The Case for Implementing
Activity Based Costing
By Paul H. Monge, RT, RDMS, CRA, BS, Nicole Bolinger-Perez, RT(R), BS, MPA, and Kent Boysen, BS, MBA
The credit earned from the Quick CreditTM test
accompanying this article may be applied to the
AHRA certified radiology administrator (CRA)
fiscal management domain.
• ABC identifies profitable volumes to
give managers information to better
manage volumes. Managers must balance the demand for service while
maintaining a reasonable profit margin.
• Disparate systems work extremely well
for their intended purposes, but they
do not communicate with one another.
The strength of the data they hold individually may be leveraged when implementing ABC methodology.
• Mayo Clinic in Rochester, Minnesota
implemented a pilot of ABC to evaluate
CT services where there is a high volume, multiple service location for cost
comparison, variety of patient acuity
and service mix, and large capital
investments. The goal was to reveal the
actual cost of CT services at the procedural level.
The economic reality of
the healthcare industry is decreasing
reimbursement rates with increases in
resource utilization and projections for
an increase in demand for service. As service providers begin to feel the pain of
reduced revenue it’s becoming apparent
that only the fittest and leanest healthcare providers will survive. Imaging directors and managers, who have a significant amount of control of the healthcare
budget, must balance clinical and financial demands. However, knowing what
impact their operational decisions will
have on a budget is sometimes nebulous.
Knowing what costs are incurred and
how to reduce them in a dynamic healthcare environment is challenging, but not
impossible. This is especially true in radiology where the prevalence of information technology (IT) systems produces a
data rich environment and makes a fertile ground for implementation of activity based costing (ABC).
ABC breaks services delivered into
activities and then assigns cost of the
resources consumed to produce the ser-
vice in the activity. The fluidity of imag-
ing services makes the application of any
costing model a bit challenging because
resources associated with the provision
of imaging exams are amorphous. Ex-
actly how much does it cost to perform
a CT scan of the brain? The answer is a
resounding “it depends.” Was the patient
adult or pediatric requiring sedation?
Was the patient an inpatient, outpatient,
or ED? Of course it costs more to per-
form a CT scan of the brain on an ED
patient with head trauma than an ambu-
latory outpatient, but, exactly how much
more? And, although the cost associated
with providing a particular service will
vary, the reimbursement for the service
is usually constant. Profitability lies in
the difference. ABC may successfully re-
place the ill-fated methodology of gross
calculations, like dividing total cost by
total volume. This misguided attempt
to assign costs doesn’t provide the true
costs incurred at the procedural level.
Exacerbating this is the concept that in-
creasing volume will increase profitabil-
ity. There’s no sense in increasing volume
of unprofitable procedures. ABC identi-
fies profitable volumes to give managers
information to better manage volumes.
Managers must balance the demand for
service while maintaining a reasonable