Standard costing concepts can also be applied to services. Standard service costs are similar in concept to standard product costs. In the medical field, costs of caring for a patient have been increasing at a high rate for many years. Hospitals, for example, have often been paid on a retrospective basis. Essentially, they have been able to recover (from Medicare or their insurers) most of what they spent in treating a patient. Hospitals have thus had very little incentive to control costs. Some argue that retrospective payments encourage hospitals to acquire new and expensive technology and to offer more and more complex procedures. Prospective payments have emerged as an alternative to retrospective payments. Recently, a new type of prospective payment has emerged known as “per-case payment.”

Required:

Conduct an Internet search on per-case payments, and answer the following questions:

1. What is per-case payment?

2. Explain the following: “Per-case payment can become a viable payment scheme only if the hospital’s case mix can be properly measured.”

3. Discuss the merits of using diagnostic related groups (DRGs) to measure case mix.

4. Patient management categories (PMCs) have been suggested as an alternative approach to measuring case mix. Define PMCs, and discuss their merits.

5. Describe how the per-case payment approaches are forms of standard costing discussed in this chapter.