Hospital Association).

6. American Hospital Association, Uniform Hospital Definition,
(Chicago: American Hospital Association, 1960).

7. Connecticut Hospital Association, Connecticut Hospital Asso-
ciation Accounting Manual, (New Haven, Connecticut:
Connecticut Hospital Association, 1970).

8. Cost Finding and Rate Setting for Hospitals, American Hospital
Association, 1968, pp. 31-34.

9. Horngren, Cost Accounting- A Managerial Emphasis, pp. 417-428.

10. Ibi_d., p. 426.

11. Ibid., p. 424.




The cost accounting system developed in the preceding chapter was

assumed capable of producing cost accounting information for use by

internal and external decision makers. It will be the purpose of this

chapter to indicate how that assumption was tested. Each step of the

method used to evaluate the cost accounting system will be detailed.

At the same time, a discussion of the results of completing each of

those steps will be included.

The method used to evaluate the cost accounting system consisted

of 3 major sections. First, actual cost data were collected from each

participating hospital and processed in accordance with the instruc-

tions and guidelines developed in Chapter III. This represented a

test of the procedural aspects of the system. Second, an evaluation

of the cost output was conducted to determine if the information was

capable of providing assistance to internal and external decision

makers. This second section of the method, the output evaluation

section, was completed by having the administrators and the financial

and/or accounting managers of selected hospitals review and comment

upon the cost accounting system's final product--the 4 cost reports

described in Chapter III. The last phase of the evaluation was to

determine the reporting requirements of external cost information

users, and to evaluate the cost accounting system's output against

those requirements.

The remainder of this chapter will be a detailed discussion of

the major parts of the method which were outlined briefly above.

Method Related to Procedural Aspects
and Discussion of Results

It was the aim of this particular portion of the research to de-

velop the group of reports called for as the output of the cost as-

counting system. As such, the reports were developed from each

hospital's actual cost information and are intended to be represen-

tative or typical of the reports which can be prepared on a continuing

basis to assist in both internal and external reporting situations.

There were 3 operations performed to arrive at the final output:

1) data collection, 2) data manipulation, and 3) report preparation.

Each operation will be discussed in greater detail below.

Data Collection

The 5 Jacksonville hospitals participating in the project were

asked to provide the cost data for each activity defined in the Chart

of Accounts, which was being performed within that particular

hospital. Additionally, the statistics necessary to measure out-

put and distribute indirect costs were to be provided for each

activity. The forms displayed in Appendix G were used for that pur-

pose. The data were to cover a 1-month time period. The month was

to be a "normal" month, with "normal" defined as a month in which

there were no major renovations causing areas of the hospital to be

closed, no extremely high or low census as compared with the average

for the past 12-month period, and no other extenuating circumstances

which might cause operations to be out of the ordinary such as labor

disputes. Each administrator determined the "normal" month for his

hospital given the preceding guidelines. Three selected January,

1973, and two selected March, 1973.

Having selected the time period, the accounting personnel within

each hospital collected all necessary information by following the

activity definitions as per the Chart of Accounts. The personnel

collecting the data were to contact the researcher only if and when

problems were encountered with the activity definitions. It was

imperative that the integrity of the definitions be maintained so

that cost information, when completed, would be for identical activi-

ties. Other than that one exception, the hospital personnel were to ac-

complish the data collection using only the guidelines provided by the

Chart of Accounts. This served two purposes: first, to determine how

closely the definitions explained the activities within the various de-

partments of the hospitals, and second, to establish how much effort

was required to develop the data in the required detail.

The current accounting systems employed by the participating

hospitals represented varying degrees of sophistication. As a result,

it took only a short period of data collection to determine that only

one of the hospitals was presently collecting information approaching

enough detail to satisfy the reporting requirements as per the pro-

posed system. An investigation indicated that a major difficulty was

that the existing reports were prepared at a summary level. A vivid

example was found in the nursing service areas. All medical and

surgical units were summed together and reported as Medical-Surgical.

The proposed cost accounting system called for each medical and surg-

ical nursing unit to be identified separately. In order to separate

the various nursing units, both cost and statistical information had

to be reported for each unit individually. An examination of the hos-

pitals' cost records indicated that the detailed cost information was

available, and it was used at the detailed level for this project. A

more serious problem, and the main reason why the existing cost re-

ports were used in summary form, was that the statistical data were

either not collected, or not collected below the summary level. The

latter difficulty required that the accounting personnel collecting

the data for this research perform special analyses in order to obtain

the necessary information.

The special analyses resolved all statistical data problems ex-

cept two. First, for Central Sterile, only 2 hospitals maintained a

count of requisitions. Second, with one exception, none of the hospi-

tals could provide relative unit values where such were required.

Only 2 hospitals were able to do so for the laboratory, and that

measure was used for those 2 as a laboratory indicator. For all other

relative unit values, unweighted units were substituted, i.e., number

of x-ray exams instead of relative unit values of x-rays, and number

of cardiac catherization procedures instead of relative unit values of

catherization procedures.

Because of the time required to perform the special studies in

order to collect the statistical information, the data collection it-

self took longer than had been anticipated. It required an average of

approximately 4 weeks in each hospital. This operation was begun

April 1, 1973, and completed May 31, 1973. The next operation was to

process the data.

