Costing and Managerial Accounting

Key Findings of the HFMA-IMA Initiative

December 5, 2017 11:46 am

In 2016, HFMA began a collaboration with the Institute of Management Accountants (IMA) on an initiative to develop a uniform cost-accounting approach that could be used to help prepare an organization for success in the evolving value-based healthcare environment. The initiative’s larger goal is to create cost accounting standards for the healthcare industry and a practical guide for those implementing or currently using a managerial costing tool.

As this is a comprehensive and ongoing project, it involves a number of steps. The first step was the survey of HFMA members conducted at the end of 2016, key findings of which are described here. The survey findings, based on responses from 41 participants representing both hospitals and other types of healthcare provider organizations, are intended to provide a baseline for the larger initiative. Comparing the 2016 survey findings with those from two prior studies performed in 1994 and 2004 provides a perspective on how the industry has evolved in its perceptions and use of cost accounting systems over the past two decades. a  Although the number of respondents is somewhat limited, the responses obtained are consistent with trends in the adoption of ABC specifically, and the adoption of new management techniques more generally.

Impact of Costing Systems on Enterprise Performance

Survey respondents were asked to rank their performance in a variety of areas, ranging from “best practice” to “acceptable” to “needs improvement.” Their responses are depicted in exhibit below, indicating that most of the organizations regard their performance as acceptable in the areas of accounts receivable and net revenue, general ledger structure, and payroll and FTEs. Conversely, slightly over a quarter of respondents believe their performance in the areas of statistics and RVUs needs improvement.

Organizational Performance (Percentage of Respondents)

Looking more closely at organizational performance in these latter areas, the exhibit below shows that the organizations that believe their organizations are best-practice performers are most likely to disagree with the statement that their accounting systems do not provide all the information required for managerial decision-making, while those that believe their systems need improvement are most likely to agree with this statement.

Agreement That Accounting System Fails to Provide Information for Managerial Decision-Making With Respect to Statistics/RVU Performance

This finding provides strong support for the idea that a healthcare organization’s overall performance is closely tied to the ability of it accounting system to deliver the necessary information for decision-making, including accurate cost information.

Satisfaction With Costing Systems

How satisfied are healthcare organizations with their costing systems? The 2016 survey asked a series of questions to answer this question, with responses provided on a five-point Likert scale ranging from “strongly agree” (1) to “strongly disagree” (5), and with “neither agree nor disagree” being the midpoint. The exhibit below lists these questions and the responses, both for the 2016 and the earlier surveys.

Satisfaction With Existing Accounting System

The responses to these questions indicate that respondents are, on average, somewhat dissatisfied their accounting systems. Although there was agreement (mean = 2.30) that organizations’ accounting systems provide accurate and useful service or product cost information, there was also agreement (mean = 2.71) that current accounting systems do not provide all the information required for managerial decision-making, with more than half (56 percent) of current respondents agreeing or strongly agreeing with this statement. Not surprisingly, nearly three-quarters of respondents agreed or strongly agreed (with mean = 2.20) that there was a need for better managerial costing systems to support managerial decision-making. In this regard, although 73 percent of respondents’ costing systems are capable of measuring costs at the procedure level, the percentages of respondents’ systems that can do so at the activity level, at the longitudinal level, and on a per-member-per-month basis (perhaps less applicable for some) are only 46 percent, 12 percent, and 7 percent, respectively.

The survey results point to numerous areas for improvement in costing systems. Although there was slight agreement on average (mean = 2.78) that organizations’ costing systems measure the impact of readmissions, many systems (47 percent) do not. Only one-third of costing systems measure the cost of waste in care processes (i.e., duplicative/unnecessary tests or procedures) and less than one-third of systems measure the cost of adverse events (mean response = 3.14).

One goal of an organization’s costing system should be to support operational improvements. In this regard, respondents’ thoughts were mixed. On the positive side, there is a belief that accounting systems provide information useful for determining the cost of the various activities performed by an organization, and that these systems provide information useful in guiding process improvement efforts (mean = 2.26). Yet there also is a strong belief that it is important to do better: “Improvement in tracing the costs of activities performed would facilitate process improvement efforts” was the statement which received the highest level of agreement (mean = 1.56). Furthermore, there was slight agreement (mean = 2.92) with the notion that considerable operational improvements had been achieved but were not reflected in current financial reports. This perception is unfortunate because respondents also said they strongly feel that improvement in service or product costing information would give their organizations a competitive advantage (mean = 1.68).

A comparison of the results of the 2016 survey with those from 1994 and 2004 shows a great number of similarities among response. Organizations have consistently reported the failure of accounting systems to provide information required for managerial decision-making and cited an associated need for improved costing systems to support managerial decision-making.

On the positive side, there is a greater belief now than at the time of the earlier surveys that accounting systems are providing accurate and useful service and product cost information, that the cost of activities can be determined, and that the systems provide information useful for supporting process improvement efforts. These improvements can be directly traced to the wider adoption of activity-based costing systems, the focus of the larger feature article that this sidebar is intended to supplement.

Raef Lawson, PhD, CFA, CMA, CPA, is vice president, research and policy, professor-in-residence, and editor, IMA Educational Case Journal, Institute of Management Accountants, Montvale, N.J.


a. Lawson, R., “The Use of Activity Based Costing in the Healthcare Industry: 1994 vs. 2004,” Research in Healthcare Financial Management, Jan. 1, 2005. 


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