Costs, Fixed versus Variable

Identification

By identifying and controlling all relevant costs, healthcare managers are better able to earn a profit and be successful. Fixed costs are those that generally do not vary between payment intervals. Generally, these costs cannot be altered on a short-term basis because of contractual agreements. Variable costs are those that increase with increasing units of service. For example, an increase in the number of patient visits would result in the use of additional materials, extra labor, and wages. One way to determine fixed costs is to consider the expenses that would continue to be incurred if a healthcare facility were to be temporarily closed and no patients were to be treated. In this case, rent, fees, and loan payments would still be due. They generally do not change with increases or decreases in facility activity. It is important to note that fixed costs are unvarying only within a certain range of facility activity. For example, if the facility activity grows enough to require additional space or additional employees, the fixed costs associated with rent or salaries will change as well. Variable costs are those that change as the level of facility activity changes.

Examples of the variable costs within a healthcare facility would be supplies used for each patient visit, and wages for hourly, part-time employees. These costs are driven primarily by the facility's activity and would stop only if the facility were to close for a period of time, such as a month. Once the difference between fixed and variable costs is understood, it is important to know how to distinguish one from the other. For instance, consider a clinic that has fixed costs of $3,800 and variable costs of $7 per patient. To cover its monthly expenses, the clinic would have to earn $3,800 in fees plus $7 per patient treated. If the clinic had only one patient visit per month, it would have to charge $3,807 for that one treatment to cover its fixed and variable costs! If the practice had 1,000 patient visits during the month, its total costs would be $10,800 ($3,800 in fixed costs plus 1,000 patient visits at $7 each). Therefore, this clinic would only have to charge $10.80 per patient visit to cover its fixed and variable costs. This example illustrates that the amount of fixed costs that each patient visit must cover depends on the total number of patient visits across which these fixed costs are to be spread.

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