Data Manipulation

The information collected was processed through the cost account-

ing system model represented by Figure 6, Chapter II. The amounts

distributed from one cost center to another were calculated as per the

instructions in the "Distribution" section of the Chart of Accounts,

Appendix E. For the reasons indicated in Chapter III, the step-down

procedure was used to distribute costs in accordance with the instruc-

tions in the Chart of Accounts. The sequence for closing accounts as

outlined in Chapter III was followed. That called for 1) the distri-

bution of depreciation, amortization of start-up costs, insurance ex-

pense, and interest expense to all cost centers; 2) the closing of

hotel support service cost centers; and 3) the closing of the pro-

fessional support service cost centers. Figure 7 is an example of how

the step-down method works and is extracted from one of the calcula-

tions. It is used here for illustrative purpose only. Appendix II con-

tains the entire step-down calculations for closing one hospital's

professional support service cost centers to the patient service cost


The entire cost allocation process for this project was completed

manually. It was determined that it would take several months to de-

volop and to write a computer program to accomplish such an alloca-

tion. Consequently, that would have extended the time frame for

completing this research. It would be advisable, however, to use a

computer for such a routine, repetitive function as this one should




Adj. Exp.
Cost Bal. from Total
Center Work. A. 601 602 690 758 765 775 920 921 Cost
601 7189 7189
602 9114 188 9302
675 36987 126 167 94 37374
690 5132 50 65 5247
758 11522 11522
765 3103 3103
775 17731 17731
920 17023 17023
921-678 15120 117 157 89 15483
702 11738 11738
706 53837 58837
714 13599 13599
716 14064 14064
718 5469 5469
721 49289 49289
728 7347 7347
731 35933 35933
735 6791 14 19 10 6834
737 18946 18946
739 2685 2685
741 7647 7647
757 22416 308 408 232 23364
660 53532 643 854 484 3103 58616

Fig. 7.--Example of step-dcwn cost allocation procedure.

the cost system be implemented. The time required to complete this

operation manually was an average of 10 days for each hospital.

Report Preparation

At the completion of the cost distribution calculations, it was

necessary to develop a format for displaying the results of those cal-

culations in a logical fashion. For that purpose, 4 were developed in

Chapter III: 1) Hospital Cost Report, 2) Comparative Hospital Cost

Report, 3) Hospital Cost Summary, and 4) Comparative Hospital Cost

Summary. This portion of the method discussion will present the com-

pleted formats. The text will include examples of completed, actual

reports and some tables containing extracts of the other reports.

Completed copies of all 4 reports are presented in Appendix I. This

serves 2 purposes. First, it demonstrates the reports that are gen-

erated by the cost accounting system. Second, it is a copy of the in-

formation provided to those who evaluated the cost accounting system.

Figure 8 is a copy of one completed Hospital Cost Report. The in-

formation for this report came directly from the Data Collection Form.

The Hospital Cost Report displays significant detail concerning the di-

rect expenses of each cost center. Information concerning each ele-

ment of the direct expenses of each cost center is displayed 4

different ways. Under the "Dollars" column, the dollars expended on

that element are shown. Under the "Percent of Total" column, the per-

centage each element of direct expense is to the total cost center's

expense is shown. Under the "Patient Day" column, the result of di-

viding each element of the direct expense by patient days is shown.

Finally, under the "Activity" column, the result of dividing each






DATE: One month

cc--A '-nrt Ti----j'l I of Tcal tient Di' Actliv L Do,! J.rs


SAEARTA'TrT.AucS-----I-T- -Alp_-----_ -
Nursing Super./Super. I .8
Head Nurse/Professional 1 4.40 1.27 .18 924_
_Chare _lurse -!
Staff Nurse | 26.17 7.4 .03 i 555
Pract. Nurse/Semi-Pro. | 15.29 4.40 .53 3192
using Assist./Student 19.72 5,68 .82 4117
Unit Admin./Clerical I
Clors/TyJs ts. 8.12 2.34 .34 ?9-
TechnjLc i /Technici rn
Phys ici n sPhys ici ns I
.[ntterns & Residents
General l/Gen era 1
TOTAL SAL., KAGES, HRS. /." Hr73 3.05 ib, -

_Social Security (FICA) 4.3 10.24 ... .0
_Grou_ Life Insurnce 1.38 .54 .08 393
GrJQ.IP i Heath insurance
Retire. Plan Contribtion 63 .18 .X3 132
_J1 .Tn's CoLoensation .34 .10 .0 71
StJte Unem y. Tax .66 .19 .03 1
FJed. Upel oy. Tax _____
1n_____ ___ _.72 .21 .03 151
Unifaos ___........
health Service .06 .02
TLZ.BEE..T ___......... ..

_leoal ____.....________ ___.____ _______

__lcin ae____ _____ __ _e
Consulting __ ____
Med. Spec. Admin.
Med. Spec. -Phys.Serv. _____ _


Medical & Surgical .34 38 .06 ___ 9__
Inven. Cout Adi u st
Instrumentts_ _

__J.'ear-iing.. A.r,] (ex Ulni .) --
.__I-.om Ls,,______ _a.._____ I -

Fig. 8.--xaple of a completed Hospital Cost Report.--- -
Fig.' 8.--Examiple of a completed Hospital Cost Report.






DATE: One month

__ Account Title % of Total Patient Day Actvity Dollars
Films and Chemicals ____

PrinT.ed Forms
Pub. jBooks & Periodicals
Beverages & Nourishments
LRe&ir_ L& jinjtenanj ce_
Di shes, G ass]w re. Silver. ___ _____
Disposable Eating Uten.

