The role of cost accounting



Health care policy and system reform in the United States has been debated over the years without a conclusive step for the federal government to take with regard to the issue. According to the US Census Bureau report of 2003 and 2008, about 60 percent of the population was covered by employment-based health insurance, about 27 percent of the population was covered by government-based insurance and the remaining population of about 15 percent had no insurance as shown in Figure 7 (Murdock, 19). As evident, a larger population is covered by private employment-based insurance while a relatively smaller amount of the population sector is covered by public health insurances. Notably, a considerable amount of the population section is not insured at all.

The United States spend most of its GDP on health care with about 14 percent of its GDP going to the healthcare sector (Robert, 9). Despite the expenditure there is still a great concern attributed to the affordability of these services, because eligibility to the health care access has strict limiting rules required for one to be insured in any form of insurance coverage that exists in the country. This has been the genesis of the health care reforms issues in the country in the recent years. With regard to the cost and managerial accounting concept, there is a lot for the United States federal government and other relevant policy makers to decide based on the fundamental concepts deeply articulated by Cost and Managerial accounting (Michael, 7).

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Cost accounting is mainly concerned with establishment of a suitable budget, operational cost and profitability of the money invested in a defined sector of the economy. In brief, cost accounting is mainly concerned with the financial value of the investment made through a chain of events from production through to the resultant value of the investment in addition the GAAP standards that should followed (Kurunmaki, 11). Managerial accounting on the other hand is concerned with the usefulness of the accounting information provided to the managers; such information includes the cost accounting details which together with other relevant accounting information provide the manager with pertinent and adequate information in order for informed decision making. Health insurance is a strategy which provides services and financial indemnities for the purpose of medical care in the event of illness or unpredicted disability from an illness or accident and it is normally administered by either private or public insurance plan (Robert, 11).

With ample knowledge on of cost and manegerail accounting, one will be in a better position to make decisions based on the facts articulated by the information he/she is equipped with. Regarding the debatable issue of the options on private and public insurance, this paper looks into details on the relevance of cost and managerial accounting concepts on the best financial decision to be made by either the state or the stakeholders. The paper will therefore shade more light on the private and public health insurance and suggest a succinct proposal on the better financial choice based on the cost and managerial accounting basics.

Private Health Insurance

Statistically, health care facilities of the United States and other European countries are owned by the private sector, these accounts for more than 60 percent of the health sector in the United States. This is due to the fact that majority of the people obtain their health insurance from their employers once employed (Murdock, 21). There are several private health care services available to the citizens of the United States. Some include;

Blue shield, Consumer-driven health care, High deductible plan, Health maintenance organization (HMO), Medical Underwriter, Flexible Spending account (FSA), Health saving accounting, and Preferred provide organization (PPO).

Most of the above insurance companies do not announce their yearly premiums in advance leading to a situation where an individual could find his/her premiums have increased greatly and consequently leading them to questioning of the validity of the insurance. Since most of the private insurance services are through employer sponsored plan, a larger number of the unemployed or self employed section of the population is left out. More so, employers can easily write off employees insurance premiums from their taxable incomes, which is not the case for individuals who have to pay their taxes on the same income that funds their health insurance. This has lead to an increased employee-dependence on the employer on the extent of health care administered to them and thus compromising the quality of the service (Robert, 8).

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As far as the private health care plan to cost and managerial accounting is concerned, there is a critical need to address the policies of the private health insurance policies. For instance, Health Maintenance Organization (HMO) has excessive cost cutting polices which dictate the kind of medical services to be provided to patients according to their own terms regardless of the actual need of the medical care. Evidently therefore, an individual may have to seek additional medical attention outside the health care policy that is supposed to be covering him/her. As a result, there is an increased extra cost on health care that should have been addressed by the insurance policies. In the managerial perspective, this situation defies the need to have insurance companies.

Public Health Insurance

According to the US Census statistics report of 2008, about 27 percent of the United States population is covered by public health insurance (Figure 7). They mainly include the elderly, children, disabled, veterans and the poor (Figure 8). Some of these government funded programs are;

  1. Medicare-This program covers the elderly citizens of above 60 years and also the disabled.
  2. Medicaid- This program concentrates on low income the category of earners including pregnant mothers, children and the disabled.
  3. State Children Health Insurance Program-This program concentrates on low income children who in one way or another failed to be covered by other programs such as Medicaid.
  4. The Veterans Administration-This program, as the name suggests provide services to the veterans.

As evident from the form of insurance program available to the public, the public health insurance is mainly concerned with majority of the population who are not eligible to obtain private insurance or unable to obtain the services due to the perceived low productivity level (Lewin Group study).

Proposed option

The proposed Universal health care being debated at the moment sets out that health care should be universal and continuous to each individual and family. The cost of the program should be borne by the government-funded institutions and thus making access to insurance a right and not the ability to pay insurance premiums. This way, the government will be able to manage the escalating cost of health care in the United States. Cost and managerial accounting leads to the truth through provision of information that is critical to the success in the delivery of health care services as its assists stakeholders in establishing the profit margins in their services. Accounting factors such as direct and indirect cost of health care provision will also be of public interest since this information will be able to establish cost per procedure data to actual estimates about people being served by the health care plan (Michael, 6).

