Explains how activity‐based costing (ABC) can be applied to hospitals and outlines some previous research on its use and benefits. Reports a survey of US health administrators to establish their view of the cost hierarchy and uses the information in a numerical example based on a radiology department to demonstrate the differences between using traditional costing methods and allocations based on the cost hierarchies. Shows that many survey respondents were dissatisfied with their traditional costing systems and argues that the use of ABC could not only improve pricing and product mix decisions but could also enhance profitability by facilitating the management of activities and elimination of waste at all levels of the cost hierarchy, i.e. continuous improvement of processes.
The major problem in reimbursement rate setting has been to develop approaches capable of identifying the inefficient deliverers of service, while recognizing legitimate differences in environmental factors and service orientation. This article suggests several new analytical approaches, based on various types of Pareto comparisons. Pareto efficiency is a relative approach which as a by-product constructs a peer group of other op6rating units which are matched on environmental factors, level of outputs provided, and level of resources consumed. The analysis utilizes straightforward linear programming formulations or mixed integer LP's. The various approaches are demonstrated using actual data from 68 pharmacies. Medicaid prescription drug dispensing fees are used to illustrate a scheme for encouraging increased efficiency on the part of the pharmacies.
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