Food-Meat, Fi sh, Poul tryv__
Food-Dairy .
Food-All Other
Laboratory ___
House. Paper Products _____
House. Sanitary Products
_Laund ry
Linens__ __
Miscellaneous .18 .0 .01 37

"--TOTAL SUPPLIES 1.56 .44 .u/ "

Purchased Maintenance
Purchas. Main Contract
_Purchas. Main Other_
Utilities Electricity ____ __
Utilities Gas
Utilities Water & Sewer
Garbage Collection ___ __
Telephone & Teleraprah .47 .14 .02
Insurance & Bonding 1.22 .35 5 ___ Z5
Duees ard j erb r-ships-
_ P:r f.A..._AnJ J^i-t, _Stu..d, .....
_ .I --Lje- 1-
-ravel ducation_____
Travel 0- Other
EcGujprent Rentals
_Euipment Leasesi- .72 .21 .03 150

FPig.h &.--Cntinu ment
Fig. 8.--Continued.






ACTIVITY BASE: Hours of Care

DATE: One month

AccmirLTtl0e % of Total Patient Day Activity_ DTo rs
non-Hos pital Lab.
Serv. From Other Hosp. ____
O outside oni_ orin
Pjrirl ___tin_________
Pr itin_____ _______ _______ ______ ____
eHousekeepi ng_
Security _
Data Processing
Inter1ov. Aen. (Univer.)
Other _____



pri._-JigFJquY n1.4u .40 .06 --
__QIaC-_i- F_ ,L1_ oi-_ .17 .05 .1 35
__Dnprec Building 2.75 .79 .T1l 57
._De'prec- Building Sery. 3.41 .98 .14 711
)Derec. Land Imorovement .36 .10 .01 75
Amort. of Start-Up Cost__
Interest Short Tenn Loan .08 .2 17
_Interest Mortgages 3.94 1.14 .1 823
Interest Bonds 1.62 .47 .01 338
Interest Other _
Loss on Dis. of Assets
Loss on Dis. Stocks & Bonds
Credits to Expense ___
Credits to Exp. Research _
Credits to Exp. Grants
Cre. to Exp. Cen. St. Sup ___
Credits to Exp. Pharmacy _____
Cre. to Lxp.- Rep. A& Main.
Crc. to Ep. Other
TOTAL OTHER EXPENSES 13.73 3.95 .56 2864

G RANiD TOTAL 100.09 28.80 4.14 20881



Fig. 8.--Continued.

'---1 -t--- *-1*~---- I- -

element of direct expense by that certain cost center's activity base

as defined in the "Activity" section of the Chart of Accounts is shown.

The cost accounting system calls for one such report to be prepared for

each cost center within each hospital.

Figure 9 is a copy of one completed Comparative Hospital Cost Re-

port. The comparative report displays the same information as the

Hospital Cost Report, except it displays cost on a comparative basis

so that each hospital's direct expenses may be evaluated in comparison

with others in the community performing the same activity. That com-

parison may even be carried down to each element of direct expense, if


Both of the detailed reports just discussed represent the col-

lection of cost information before any cost distribution procedures.

In order to establish cost in accordance with the cost accounting

system model presented in Figure 6, Chapter II, it is necessary to

begin to recognize certain indirect expenses and distribute those ex-

penses to the benefiting cost centers. Initially, the direct expenses

of all cost centers were adjusted to recognize the amount of depre-

ciation, amortization of start-up costs, general insurance expense,

and interest expense that should be borne by each. This new cost

center expense was titled "Adjusted Direct Expense." At this point in

the processing, if the amounts reflected in those accounts for all

cost centers designated Hotel Support Service Cost Centers and Pro-

fessional Support Service Cost Centers were summed, the total would

represent the costs of production through Stage I of the cost account-

ing system model depicted in Figure 6, Chapter II.


Acct. Cost s % of T tal Cost r r Patlert Day :ost Per Activity Base
io. Title
S2 3 4 5 1 2 3 4 5 2 3 4 5

~ 3AL ES-AND = AGE-S ----
001 Nursin_ Super. L uer. .,66 1,17 _
C .010 Head Nurse/Professional 4,.0 16.22 1.27 3.35 ,18 .72.
.011 Charge Nurse__ ___
.012 Staff Nurse 6_.17 7__4 1,08
.020 Pract. Nurse/Semi-Pro. 15.29 22,00 4.40 4.5A .63 98
.030 Nursing Assist./Student 19.72 5.68 ,__
.040 Unit Admin./Clerical __67 .5 12
.041 Clerks/Typists 8.12 2.34 .34 _
.050 Technicians/Technicians
.060 Physicians/Physicians
.061 Interns & Residents
070 General/General _24,8 5.13 10
TOTAL SAL., WAGES, HRS. 73.70 63.40 71.41 71.25 21.23 14.47 14.74 _8. _3_ 3.05 2.96 3.17 3,05
10 Scial Security (FICA) 4.31 3.74 3.36 4.17 1,24 ,85 ,69 1,07 .18 .17 .15 .18
.110 Group a ife Insurance 1,88 .85 .54 .22 .0 04
ll Grmip Hpalth Iinr ranpc 3.29 1.10 .86 .75 ,23 .22 ,15 .05 .04
.112 Group Disability Insur. 3.58 92 .15
.120 Retire. Plan Contribu. .63 3.78 .96 .18 .86 .20 .03 .18 .04
.130 W Comen's Cmpensation .34 .23 .10 .05 .01 .01
.140 Stte Une mloy, Tax .66 .24 .19 .05 .03 .01
,M1 Fed, Unemploy, Tax
.15 Uniforms .72 .21 .03
.160 ieals .37 .08 .02
170 .06 02 -
TOTAL FRINGE BENEFITS 8.60 10.81 6.26 9.46 2.48 2.46 1.30 2.43 .36 .50 .28 .41
.200 Legal
210 Auditing
.220 Collection Agencies
.23 Cniultirg _____ ______
F.24-0x P a n_______ _c______teo_______ n pt H I tl_______ ______-s
..24 MPd Spac.-Ad in.
S- e,-Phys -Serv,_____ I ____ -

Fig. 9.--Example of a completed Comparative Hospital Cost Report.