Widening the scope of both the managerial and cost accounting fundamentals, there is a clear need for the result of what is invested to be useful and worth in terms of monetary value. Despite this need, there is an overall risk in the process of investment in the various sectors involved in processing the invested amount into profit. Managerial accounting is basically meant to inform the manager or decision maker of the best equipped decision to make with regard to any business. Notably, all companies the world over are mostly profit oriented and thus need insurance as an entity and to its workers who are the most important resource a company has at its disposal (Lewin Group study).

Insuring employees against diverse risk with regard to the firm functions is one of the most important investments a company can do. In doing so it is simply protecting the most crucial part of its productivity. Considering the nation as a whole, its people is the countries' most important resource yet there are hundreds of thousands Americans who die every year because of health insurance related issues. The major reasons for increased underinsurance according to the report America at risk, it is predominantly because of poverty, low income and the rising requirements for eligibility to health insurance access coupled with economic recession. The number of the uninsured was 45.7 million in 2007 and a percentage increase rate was about 15.3 percent according to Figure 6 (Families USA, 25).

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Despite spending more than 6 percent of its GDP on health care, the US is the only country among OECD countries that is largely criticized for its uneven and inequitable health care policy that has led to decreased number of insured people in the country. The cause of these problems centers in the policies that govern health care reforms of the country. The private sector owns the largest responsibility of insuring Americans. This dominance is the origin of health care issues that are being addressed without any substantial solution prevailing from this much issue. With reference to the managerial and cost accounting knowledge, it is prudent to increase funding and creation of new federal-based insurance schemes.

From cost and managerial perspective, the fundamental question that one needs to answer is, what will be the impact of reduced insurance scheme to the public and vice versa? This question is open to un-ending debate on the correct financial measures to take with an aim of increasing the country's productivity. Since cost and managerial accounting aims at finding suitable budgeting and operational costs before establishing the best possible decision to take, there is need for increased public health insurance based on the overall cost impact of the uninsured population as shown in (Figure 9) the increasing number of uninsured people (Families USA, 4). The United States law clearly outlines the necessity of the emergency department and all health care institutions to attend to all emergencies without asking for payment. After the patients involved are treated, the hospital or any health facility can go ahead and order payments from the victims or their insurance firms (Åke, 774). If it turns out that the victims involved were not insured and cannot afford to pay the hospital bill, the health institution will be forced to write off the expense as bad debts. Other situations that further support the need for an overall need to increase insurance cover which can only be through federal funding is the increasing number of people dying as a result of inadequate health care. This should not be the case in a country that invests the largest amount of its GDP on health care systems more than any other nation in the world. In managerial terms, this simply a failed investment as it does not address its fundamental purpose and there is need for urgent reforms.


As succinctly discussed, managerial and cost accounting fundamental facet shades more light on the issue that is largely affecting Americans in their bid to ensure equitable and continuous health care availability for all. The information provided clearly articulates the need and procedures to follow in ensuring public satisfaction with the health care policy in a country spending about 14 percent of its GDP on health care reforms. As a result, there will be an increased cost if a larger section of the public is uninsured. Hospital bills and ailments because of inadequate prevention measures will escalate due to this high cost of health insurance policies and medication procedures.

As proposed, it will be wise for decision makers to increase insurance to the public and in the process increase the productivity of the population while reducing cost of health care because of adequate preventive measures to diseases that can be easily controlled. The only option that the government can take in order to increase public insurance therefore is to fund more federal schemes that offer health care services to the less privileged and the needy. More regulations should be made in order to ease insurance eligibility requirements in both private and public insurance schemes. The result of these reforms will be increased productivity and reduced health care costs as a facet of managerial and cost accounting concepts.

Work Cited

  • Åke, B, Léger, Pierre T. "Information asymmetry, insurance and the decision to hospitalize," Journal of Health Economics, Vol 24(4), pp. (2005): 773-799.
  • Families USA. Americans at risk: One in Three Uninsured. New York NW,Suite 1100.(2009). 3-37
  • Kurunmaki, Liisa. Failing Organizations and Organizational Failures: The case of Accounting and Health Care. UK: London School of Economics and political science, 2006. 9-12.
  • Lewin Group study. New Report Finds 86.7. Million Americans Were Uninsured at Some Point in 2007-2008 Families press release summaries. 2009:6-9.
  • Michael F. Cannon, "All the President's Mandates: Compulsory Health Insurance Is a Government Takeover," Briefing Paper no. 114, Cato Institute, 23 Sept, 2009.5-9
  • Michael, Tanner, "Individual Mandates for Health Insurance: Slippery Slope to National Health Care," Cato Institute, Policy Analysis No. 565, April 5, 2006.5-7.
  • Murdock, S. "Income, Poverty, and Health Insurance Coverage in the United States U.S. Census Bureau: 2007." Issued August 2008.1-84
  • Robert L. Ohsfeldt and John E. Schneider, "How Does the U.S. Health-Care System Compare to Systems in Other Countries;" presentation given at an American Enterprise Institute conference on October 17, 2006. (2006).7-12