Carroll University Hospital This report doesn 't describe where our costs are generated. We're applying one standard to all patients, regard- less of their level of care. What incenive is there to identify and account for the costs of each diagnosis? Ann Julian, M.D., Chief of the Department of Medicine (DOM) at Carroll Univers ity Hospital (CUH), was reviewing her most recent cost report. Disappointed with its contents, she was meeting with Jonathan Haskell, the department's administrator, who had worked with the hospital's finance office to generate the report. She continued: Unless I have better cost information, all our attempts to control costs will focus on decreasing the number of inpatient days. This limits our options. In fact, it's not even an appropriate response to the hospital's reim- bursement constraints. BACKGROUND With the advent of DRGs and the growth of managed care, CUH had felt the pinch of third parties' attempts to control hospital costs by putting hospitals at increased risk. Carroll, like many other tertiary care institutions, had dele gated cost control responsibility to its middle managers, re- quiring department heads to become involved in the hospital's budgeting process, and to be ac countable for the costs associated with the ir departments' activities. After some discussion with the board, the Vice President for Medical Affairs had agreed that each clinical department chief should assume responsibility for the costs associated with caring for patients in his or her department. By enlisting the participation of chiefs in the cost control efforts Carroll's senior management hoped to improve the hospital's overall financ ial performance. In the Department of Medicine, Dr. Julian had decentralized this responsibility to the directors of the vari- ous divisions, such as general medicine, cardiol ogy, oncology, and gastroenterology. THE PRESENT SYSTEM The hospital's present cost accounting system was based on an average standard costing unit applied to each department. For inpatient costs, the system used a cost-per-bed-per-day, known as a bed/day. For operating rooms (both inpatient and emerg ency), the standard unit was a cost per-op- eration or procedure To calculate unit costs, the finance office began with a department's direct costs (shown in Ex hibit 1). It then allocated indirect costs, such as maintenance and depreciation, according to a method that it had developed to report costs to third parties, such as Medicare. The method used al location bases such as square feet, salary dollars, and beds. For a given cost, the basis ofalocation was designed to distribute indirect costs fairly across departments. Once all direct costs had been assigned to departments, and indirect costs had been allocated, the finance staff would calculate the average cost per unit by dividing the department's total costs by the number of activity units for that department. Exhibit 2 shows the average cost per unit for several hospital departments. After reviewing the costs and activities of the DOM, Dr. Julian felt that while the costs in gen- eral medicine were fairly well-defined, the costs in divisions where there were procedures posed some problems. This was especially true in the divisions of gastroenterology, cardiology, and on cology. She commented: Costs in divisions where there are procedures are less amenable to assignment into cost categories. This is mainly because of the age range and diversity of the patients, but it's also due to the distinctions among the subspecialties in medicine. Bocaue of this, the present cost accounting system is of little use for many cases. This is ex tremely frustrating, especially since the hospital is expecing me to use the aveage cost per day approach to manage costs in the department. The average figure simply does not account for the real use of dinical resources by patient undergoing procedures It was because of this concern that Dr. Julian had asked Mr. Haskell to go to the finance office for assistance. Howe ver, when he deseribed Dr. Julian's assessment of the problem to the finance The finance folks told me that Dr. Julian just doesn't understand. According to them, their system is ideal for comparative purposes. It allows them to quickly compare the costs of services among different depart- ments within the hosptal. It also helps them compare the cost of a particular department at Caroll with a similar department another hospital. Additionally, they can use the infomation to estimate the cost of treating an entire illness at Caroll. According to the finance office figures, the cost of a patient with pancreatitis would be about $3,709 (S927.25 x 4), since an average patient with this discharge diagnosis required about four days in the hospital (depending somewhat on the degree of complications). According to Dr. Jul- ian: Some patients, especially ones with complicated pancreatitis, use more resources than others. This is mainly because the testing and therapeutic treatment of patients varies widely. Some patients roquire more or fewer diagnostic and therapeutic interventions, depending on their admitting dagnoses. ERCPS Endoscopic Retrograde Cholangiol Pancreao graphy procedures], for example, ae used excdusively by pa tients in gastroenterology Somehow, a good cost accounting system must recognize these differences I also don't want my d partment to appear overly costly simply because some patients don't oonfom to the norm. The cuent cost accounting system doesn't acoount for the differences among patients, and