Act. Cost s % of Ttal Cost P r Patie t Day ost Per ctiviy Base
No. Title
1 2 3 4 5 1 2 3 4 5 1 2 3 4 5

.30C Mpdical & Surgical 1.34 2.14 .14 .23 ,38 .49 .03 .06 .r, .10. ()
,301 Inven. Count Ad2ust.
,302 Instruments
.__310, Drugs .03 01
320_ Intravenous Solut ons. 01
.3-0T Wear. Apparel (ex. Un. __
.331 Uniforms
3401 General peratin .95 20_
.350 Oxvcen and Gase_____
S_36C0 Films and Chemicals ,
___________r___ ____ __ ___I 2.14 .14 .23 3_ ___..... _......... ___. ........DL...

.364 __ _____ .03_ _______"-_ .03.01____ ______________

__30________ Fu e
.390 P;b. fBooks & Period.) .
.400 Bov-ages o -ourish.
.410 Reir MaIrtenance-
.420 Dishes. _Glass.. Silver._
42 Disposable Eat. Uten.
._430 Kitchen
.440 Fonnd__
.441 Fnnd-Mept, Fish, Paul
442 Food-Dairy
.443 Fod-FresIh Prodruce
_444 Food-All Other_ _____ __ __
.4Pa aIboratory _
.._,_4.AC Housekee Pinor....

461 House.-Paper Products i
4 nSne.-Rpitary Prndut -

4 Print___ _____ _
.500 Miscellaneousd .18 ,2f 1 .0. .- -.1 0__ ___ n I --

Fig. 9.--Continued.





Acct. Costt al ost Pr Patiet Day Cost Per Activiy Base
No. Title 2 3 4 5 1
o. T1e 1 2 3 4 5 1 2 3 4 2 3 4 5

S540_ _____
TOTAL SUPPLIES 1.5 2.14 1.51 23 .44 .49 .31 .06 -07 .in .07 .01
.600 Purchased Maintenanc
6__ 01 Purchas. Main-Contrat
. l2? Purchase. M!i,-[ther
.610 Utilities
.611 ftilltis-Flptrity_
.613 Utilities-Water & Sewer
.620 Garbage Collection
.630 Telephone & Telegraph _7 .14 ,?
.640 Insurance & Bonding 10.10 1,22 2,47 ,20 1.45 3.76 .5 6 .- 4 __ .05 I .n .-ni 0
.650 Dues and Memberships
.651 Prof. Activity Study
S.660 Travel
,661 Travel -ducation
.662 Trav l-Oth-r
,670. Equipment Rentn1s
-.71 EDquipment leases .72 .21 ,
S .672 Photocopy Equipmient
___. Microfilm
.690 Postage
.700 tNon-Hoopital -ab,
701 Se From Other sp
.710 Outside Monitorino
.720 Laundry
.721 Printing_
.722 Housekeeping ____ _______ ____ ______
.723 Dietary _____ ______ ____ ______ ______
,724 Security
.725 Data Processing__ _
.730 Interao. Aen. (Univer
i .740 Other. .4 10 -02

Fig. 9.--Continued.




Acct. Cost s of Ttal Cost Pir Patient Day :ost Per Activiy Base
STte 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5


TOTAL PURCHAFSD SERV. 10.10 2.41 2.47 .69 1.45 3.76 .70 56 .14 .37 .10 .12 .03 .06

.800 Depreciation _
,801 Deprec,-Maj. May. Equip 1.40 4.91 1.24 2.53 .40 1.12 .26 .65 .06 .23 .05 .11
p802 epre-Fixed Equin .17 I .04 .05 .01 .Oi -
.803 Dprc -Buildig 33888 2.75 8.80 13.08 10.11 14.47 .79 2.01 2.70 2.60 .11 .41 .58 .43
.804 Deprec.-Building Sery... 3.41 -98 14
.805 nere.-Land Im'rmvp.t 6 05 _07 i___ .01 .01 __01 -
To10 Arnrt- nf .Sart:-tp r.n;t __7 .01
.qS) Tntprpt _____ _____
.821 Interest-Short Trm Loan ,08 .02
.822 Interest-MAortgages 51.02 3.94 7.13 .30 18.98 1.14 1.E3 .19 .16 .33 .04
.8231 Interest-Bonds 1.62 4.80 4.97 .47 .99 1.28 .07 .21 .21
.824 Interest-Othnr
.830 Losson .Dis, of Assets
S.840 Loss Dis. Stocks.&__ ___ __
.85 Credits to Exense
.851 Credits to Exp.-esear.
.851 Credits to Exp.-Resear.
.853 Cre. to Exp.-Cen.St.Sup_
.854 Credits to Exp-Pharmacy
'___5i Cre. to E-p-Rep.&Ma'n.-
.856 Cre. to Exp.-Other
TOTAl OTHER FXPENSFS 85.90 13.73 21.18 20.13 17.61 33,45 3.95 4,84 4.16 4.53 .56 .98 .89 .75

.GRAND TOTAL 100, 110,0 00.00, 100.00 100.00 37.21 28.80 22.82 20.64 25.69 4.14 4.68 4.43 4.28


Full Time Eauqy. Emylov

Fig. 9.--Continued.



