Healthcare finance leaders use various terms regarding costing models. Paul Selivanoff, CPA, vice president of finance at St. Helena (CA) Hospital–Napa Valley, part of Adventist Health, clarifies the cost model terminology for this article:
Process-based costing (PBC): A type of cost accounting that offers CFOs a tool to better understand the resources consumed by tracking all resources used in providing the organization's products and services. It tracks direct costs and allocates indirect costs of processes and services. Overhead is spread across all billable services without regard to the relationship of the overhead within a specific procedure. Process costing is used to ascertain the cost of a product at each stage of the process.
Activity-based costing (ABC): An enhanced form of PBC that groups hospital expenses into cost pools, and then tries to find a driver between the cost pool and the billable services. It identifies activities in an organization and assigns resources associated with each activity or service according to actual consumption. This model assigns more indirect costs into direct costs compared to conventional costing models. It is closely related to PBC.
Micro-costing: An itemized list of the resources and their associated costs incurred in delivering a particular good or service to a customer. The list could represent a "best practice" or "normal consumption pattern" and is based on observations or interviews with knowledgeable personnel. The cost associated with each item could be budget cost, average cost, or current cost, depending on the purpose for which the cost project is undertaken. The emphasis of micro-costing is accurately identifying the direct variable costs.