Comparing methodologies for the allocation of overhead and capital costs to hospital services

BACKGROUND: Typically, little consideration is given to the allocation of indirect costs (overheads and capital) to hospital services, compared to the allocation of direct costs. Weighted service allocation is believed to provide the most accurate indirect cost estimation, but the method is time consuming. OBJECTIVE: To determine whether hourly rate, inpatient day, and marginal mark-up allocation are reliable alternatives for weighted service allocation. METHODS: The cost approaches were compared independently for appendectomy, hip replacement, cataract, and stroke in representative general hospitals in The Netherlands for 2005. RESULTS: Hourly rate allocation and inpatient day allocation produce estimates that are not significantly different from weighted service allocation. CONCLUSIONS: Hourly rate allocation may be a strong alternative to weighted service allocation for hospital services with a relatively short inpatient stay. The use of inpatient day allocation would likely most closely reflect the indirect cost estimates obtained by the weighted service method.

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