Moving from the adjusted direct expenses of all cost centers to

the full cost of the patient service cost centers required the step-

down operations previously discussed. The report that reflects the

distribution of costs from support to patient service cost centers so

that full costs may be calculated is the Hospital Cost Summary. The

basic input to this report was each cost center's total direct expense

as reflected on the Hospital Cost Report. The summary report displays

the same types of information as the detail report, i.e., dollars cost,

cost as a percentage of total, cost per patient day, and cost per ac-

tivity base. The information, however, is provided at 3 different

stages of the cost accounting system: Direct Expenses, Adjusted Di-

rect Expenses, and Full Costs.

Figure 10 is a partial copy of the Hospital Cost Summary Report.

It is meant to serve as an illustration of the manner in which the cost

inFormation is displayed. A complete copy of the Hospital Cost Sum-

mary Report for one hospital is displayed in Appendix I.

The final report prepared was the Comparative Hospital Cost Sum-

mary Report. This report summarizes the information found on each

Hospital Cost Summary Report. A comparative display of the information

allows the management of each hospital to evaluate its cost of provid-

ing specific services with other hospitals providing the same service.

Further, the comparison can be made for the 3 stages of costs. The

following tables reflect, in summary form, highlights of the compara-

tive analyses. The complete Comparative Hospital Cost Summary Report

is presented in Appendix I.

The information reflected in Table 1 is the same as that shown in

Figure 9, the Comparative Hospital Cost Report.



N.S. Admcin.
N.S. Supervision
M.S. Medical
..S. Medical
N.S. Medical
N.S. Medical
N.S. Surgical
N.S. Surgical
N.S. Surgical
N.S. Surgical
N.S. Surgical
U.S. Surg. Ortto
'.S. ICU
N.S. ICU Cornary
N.S. Psych.
N.S. New.or
N.S. -OR
N.S. Rec. Roo
N.S. DlI. 4 Labor
Central Sterile
I.U. Therapy
NS Eu-cation
Lab A.at3m-cal
Lab Clinical
Blood Banx
Radiology Diag.
Radioisotope Lab.
Pharnacy repackk & Ois.
Respiratory Therapy
Pulmnary functions
Rehab. P.T.
E.R. Nursing
Medical Staff
Interns and Residents
Medical Re food ProdLction
Oictary Cafeteria
Operation of Plant
Laundry Coll. & Dist.
Laundry Processing

1,942 .58
7,511 .89
13.0S3 2.14
16,231 1.92
16,232 1.92
16,665 1.S2
20,407 2.42
16.827 1.99
17,7;2 2.10
16,372 1.94
15. 64 1.84
16.497 1.95
15.737 1.86
li,065 1.31
13,008 1.54
15.362 1.82
40,6:4 4.81
4.456 .53
14.636 1.73
31,260 3.81
12,950 1.53
2.415 .28
9.569 1.13
51,371 6.08
12.173 1.44
12.314 1.46
4,605 .54
40,562 4.80
6,233 .74
32.343 3.83
5,795 .68
16,017 1.90
2.070 .24
4.286 .51
13,287 1.57
6,887 .81
2,707 .32
14.310 1.69
57.423 5.80
29,404 3.48
33,437 3.96
3.717 .44
32,769 3.13
6,602 .78
10.64 1.25




5,378 .59
7,643 .84
20,881 2.30
18.86 2.01
18.521 2.04
19,776 2.18
23.001 2.53
19.635 2.16
20,530 2.27
18.633 2.05
18.677 2.06
19,347 2.13
16.757 1.85
11.641 1.28
15.855 1.75
15,912 1.75
42,613 4.70
5,026 .55
16,281 1.79
31.983 3.52
13,318 1.47
3.140 .35
10,095 1.11
52.491 5.78
12,252 1.35
12.500 1.28
4.721 .52
42,021 4.63
6,382 .70
32,779 3.51
5.993 .66
16.782 1.79
2.159 .24
5,145 .57
14,033 1.63
7.048 .78
2,710 .30
14,714 1.62
59.513 6.56
30.334 3.35
43,405 4.78
3,776 .42
33,335 3.68
6,912 .76
10,664 1.29

42,739 4.71
35,376 4.01
39,429 4.34
41,073 4.53
52,317 5.76
42,055 4.63
42,944 4.72
37,756 4.38
38.948 4.29
40.864 4.50
26,665 2.94
20,193 2.23
32,351 3.57
29,048 3.20
.8,616 6.46
7,820 .86
23,354 2.57
37.374 4.12

11,738 1 29
58,837 6.48
13,599 1.50
14,064 1.55
5,469 .60
49,289 5.43
7,347 .81
35,933 3.96
6,834 .75
18.946 2.09
2,685 .30
7,647 .84
23,364 2.58

58.95 8.46
64.38 8.46
55.15 8.73
59.96 8.94
57.05 9.12
59.07 8.94
62.27 9.27
57.12 8.97
62.52 8.74
53.28 8.86
141.08 7.53
152.98 9.99
87.91 9.75
57.41 8.19
7.07 1.17
.94 .14
2.82 212.30

1.42 .31
7.10 .23
1.64 57.65
1.70 14.73
.66 41.32
5.95 12.76
.89 14.78
4.34 1.63
.82 .15
2.29 3.37
.32 5.96
2.82 9.75

Fig. 10.--A partial copy of the Hospital Cost Summary Report.

Table 1: Direct Expense Comparison

Selected Cost Centers as they appear on
the Comparative Hospital Cost Summary Report

-T0 NS-Medical
660 NS-O.R.
706 Lab-Clinic.Path.
757 ER-Nursing
864 Laundry-Proces.
910 Patient Acctg.
Total Hospital

.Percent of Total
610 NS-Medical
660 NS-O.R.
706 Lab-Clinic.Path.
757 ER-Nursing
864 Laundry-Proces.
910 Patient Acctg.

