Cost Centers

A cost center is a department or multiple units within an organization where a manager is completely accountable for costs. In an organizational setting, a manager is supplied with a chronicle of data which includes cost information, figures and reports of each department/units displaying the expenses of the organization. A cost center might be a division, an office, or an entire department, depending upon the organizational structure. Cost information should come close to perfection allowing the administrator to make assessments concerning a variety of changes in the environment. An example of a cost center is a Laboratory and Radiology. Diagnoses and Procedures can be grouped expenses for the intent of preparing and monitoring within an organization. According to our text, there are 23 Major Diagnostic Categories which serve as the basic classification system for diagnosis-related groups. DRGs are part of the prospective payment reimbursement methodology (Baker, J., & Baker, R.W., pg. 44). Care Settings and Service Lines can be grouped jointly presenting the expenses related to inpatient and outpatient services. Grouping revenue by care setting recognizes the different sites at which services are delivered (Baker, J., & Baker, R.W., pg. 36 &45).

An advantage of a Cost Center typically adds to revenue indirectly or fulfills some corporate mandate. Money spent on research and development for example, may yield innovation that will be profitable. Because the cost center has a negative impact on profit (at least on the surface) it is likely target for rollbacks and layoffs when budgets are cut. Operational decision in a cost center, for example are typically driven by cost consideration. Financial investment in new equipment, technology and staff are often difficult to justify to management because indirect profitability is hard to translate to bottom-line figures (searchcrm.techtarget.com, 2006). I do not believe that certain grouping would be completely inappropriate; each circumstance merits its own approval in the allotted situation. The usage of the entire grouping of centers may be needed for controlling and planning. This depends on the classification of the organization and what is needed for the organization to succeed.

Baker, Judith J., & Baker, R.W. (2011) Health Care Finance: Basic Tools for Nonfinancial Managers, 3rd Ed., Sudbury, MA; Jones and Bartlett.

Anonymous, (2006) What is Cost Center, Retrieved from: http://searchcrm.techtarget.com/definition/cost-center