Benchmarking, hospital cost comparisons. Julie Leung is the newly appointed president of Provincial University. Provincial University Hospital (PUH) is a major problem for her, because it is running large deficits. While it is not-for-profit, the province will reduce fund¬

ing if hospitals fail to meet their budgets. Sam Horn, the chairman of the hospital, tells Leung that he and his staff have cut costs to the bare bone. Any further cost cutting, he argues, would destroy the culture of the hospital. He also argues that the use of detailed cost studies is totally inappropriate for a medical institution because of

(a) the inability to have well-defined relationships between inputs and outputs and

(b) the problem of defining what a good output for a hospital is. He notes that he is “fed up with people equating continuous improvement at PUH with continued cost reduction. This is only a cost accountant’s view of the world. Our top priority is to help doctors save lives and to help people recover their health.”

Leung hears about a new benchmark cost analysis service offered by Market Insights.

She asks Horn to hire Market Insights to provide a benchmark cost report that pertains to PUH. Horn is not enthusiastic about doing so, but he complies with her request. The report includes the following:

a. Aggregate Hospital Cost Comparison

(average = 1.00)

Hospital E 0.69 Hospital C 0.70 HospitalJ 0.70 Hospital A 1.19 Provincial University Hospital 1.20 Hospital O 1.21

b. Diagnostic Group Cost Comparison Diagnostic Group Provincial University Hospital Market Average 25th Percentile Average of Best Quartile

(0-25th)

Angina, chest pain $27,600 $24,600 $20,760 $18,360 Asthma, bronchitis 18,480 15,720 12,480 10,800 Skin disorders, cellulitis 11,520 11,040 7,800 6,960 Renal failure and dialysis 9,120 6,600 5,040 4,320 Diabetes 8,040 6,120 4,440 3,720 Gastroenteritis 14,400 22,200 19,200 15,360 Required 1. Do you agree with Horn that the use of detailed cost studies at PUH is totally inappropriate?

Explain your answer and comment on Horn’s reasoning.

2. What inferences do you draw from tire MI benchmark cost report on PUH?

3. What use might Leung make of the MI benchmark cost report?

4. What criticisms might you anticipate Horn would make of the MI benchmark cost report?

5. What factors other than cost might Leung consider in evaluating Horn’s performance and that of PUH?