it doesn't give me the daa Ineod to manage costs. THE USE OF CLINICAL DISTINCTIONS After some discussion. Dr. Julian and Mr. Haskell convinced the finance office that the average unit cost calculation could be revised to account for the differences among patients in different divi- sions. In an effort to address these differences, Mr. Haskell suggested that the finance office do an analysis of the patients in three of the divisions where there were procedures: Gastroenterology, Cardiology, and Oncology (although there were other divisions that did procedures, these were the major ones) With the help of Dr. Julian, Mr. Haskell calculated time and material estimates for each type of patient stay. For example, he estimated that, in general, more medication was used on oncology pa- tients than on general medicine patients. Also, oncology patients were likely to need more of a vari- ety of other resources, such as lab tests, drugs, and X-rays. Mr. Haskell conferred with the finance office about the best method to apportion indirect costs among the three divisions. After much discussion, they decided to apportion most of these costs ac- cording to the number of patient days per division. They made some adjustments to reflect unusual circumstances, however. Although this new system maintained bed/days as the standard costing unit, Mr. Haskell pointed out that it was more accurate than the one currently in use because there were now three av erage costs per bed/day: one for gastroenterology, one for cardio logy, and a third for oncology. Ex- hibit 3 contains this infomation. Dr. Julian and Mr. Haskell performed some calculations and compared the differences between the two systems. They computed the cost of a patient with pancreatitis using each system. Dr. Jul- ian estimated that a somewhat complicated pancreatitis patient required a 4-day stay in the Gastro- enterology division. They also compared the costs of patients with two odher diagnoses. One was cardiac dysrythmia, which required a cardiac catheterization and some electrophysio logy studies. The other was a patient with liver cancer, who would be tested and diagnosed in the oncology divi- sion 2 of 8 From their findings, Dr. Julian and Mr. Haskell concluded that this specialty-based system could greatly increase Dr. Julian's ability to identify and control costs. However, Dr. Ju lian contin- ued to harbor some concems. INTENSITIES OF CARE Although the specialty-based system was an improvement over the average bed/day calculation it still had problems. Dr. Julian was particularly disturbed about the intensities of medical and nurs- ing attention given to patients within each division. She explained: Some patients with cancer require more mursing and medical care than others, even if both patients are in the oncolbgy division. The same is true in other divisions. Even with the improvements we've made, were not considering this. The system makes it appear as if all oncology patients receive the same amount of care on a given day in the hospital. Froma dinical penspoctive, this just isa't true. Because of this problem, Dr. Julian felt that the divisional breakdown was still not a sufficiently accurate measure of the costs of care rendered to different patients. Work ing on her own, she de- veloped a third cost accounting methodology based on levels of care delivered by the nursing and medical teams. In developing this new approach, she divided the entire department's costs into three categories that were quite different from those in the specialty-based system: daily patient mainte- nance, medical treatment, and nursing care. The daily patient maintenance category was for the basic hotel and meal portion of a patient's costs. It included dietary, laundry, housekceping, and so forth. This would continue to be measured on the basis of a bed/day By contrast, Dr. Julian decided that me dical treatment could be measured with an index of non- nursing clinical intens ity. She worked with two other physicians in the department to determine the amount of laboratory. diagnostic radiology, therapeutic radiology, special procedure, and pharmacy resources that would be used by a typical pancreatitis patient. She did the same for patients with cardiac dysrythmia and liver cancer. She then translated these resources into units that she called medical treatment units (MTUS). She made some estimates for the rest of the activities in the de- partment and amived at the total MTTUS that were used. Dr. Julian knew that this type of information was not completely accurate. For example, a pa- tient with pancreatitis, but otherwise in relatively good health, would need fewer tests and drugs than a somewhat older patient, or a patient with complications. This could result in higher or lower medi- cal intensity, even though the number of MTUS would be the same for all patients with the same condition.Despite these problems, she felt that she now had a way to measure medical resource use fairly accurately Levels of nursing care proved to be a simil arly complicated issue. Dr. Julian consulted with nurses on the medicine floors and, with them, developed a system to measure patient care needs. They defined three basic levels of nursing care, which are descrilbed in Exhibit 4. A patient could change levels during his or her stay, and, within each level, a patient coukd be assigned a range of units, depending upon the intensity of nursing services being provided. In this third method, Dr. Julian expected to use a combination of bed/days, average medical