Doctors are extremely well-educated in medicine, but when it comes to knowing the costs of the services they provide, they may be in the dark.

To remedy this situation, 20 accounting professors from across the country, lead by Professor Gary Siegel of DePaul University's School of Accountancy, are conducting studies to measure the costs of medical service delivery using an accountancy method known as activity-based costing, or ABC. ABC was developed in the 1980s for manufacturing companies to help them compete in global markets and has since been applied successfully to the retail and service industries. The accountancy professors' work has been commissioned by professional medical associations to help their members better understand the business part of their practices.

"Accounting case studies confirm that ABC provides a more accurate way of measuring cost per product or service than traditional accounting methods," said Siegel.

His teams are conducting ABC studies at 80 medical practices in Chicago, New York, Los Angeles, San Francisco, Baltimore, Oklahoma City, Dallas, Atlanta and Miami. Cost studies have been completed for neurosurgery, thoracic/cardiac surgery and orthopedic practices. Studies for cataract surgery, gastroenterology and plastic surgery are expected to be completed by early summer.

In addition to Siegel, Gail C. Eynon and Nancy Hill, DePaul University assistant professors of accountancy, were among the 20 accounting professors researching the cost studies.

To conduct the study, the accounting teams spend several weeks observing work at the medical practices. Using the ABC approach, they identify and group doctor office activities into processes, or related work activities. Examples of processes include servicing patients, billing, providing information to third parties, scheduling surgery and maintaining facilities.

"The cost models we're constructing are based on a two-step ABC allocation method," said Siegel. "We trace dollars actually spent on each process, then we trace the process cost to the service delivered."

Siegel believes that ABC has the potential to alleviate two problems physicians face with respect to the costs of running a medical practice in the age of managed care. "Doctors can use ABC to better understand and control their costs in order to run their businesses more efficiently," Siegel said. "And the government and managed-care companies can use ABC to determine equitable reimbursement rates based on the money doctors actually spend to perform procedures and deliver services."

Siegel has testified about the study's findings before the U.S. General Accounting Office, which is evaluating the way the Health Care Finance Administration determines doctor reimbursement levels for Medicare. Current reimbursements by Medicare for practice expense are based on a complex formula that does not involve cost-related variables.

Siegel believes that in an environment where medical practice revenues are capped or falling, strategic cost management is an increasingly important way for medical practices to remain profitable.

"Doctors who use the ABC cost models will be able to benchmark their practice expenses against those of other practices and pinpoint which processes need improvement," he said.

"These studies are important because the way costs are measured has significant impact on the delivery of health care."

EDITOR'S NOTE: Siegel can be reached at 312/362-8782.