Purpose: To demonstrate detrimental effects of revenue-based cost assignment (RBCA) in clinical practice and to compare that system with activity-based costing (ABC).
Method: Four cost-allocation methods including RBCA were applied to a comprehensive ophthalmology practice using typical accounting methods. Data were obtained by a survey of practitioners or practices and/or extracted from decision support and practice management systems. Inaccuracies and distortions in reported costs were enumerated. Accounting scenario analysis was used to predict resultant provider and managerial decisions. A sampling survey was used to analyze other specialties. ABC was applied to the practice.
Results: RBCA causes procedures with higher profitability to appear less profitable and those with lower profitability to appear more profitable. The distortion in reported costs, in medical settings, is often sufficient to incentivize providers with higher profitability to exit a practice and those with lower profitability to remain in it. The departure of providers causes the residual practice profits to decline. These detrimental effects occur in many subspecialties, which suggests a national effect on health care. ABC allocation can reduce cost distortions and eliminate detrimental effects.
Conclusions: RBCA leads to fragmentation of health care and a reduction in the profitability of multispecialty practices. Its use may slow the updating of reimbursement and help eliminate low-profitability specialties.