Cost Per Patient Day
610 NS-Medical
660 NS-O.R.
706 Lab-Clinic.Path.
757 ER-Nursing
864 Laundry-Proces.
910 Patient Acctg.
Total Hospital

Cost Per Activity Base
610 NS-Medical
660 NS-O.R.
706 Lab-Clinic.Path.
757 ER-Nursing
864 Laundry-Proces.
910 Patient Acctg.


$ 897 $


$ 14.47

$ -




* 24.90



$ 23,988 $



$ 3.57


13,220 $










$ 20.79



Table 2 reflects the adjusted direct expenses for selected cost

centers. This cost information represents the direct expenses ad-

justed for depreciation, insurance, amortization of start-up costs,

and interest expense. The effects of adding those 4 major categories

of indirect expenses to the direct expense can be easily traced by

comparing the data in Table 1 with the data in Table 2.

Table 3 indicates the effect of distributing the costs of support

service cost centers to patient service cost centers. It should be

noted that the support service cost centers show no "full cost." They

have been closed to the patient service cost centers. Those cost

centers which still remain open and for which a full cost is displayed

are those cost centers selling a service/product to the patient/phy-

sician. The price or charge of the service offered by the cost

centers should be equal to the full cost if each cost center is to

"break even," i.e., to operate at neither an accounting profit nor ac-

counting loss.

The foregoing discussion attempted to explain the procedural por-

tion of the evaluation method. The discussion centered around the de-

tails of collecting, processing, and reporting the cost data which

were later evaluated. As such, copies of, or extracts of, infor-

mation from all reports were provided in the text of this chapter.

All reports are shown in Appendix I. The only problem related to

these 3 steps was encountered during the data collection operation.

The manner in which the problem was alleviated was discussed. In all

cases, the procedures called for in the cost accounting system de-

velopment discussion in Chapter III were followed. This section has

demonstrated that by carrying out the instructions included in the

Table 2: Adjusted Direct Expense Comparison

Selected Cost Centers as they appear on
the Comparative Hospital Cost Summary Report

610 NS-Medical
660 NS-O.R.
706 Lab-Clinic.Path
757 ER-Nursing
864 Laundry-Proces.
910 Patient Acctg.
Total Hospital

Percent of Total
610 NS-Medical
660 NS-O.R.
706 Lab-Clinic.Path.
757 ER-Nursing
864 Laundry-Proces.
910 Patient Acctg.

Cost Per Patient Day
610 NS-Medical
660 NS-O.R.
706 Lab-Clinic.Path.
757 ER-Nursing
864 Laundry-Proces.
910 Patient Acctg.
Total Hospital

Cost Per Activity Base
610 NS-Medical
660 NS-O.R.
706 Lab-Clinic.Path.
757 ER-Nursing
864 Laundry-Proces.
910 Patient Acctg.


$ 2,307


$ 37.21

$ -


$ 20,881


$ 28.80



$ 31,418 $
408,566 1


$ 22.82

$ 4.68





$ 20.64







$ 25.96


Table 3: Full Cost Comparison

Selected Cost Centers as reflected
on the Comparative Hospital Cost Summary

610 NS-Medical
660 NS-O.R.
706 Lab-Clinic.Path.
757 ER-Nursing
863 Laundry-Proces.
910 Patient Acctg.
Total Hospital

Percent of Total
610 NS-MeacTcaT
660 NS-O.R.
706 Lab-Clinic.Path.
757 ER-Nursing
863 Laundry-Proces.
910 Patient Acctg.

Cost Per Patient Day
610 NS-MedTicaT
660 NS-O.R.
706 Lab-Clinic.Path.
757 ER-Nursing
863 Laundry-Proces.
910 Patient Acctg.
Total Hospital

Cost Per Activity Base
610 NS-Medical
660 NS-O.R.
706 Lab-Clinic.Path.
757 ER-Nursing
863 Laundry-Proces.
910 Patient Acctg.

$ 6,159 42,739
95,800 58,616
81,805 58,837
39,393 23,364

1,240,564 970,576



99.34 58.95
9.73 7.07
8.31 7.10
4.00 2.82

126.01 109.50












1,306,767 1,547,519












__ I_

cost accounting system development discussion, the reports called for

can be prepared. It will be the subject matter of the following

section of this chapter to evaluate that output.

Method Related to Output Evaluation
and Discussion of Results

After generating the required cost information, the next step was

to determine whether that output was the type of information antici-

pated. There were 2 aspects to the test required to determine this.

First, did the reports help internal managers in their decision making,

by providing measures of 1) the activities within their hospital, and

2) the comparable activity within other hospitals in order to compare

operations? The answers to these questions were determined by provid-

ing a group of hospital managers with the cost reports and then so-

liciting their response to several questions concerning the reports.

Second, the question of the reports' being able to provide comparable

data for external parties remained. This problem was resolved by de-

termining the reporting requirements of the identified external users

and comparing the system output with those requirements.

Evaluation by Hospital Managers

Copies of selected reports were presented to a panel of 13 eval-

uators. The evaluators were the administrators, assistant adminis-

trators for finance, financial directors, and chief accountants of the

5 Jacksonville, Florida hospitals participating in the research. Ap-

pendix K lists the evaluators by name, position, and hospital repre-

sented. The evaluation was accomplished by holding interviews with

each hospital's personnel separately. The interview procedure is

outlined below.

I. Distribute Reports to Managers. Copies of the following reports

were given each manager.

