Patient's Hospital (Cost Allocation, Step Method): The annual costs of hospital care under the medicare program amount to $20 billion per year. In the medicare legislation, Congress mandated that reimbursement to hospitals be limited to the costs of treating medicare patients. Ideally, neither nonmedicare patients nor hospitals would bear the costs of medicare patients nor would the government bear costs of nonmedicare patients. Given the large sums involved, it is not surprising that cost reimbursement specialists, computer pro- grams, publications, and other products and services have arisen to provide hospital administrators with the assistance needed to obtain an appropriate reimbursement for medicare patient services.

Hospital departments may be divided into two categories: (l) revenue-producing departments and (2) nonrevenue-producing departments. This classification is simple but useful. The traditional accounting concepts associated with "service department cost allocation," while appropriate to this context, lead to a great deal of confusion in terminology since all of the hospital's departments are considered to be rendering services.

Costs of revenue-producing departments are charged to medicare and non- medicare patients on the basis of actual use of the departments. These costs are relatively simple to apportion. Costs of nonrevenue-producing departments are somewhat more difficult to apportion. The approach to finding the appropriate distribution of these costs begins with the establishment of a reasonable basis for allocating nonrevenue-producing department costs to revenue-producing depart- ments. Statistical measures of the relationships between departments must be ascertained. The cost allocation bases listed in Exhibit A were established as acceptable for cost reimbursement purposes. The regulated order of allocation must be used for medicare reimbursement.

A hospital may then use either a simultaneous solution method to the cost allocation problem, or they may use the step method. If the step method is used, the order of departments for allocation is the same order as that by which the depart- ments are listed in Exhibit A. Thus, depreciation of buildings is allocated before depreciation of movable equipment. Cost centers must be established for each of these nonrevenue-producing costs that are relevant to a particular hospital's operations.

Percentage usage of services by one department from another department were as follows:

The proportional use of revenue-producing department services by medicare and other patients was as follows:

Required: What is the amount of the reimbursement claim for medicare services, using the step method of allocation?

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Exhibit A 5-37 Bases for Allocating Nonrevenue Department Costs to Revenue-Producing Departments Nonrevenue Cost Center Depreciation-buildings Depreciation-movable equipment Employee health and welfare Administrative and general Maintenance and repairs Operation of plant Laundry and linen service Housekeeping Dietary Maintenance of personnel Nursing administration Central supply Pharmacy Medical records Social service Nursing school Intern/resident service Basis for Allocation Square feet in each department Dollar value of equipment in each department Gross salaries in each department Accumulated costs by department Square feet in each department Square feet in each department Pounds used in each department Hours of service to each department Meals served in each department Number of departmental employees housed Hours of supervision in each department Costs of requisitions processed Costs of drug orders processed Hours worked for each department Hours worked for each department Assigned time by department Assigned time by department