Fixed Costs

Fixed costs are costs that do not directly change as patient volumes increase or decrease. This definition assumes that costs will be fixed within an expected range of activity or volume for a specified time period. Alternatively, costs will not remain constant if there are extreme fluctuations in patient volumes.1 A hospital may estimate that patient days in the coming year will range from 30,000 to 45,000. If it is unlikely that utilization will fall outside of this estimate, the range serves as the hospital's relevant range.2

Examples of fixed costs include those related to facilities and equipment, certain salaries, and other costs such as information systems. Assets intended to serve a long-term purpose remain fixed in the short term, regardless of volume. However, no costs remain fixed over the long term, because patient volumes generally continue to increase over time. With this trend, fixed costs increase as health care organizations acquire additional property and equipment, labor, and other assets. Conversely, if patient volumes decrease significantly, fixed costs will decrease to reflect a reduction in fixed assets.3

Fixed costs do not represent the total costs incurred by a health care organization. Total costs consist of both fixed and variable costs. Whereas fixed costs do not directly change in relation to the number of patients, variable costs, such as medical supplies and pharmaceuticals, are directly related to patient volumes. Although variable costs change directly with a change in volume, the variable cost per unit is expected to remain relatively constant. In contrast, fixed costs per unit change inversely with volume. As patient activity increases, fixed costs decrease at a decreasing rate, as illustrated next. The fixed cost is shared across a greater number of patients, and as a result the assets are used more efficiently.4

Health care organizations may also categorize costs as semifixed or step-fixed. Semifixed costs are defined as costs that are fixed within a certain volume range; however, there may be several semifixed ranges within an organization's overall relevant range. If current hospital staffing can only accommodate 40,000 patient days, additional labor is required to staff 45,000 patient days. Labor costs would then be fixed from 30,000 to 40,000 patient days and then from 40,000 to 45,000 patient days, but they are not fixed over the entire relevant range.5

Individual organizations differ on how to categorize fixed and variable costs. Labor costs or salaries serve as an example. The labor cost required to perform a CT scan may be considered variable, because more patients requiring the test will increase the cost of the service. However, a nurse supervisor salary may be fixed over the relevant range. It does not change in the short term but will change in the long term as patient volumes shift or the facility reorganizes. Despite the different classification methods, fixed costs represent a significant portion of the health care organization's total costs and operating structure.6