Chapter 23

Includes Supplements 4 through 8

The Revenue Equation

Supplement Four

• Pricing products and services– Billed charges– Cost reimbursement– DRG reimbursement– Capitation payment

Billed Charges

• Used by individuals and small insurance companies that cannot negotiate discounts or prospective payment

• The only way to lose money under billed charges is not to set your prices at a level that covers costs

Cost Reimbursement

• Historical payment system for Medicare

• Hospital was paid estimate of cost during fiscal year

• Actual costs (per patient day) were audited at year end

• Cost reimbursement provides few incentives for cost control

DRG Reimbursement

• Now used by Medicare, Medicaid and some insurance companies

• Each DRG has fixed payment• To make money a hospital must

– Admit a patient– Keep costs under charges

Capitation Payment

• First used by HMOs• Hospital is paid fixed payment per

month per enrollee • To make money

– Keep expensive services such as hospital admissions to a minimum

• Capitation and DRG both require sophisticated costing information

Supplement Five

Information Needs of Managers

Cost data is needed for . . .• Pricing• Cost Control• Strategic Planning• Measurement of Comparative

Efficiency

Wes Learns That . . .

• Since the early 1980s, rural hospitals have experienced revenue decreases due to– Shorter length of stays caused by DRG

reimbursement– Caps on payment by insurance

companies– Out-migration to larger metropolitan

hospitals

He can increase volumes by• Offering new products and services• Capturing volume from competing

hospitals

Supplement Six

Cost Accounting Taxonomies

Should the costing system be?• Job-order-costing or process-

costing?• Actual, normal, or standard costing

system?

Job-order-costing systems

• Used by firms that manufacture unique products

• Costs are accumulated on a job ticket– Direct labor– Direct materials– Overhead

• Examples include custom home builders, and auto repair shops

Process Costing Systems

• Used by companies that manufacture homogeneous products

• Costs are accumulated by department, then allocated to the products passing through the department that period

• Examples of companies that use process-costing include manufacturers of petroleum and ball bearings.

Should the system be . . .

• An actual cost accounting system?– Debit WIP for actual direct labor, actual

direct materials, and actual overhead

• A normal cost accounting system?– Debit WIP for actual direct labor, actual

direct materials, but use overhead rate

• A standard cost accounting system?– Debit WIP for standard direct labor, standard

direct materials, and standard overhead

Possible advantages of standard costing system• More accurate

information on why the hospital is losing money

• Easier methodology for assigning costs to patients

• Better inventory and cash control

• Mechanism for involving employees in cost savings through bonuses

• Better methodology for implementation of responsibility accounting

Supplement Seven

Designing Accounting Reports to Meet Information Needs

What is the difference between data and information?• Data are numbers processed by

the accounting system• Information is data that is useful

for decision making

The information needed is different to manage each of these contracts• Prospective payment contracts

– DRG Reimbursement– Capitation Payment

• Retrospective payment contracts– Billed Charges– Cost Reimbursement

Questions to ask in designing management reports• How does the hospital make or

lose money on this particular type of contract?

• What variables, therefore, should the manager monitor?

• What information must be sent on these variables?

Questions to ask in designing management reports• How will we gather the data to

prepare the reports?• What format should the

information take?• How timely must the information

be?

Identifying Information Needs

Capitation payment demonstrated

How do we lose money under capitation payment?• Unnecessary hospital admissions• Longer than necessary length of stay• Treatment of patients with higher

levels of care than necessary• Failure to keep patients well through

preventive medicine• Failure to prevent hospital infections

and complications

Variables to monitor

• Admissions• Patient days• Costs• Preventive medicine programs• Infections control programs • Etc.

Variables to monitor

• Admissions per 1000 population• Average length of stay per diagnosis• Intensity and volume of services provided• Preventive medicine services rendered• Infection rates, mortality and morbidity

rates• Cost per capita per year for each

employee

Sources of data

• Medical records• Outpatient clinics• Physicians records• Admissions and Business Office• Accounting• Actuarial data

How Timely?

• At least monthly

Global Functions of Proposed Costing System• Cost determination• Activity forecasting• Functional cost center budgeting• Performance reporting on a:

– Product level– Functional level

Supplement Eight

Designing the Pricing Module

Product Costing Detail

Final Product

IntermediateProduct

IntermediateProduct

PrimaryProduct

PrimaryProduct

PrimaryProduct

Standard Labor Cost

StandardHourlyWage

StandardHours

StandardLaborCost

X =

Take from AlmaCowdrey study

Three Options1. Industrial engineer study2. Borrow standards3. Use historical average as standard (use RVUs to determine)

Using RVUs to Determine Standard Hours• What is an RVU?

– A unit of measure of resource consumption (labor)

• Who develops RVU schedules– Professional associations such as the

American College of Pathologists

RVU Procedure

• Separate total labor into fixed and variable labor costs with linear regression

• Determine total RVUs by multiplying total procedures done by category by their respective RVU

• Divide total labor cost by total RVUs to get cost per RVU

• Multiply each test by its RVU cost