Total Indirect - Multi-Pedia

Indirect % of Net Revenue = Indirect Costs / Net Patient Revenue

This is one of the three major cost areas of Hospice.

Indirect Costs - Costs other than Direct Labor and Patient-Related costs.

They can be categorized into three sub-categories:

Indirect Labor - All labor that is NOT Direct Labor: CEO, CFO, Clinical Managers, Medical Director, QI, Education, Medical Records, HR, Finance, IT, Housekeeping, Maintenance, etc.
Facility-Related - Costs related to your building or structure from which your organization coordinates or provides services. Included are: Rent, Utilities, Building Maintenance, Building Depreciation, Property Taxes, Building Loan Interest, etc.
Operating Expense - This category of Indirect Costs include all costs that are not Facility-Related or Indirect Labor. These costs include: Answering Service, Bank Service Charges, Audit Costs, Office Supplies, Printing, Postage, Telephone, Marketing Supplies, Continuing Education, Dues and Subscriptions, Computer Support, Computer Expense, etc.

Cost Category	Average	Acceptable	Excellent
Total Indirect Costs	35%	31%	26%

Indirect Costs are not fun to deal with. Indirect Costs are some of the toughest costs to keep under control in any organization.

With Indirect Costs, you have to draw a line in the sand and say, "This is all the overhead we're going to allow," and then force Indirect Costs back behind the line. If you don't take this hard approach, you will see Indirect Costs "creep up" every year. One or two percent can make a big difference to your bottom-line.

The two ways to reduce Indirect Costs are:

Increase census WITHOUT adding more Indirect Costs (especially staff)
Reducing the number of Indirect FTEs

Of course, the best thing is to do BOTH of these points simultaneously. It is ALWAYS healthy for an organization to get rid of B and C players.

Indirect Costs are a pain, but they must be continually examined. As MVI says, "It is impossible to intelligently direct resources and energy without precise knowledge." All MVI charts of accounts contain the detail to intelligently direct your efforts in managing Indirect Costs. Use the Management Application (MA) and Benchmarking Application (BA). They will tell you what you need to work on. Also, common sense and questioning can usually lead you a long way in the right direction.

Why does MVI not recommend allocations of Indirect Cost in the General Ledger?

Because the allocation bases most often used for the allocation of Indirect Costs to departments and business units in the General Ledger do not represent reality. They are arbitrary at best and in most cases, are always suspect. It is better to isolate Indirect Costs and use a Contribution Margin approach to evaluate department or business segment performance. There should be enough contribution to offset Indirect Costs and provide for positive residual. If allocations are necessary, it is best to do this in financial report writers using calculations which can be adjusted easily.