A. Hospital Cost Report. Due to the detailed nature of this

report, copies were provided for only 6 cost centers.

Those cost centers were:

610 Nursing Service-Medical
660 Nursing Service-Operating Room
706 Laboratory-Clinical Pathology
757 Emergency Room-Nursing
863 Laundry-Processing
910 Patient Accounting

This group of reports was selected because it contained at

least one of each type of cost center.

B. Comparative Hospital Cost Report. Copies of this report for

the same 6 cost centers listed in A. above were provided.

C. Hospital Cost Summary.

D. Comparative Hospital Cost Summary.

II. Discuss Reports. During this period of time the researcher dis-

cussed each report and its purpose. Questions from hospital

managers concerning the method used to prepare the reports, and

the interpretation of the reports, were answered during the


III. Managers' Evaluation. At the conclusion of the discussion, the

hospital personnel were asked to respond to several questions.

Appendix J contains the list of questions used for this purpose

and a recap of the responses. Additionally, each manager was

asked for comments regarding the output of the cost system in

relation to his needs.

The questions asked of the hospital managers were designed to de-

termine 4 types of information. First, questions 1 and 2 were directed

at determining the general cost accounting system's effectiveness.

Second, questions 3 through 6 were directed toward evaluating the

various elements of the cost accounting system. Third, questions 7

through 12 were directed toward determining the uses of cost ac-

counting system's output. Finally, the last question was directed

toward possible implementation of the cost accounting system. The re-

sponses to the questions will be grouped below by the 4 major topics


General System Effectiveness

The 2 questions relating to the overall effectiveness asked if

the cost accounting system could produce costs by program and by prod-

uct. "Program" in this case referred to the various programs identi-

fied in the current hospital cost accounting system model as depicted

by Figure 5, Chapter II. "Products," on the other hand, referred to

the outputs of the cost centers which are part of the proposed hospi-

tal cost accounting system model as depicted by Figure 6, Chapter II.

All evaluators indicated that the system provided both program and

product costs, but one evaluator (an administrator) did indicate that

there should be an additional calculation for the purpose of review-

ing costs of activities that provide a substantial amount of service

for outpatient clinics and emergency rooms. In essence, this would

result in a more finely defined product cost.

System Element Evaluation

The proposed cost accounting system has as its base proper ac-

tivity definitions, with a cost center designated for each activity.

Additionally, the activity measures must represent the output of each

cost center for the cost accounting system to be of value. Questions

3 through 6 were directed at determining whether the elements of the

cost accounting system did what they purported to do.

All evaluators responded that the activities were defined such

that they represented accurately the activities being performed within

their respective hospitals. Additionally, all of the evaluators were

in agreement with the activity bases that had been selected to measure

the level of activity within each cost center. There was one exception:

2 evaluators (one administrator and one chief accountant) indicated that

the activity base of "hours of care provided" used for the nursing

services cost centers might be a more meaningful activity base if it

were weighted by patient days of care provided. No recommendations

were made regarding a preferred weighting scheme.

The need to define so many activities, however, was not as unan-

imously endorsed. Of the 13 evaluators, 4 felt that too much cost

detail was presented, while 9 indicated that the amount of cost detail

was right. Yet, when asked if the number of activities defined was

too few, too many, or about right, only 2 felt that too many activities

had been defined. The other 11 felt that the number of activities de-

fined was correct. This seemed to point to a minor conflict. Some of

the evaluators felt the cost accounting system was too detailed, yet

when confronted with reducing the number of activities for which costs

would be collected, they indicated that the number of activities was


In general, the majority of the responses indicated that the cost

accounting.system was producing the right amount of information and

for the right number of activities. More important was the unanimous

response that the activities had been defined accurately and, with the

noted exception, the activity bases properly reflected the outputs of

the various cost centers.

Uses of System Outputs

The next 6 questions were asked in order to determine how the cost

data would be used. The first question of this series asked to what

groups of external users had the hospital managements been required to

provide cost data? The following is a summary of the responses re-

garding the 5 hospitals. Listed first is the requesting agency, fol-

lowed by the number of hospitals sending reports to that group within

the past 6 months.

Annual Price Commission Reports 2 hospitals

Price Exception Request 2 hospitals

Annual Medicare Report 5 hospitals

Special Reports to Public Groups
or persons 2 hospitals

Special Reports to Third-Party-Payers 1 hospital

The next question asked if the type of cost information provided

by this cost accounting system would have been helpful in preparing

any of the reports. Of the 13, 9 evaluators responded that it would

have been, and 2 gave a qualified "yes." The qualification was that

it would be helpful only if all hospitals adopted such a cost

accounting system and could report comparable information. The other

2 evaluators indicated that the information would not have been help-

ful for any of the reporting. This last opinion was expressed with

particular emphasis upon the reporting requirements of regulatory

agencies such as the Social Security Administration and the Price

Commission. The 2 evaluators giving a negative response stated that

both of the cited regulatory agencies, while indicating cost and sta-

tistical data could be submitted for evaluation, were reluctant to use

such data when it was submitted.

The evaluators then were asked to what agencies or groups they

would provide such cost information. All 13 indicated they would pre-

sent the cost data to their boards of directors, while 11 of the 13

stated they would provide it to governmental agencies, third-party

payers, and volunteer planning agencies. When asked if such infor-

mation would be made available to consumer groups, only 6 responded in

the affirmative.

All of the evaluators indicated they would use a cost accounting

system such as the one developed here as a budgetary and planning

model, but only 9 of the evaluators indicated they would use the in-

formation produced by such a cost accounting system as the basis for

the internal allocation of resources. Concerning pricing decision,

however, all of the evaluators stated that they would use the output

of this cost accounting system for establishing and justifying rates

or prices. Finally, all 13 stated they felt the cost accounting

system would be of more benefit to internal decision making than to

external reporting.

