COST MANAGEMENT IN ACTION Health Care Providers Allocate Costs for Medicare Reimbursement

Since the advent of Medicare in 1966 to cover medical expenses of individuals who are aged, blind, and disabled, health care providers have been required to use cost allocation methods to receive reimbursement from the federal government for services covered by Medicare. The costs of health care service activities are allocated to the patient revenue-generating services. Some examples of service activities and patient revenue-generating services in a hospital are shown in the accompanying table. Which of the three allocation methods (direct, step, or reciprocal) would you recommend a hospital use in determining its cost of revenue-generating services for Medicare purposes? Explain your choice briefly.

Patient Revenue-Generating Services

Intensive care unit	Laboratory
Psychiatric care	Radiology
Coronary care	Emergency room
Surgery	Pharmacy
Service Activities
Dietary	Operation of hospital
Laundry and linen	Administrative and general
Admissions	Housekeeping
Social services
Nursing administration