Fixed and Variable Costs in the Emergency Department

EMERGENCY DEPARTMENT COSTS: FIXED AND VARIABLE COSTS 1

Case 5.3: Costs of Care in the Emergency Department

What is an example of a fixed cost in an emergency department? A variable cost?

Fixed costs are costs that do not change with changes in output levels (Smith, 2013). In the emergency department, fixed costs would remain constant regardless of the number of patients. An example of fixed costs in the emergency department would be the monthly salary of permanent staff such as emergency nurse practitioners and physicians. The salary is a constant amount agreed upon at the start of the contract period and would be a standard amount regardless of the number of patients one treats in a given period. The facility incurs the cost even when no patients visit.

Conversely, variable costs are costs that change with changes in output or activity levels (Smith, 2013). They increase with increases in activity levels and vice versa. An example of a variable cost in the emergency department would be patient care supplies such as medications. The cost of medication is influenced by the number of patients in a given period. The cost increases when patient numbers rise and decreases when numbers decline. If there are no patients visiting the facility, then there will be no expenditure on medications.

If emergency department volumes fell, how would its costs change?

Changes in the volume of production affect average fixed and average variable costs. Average fixed cost (AFC) is obtained by dividing the total fixed costs in a period with the total units of outputs (Shim & Siegel, 2008). It represents the proportion of fixed costs attributable to a single unit of output. A fall in production volumes implies that the organization produces fewer units of output. In the emergency department, this means a decline in the number of patients. Fixed costs do not change with production levels. However, reductions in production volumes increase average fixed costs (AFC) as the same cost is spread across fewer units of output (Shim & Siegel, 2008). For instance the fixed physician’s salary has to be shared across fewer patients, hence a reduction in AFC.

At the same time, the declining volumes reduce average variable costs (AVC). Average variable cost is the proportion of variable costs attributable to a single unit of output (Shim & Siegel, 2008). It is obtained by dividing the variable cost with the units of output in a given period (Shim & Siegel, 2008). Fewer patients imply that the facility spends less on costs such as medication that are dictated by patient numbers. A decline in variable costs coupled with a decrease in the number of patients results in lower average variable costs.

Thus, a fall in emergency department volumes would increase average fixed costs while decreasing average variable costs. The net effect on average total costs would depend on the extent of the increase in fixed costs and how fast variable costs fall as a result of the change in volume (Lee, 2019). If the increase in fixed costs is substantial, then a fall in volume will increase average costs unless variable costs can fall quickly enough to offset the increase in fixed costs (Lee, 2019). If variable costs do not fall quickly, then the increase in fixed costs will reduce profit margins by increasing average cost of production