The preponderance of the responses to these questions tended to

favor this cost accounting system as an internal management decision

making tool. However, most evaluators would provide the output to

those groups outside the hospital who had a requirement for such data.

System Implementation

The last question asked if the evaluator would implement such a

system in his hospital. Of the 13 evaluators, 8 indicated they would;

3 gave a qualified "yes," stating they would prefer to study the Medi-

care implication further; and 2 indicated they would not. These last

2 indicated that the cost accounting system was adequate but that they

had to consolidate their records with other hospitals under the same

ownership, and the proposed cost accounting system would make them in-

compatible with existing reporting schemes.

In total, the evaluators who reviewed the cost accounting system

and its output generally were favorable toward the cost accounting

system. As the responses discussed have indicated, the cost account-

ing system seems to provide useful information. Most indicated they

would implement such a cost accounting system.

Requirements of External Users

The procedural aspects of the cost accounting system were tested

by generating the reports required. Hospital managers then evaluated

the output. The remaining step of the evaluation procedure is to de-

termine the reporting requirements of external cost information users

and to compare the output with those requirements.

Identified were 4 different external groups. They were 1) the

Social Security Administration, under Title XVIII of the Social

Security Act (Medicare); 2) regulatory agencies that administer price

control programs; 3) third-party-payers; and 4) interested consumer

groups. The reporting requirements of each will be outlined below.

The Social Security Administration

In 1965 the Congress of the United States enacted Title XVIII of

the Social Security Amendment of 1965, commonly referred to as Medicare.

Under the provisions of Title XVIII people over 65 years of age were to

have medical payments made in their behalf by the Social Security

Administration. Section 139f(b) of Title XVIII states the following:

The reasonable amount paid to any provider of
services with respect to services for which
payment may be made under this part shall,
subject to the (deductible and co-insurance)
provisions of section 1395e of the Title,
be the reasonable cost of such services,
as determined under section 1395x(v) of this title.1

The restrictions of section 1395x(v) were listed as follows:

The reasonable cost of any service shall be
determined in accordance with the regulations
establishing the method or methods to be used,
and the items to be included, in determining
such cost for various types or classes of
institutions, agencies and services...Such
regulations may provide for determination of
the costs of services on a per diem, per unit,
per capital, or other basis, may provide for
using different methods in different cir-
cumstances, may provide for the use of esti-
mates of costs of particular items or services,
and may provide for the use of charges or a
percentage of charges where this method
reasonably reflects costs.
Such regulations shall (A) take into account
both direct and indirect costs of providers
of services in order that, under the methods
of determining costs, the costs with respect to
individuals covered by the insurance programs
established by this subchapter will be borne
by individuals so covered and the costs
with respect to individuals not so covered
will not be borne by such insurance programs....

In order to define "reasonable costs," the Social Security Com-

missioner formed the Health Insurance Benefits Advisory Council. The

council consisted of representatives of the hospital, nursing home,

and insurance industries as well as representatives of Federal, state,

and local governmental agencies that purchase health care. After a

year of deliberation, a Principles of Reimbursement for Provider Costs

was produced. This document set out 4 general reimbursement princi-

ples and 12 principles pertaining to specific reimbursable costs.3

The specific principles indicated what indirect costs, in addition to

the direct costs, would be considered reimbursable. The general

principles hold more significance for this research. The pertinent

general principles are:

1. Costs related to patient care. Payments to
providers must be based on the "reasonable
costs" of services covered under Title XVIII
and related to care of beneficiaries.
Reasonable costs includes all necessary and
proper costs incurred in rendering the services,
subject to principles relating to specific
items of revenue and cost.

2. Determination of Cost of Services to Beneficiaries.
Total allowable costs of a provider shall
be apportioned between beneficiaries and
other patients so that the share borne by the
program is based upon actual services received
by program beneficiaries. To accomplish this
apportionment, the provider shall have the
option of either of the two following methods.

a) Departmental method-the ratio of
beneficiary charges to the total
patient charges for the services
of each department is applied to the
cost of the department.

b) Combination method-the cost of
"routine services" for program
beneficiaries is determined on the
basis of average cost per diem of
those services for all patients;

to this is added the cost of ancillary
services used by beneficiaries, determined
by apportioning the total cost of ancil-
lary services on the basis of the ratio of
beneficiary charges for ancillary services
to total patient charges for such services.

3. Adequate Cost Data. Providers receiving
payments on the basis of reasonable cost, must
provide adequate cost data. This must be based
on financial and statistical records capable
of verification by qualified auditors. The
cost data must be based on an approved method
of cost finding and on the accrual basis
of accounting.

Consequently, the reimbursement for "reasonable costs" as broadly

outlined in the statutes has been very narrowly defined by later regu-

lations and procedures. Of all the guidelines which explain procedure,

however, there seem to be only 2 requirements that cost and statisti-

cal information must meet.

Adequacy. Adequacy seems to imply the availability of detailed

cost and statistical data to at least the departmental level.

Verifiability. The cost information reported must be capable of

verification by qualified auditors.

Cost Information Required by
Regulatory Agencies

On August 15, 1971, Executive Order 11615, established a freeze

on prices, rents, wages, and salaries for a period of 90 days and es-

tablished a Cost of Living Council responsible for administering the

Economic Stabilization Program. Since that time price controls have

been in effect for the health industry. The Internal Revenue Service

was delegated the operational responsibility of developing reporting

procedures and formats.