2. You are concerned and want to get in front of this prior to the directors’ meeting.

You know that historically the labor expense runs at about 32% of net revenue and supplies run at 20%. Considering that the volumes of service are not significantly different you surmise that these inputs must be more expensive, so you call an urgent meeting with the manager. In the meeting with the manager, he is mystified that you are concerned. He told you he was working with a multidisciplinary team to improve the care of these patients. The goal was to decrease the total cost of care to the hospital and he had made changes to accomplish that goal. You tell him that is fine, but that you want to understand more. You learn that the labor expense increased because the staffing was changed and that this change has improved the process of care significantly. You learn that these process improvements have reduced complications that led to rework, increased need for staff on the floor, and a reduction of the length of stay in the hospital. You are impressed, but want to make sure this is quantified. You learn that the finance staff is working on a new method for costing the process of care called time-driven activity-based costing and you will have to wait a few months for that to be complete. You are fine with that but want to go to the directors’ meeting knowing how much expense needs to be offset in other areas of the hospital.

a. How much has the labor expense increased when compared to the past?

Satisfied that you have a better idea about the labor expense you begin to explore the supply expenses. The manager explains the increase in supply expense may be related to a new cardiologist. This new physician is not using the standard supplies and has introduced a new, more expensive stent. You learn that these changes have not improved the quality of care and this has not contributed to improving quality, safety, or decreased expenses elsewhere.

b. How much has the supply expense increased when compared to the past? Has this increased supply expense enhanced value or eroded value?

With this information you are prepared to go to the directors’ meeting and begin to plan on interventions that can be taken for improvement.