treatment units, and average nursing units to determine the cost of each diagnosis. Mr. Haskell as sisted her in devising a way to distribute costs among the three categories in her new system. The resulting cost summary is shown in Exhibit 5. COMPARISON OF COSTS To compare her new system with the others, Dr. Julian again calculated costs for the same three diagnoses. According to her calculations, each required the following Nursing Units MTUS Diagnosis Pancreatitis Cardiac Dysrythmia 3 Bed-days 12 20 10 38 Liver Cancer Dr. Julian was satisfied with the results of this cost accounting system. She believed that it ac- curately disting uished among the activities in the different divisions, and that the differences in costs reflected the actual differences in resources used by patients. She commented: 3 of 8 With this new infomation, I can identify cost problems easily since all costs are now categorized according to the nature as well as the intensity of the services. I plan to develop this system even futher so that stan- durd unit requirements for each diagnosis become wel-known by the division heads, as well as the atend- ings and residents in the department Then I'll be able to analye costs according to the particular patient mix being treated, and in terms of the services being provided by different divisions and physicians Mr. Haskell agreed with Dr. Julian that this third system might work well in the three divisions chosen as an expenment, and perhaps in the department overall. However, he wondered if it could be transferred to other departments in the hospital. He also was concemed about the complexity of the system for division heads, who, in his view, mightt not have the inclination to use it effectively or might not feel it worth the time to collect all of the necessary information. Dr. Julian disagreed. She planned to present her system at the next meeting of division heads. If that went well, she then would present it to the chiefs of the other clinical departments in the hos- pital so that they all would have the opportunity to benefit from it. Assignment What is the cost of treating a patient with pancre anitis under each of the cost accounting systems? A pa- tient with cardia: dy srythmia? A patient with livercancer? What accounts for the changes from one sys- tem to the next I 2. Which of the three systems is the best? Why? 3. From a managerial perspective, of what ue is the information in the second and third systems? That is, how, if at all, would this additional information improve Dr. Julian's ability o conrol costs? 4. What should Dr. Julian do? 4 of 8 CARROLL UNIVERSITY HOSPITAL Exhibit 1. Cost Center Report for Department of Medicine" Number of avaiable bed/days Number of occupied bed/days Occupancy rate 164250 146020 88.9% Direct Costs Wages Nursing service Clinical support staff Administative staff $31 823 300 7936942 1326050 $41086,292 Supplies: $1550400 6200,500 Administative supplies Modical supplies 8250,900 Capital Equipment Minor purchases Depeeciation on mjor purchases $1740000 340000 2080,000 351417,192 Total Direct Costs Furchased Services Costing unit Prescription Procedure Test Procodure Procedure Pharmaceutical Diagnotic imaging Laboratory tests Spocial peocedures Radiotherapy Allocated Service Center Costs Dieary Laundry ousekorping Medical reconds $21,185,963 7873 610 7568 994 4,788,729 2444060 43861,356 Allocation Basis Meals Paticat Services $6264,300 1695,750 154200 1277200 1208970 Pounds Square Feet #of Records Social Service Hrs. of Service 11,988820 General Services Operation of plant Plant deprociation Employoe benefits Administation Liability Insurance Total Purchased Services and Allocated Costs $2364 500 3826800 Square Feet Square Feet Salary Dollars #of Employees Square Feet 4,473862 12054 500 5410000 28.129.662 $83,979,838 Total Costs $135397,0 Average cost per day at full capacity |Average cost per day at occupied capacity $82434 $92725 Exhibit 2. Cost Summary by Department Average Cost at Occupied Capacity $996.70 117280 1382 25 92725 819.12 Costing Unit Tatal Cost $76375 940 23,146360 Lnpatient Costs by Specialty General Surgery Ordhopedic Surgery Neurosurgery Medicine Obstetrics and Gynecology Podiarics bed/day bed/day bod/day bod/day bed/day bod/day 1,713050 135397030 24036250 1,803640 661.71 Anesthesia in Inpatient Operating Rooms MajouGeneral Anesthesia Majo Epidural or Spinal MajoLocal or Regional Mino/General Anesthesia Minoe/Epidural or Spinal MinoeLocal or Regional 13,789,475 procedure procodure procedure procedure procedure prcedure $1,197 1,163 60 589 485 274 Anesthesia in Emergency Operating Roams MinoeGeneralAnesthesia Minoe/Local or Regional Minoe/No anesthesia 484263 procedure procedure procedure $486 388 178 Total Costs $301.104376 Clinial cae costs only. Reseah and other costs were ported sepantely CARROLL UNIVERSITY HOSPITAL Exhibit 3. Cost Breakdown for Three Divisions Gastroenterology Costs Cardiology Oncology Total Direct Costs Wages $2,342,500 $5 602,382 $10,586241 2,785496 275 84 $18,531 ,123 Nursing service Clinical support staff Administrative staff 641,238 267,850 2548,256 288936 5,974,990 832,627 Supplies Administrative supplies Modical supplies 310,080 619,787 341088 1,161,287 325584 ,409039 976,752 3,190,113 Capital Equipment Depreciation on major purchases Minor purchases 65,472 13,305 $4,260,232 245519 49892 $10237,360 163679 33 262 $15579,142 474,670 96,459 $30,076,734 Total Direct Costs Purchased Clinical Services $1,544,090 $4322,313 $7,775859 $13,642 262 Phamaceutical Diagnostic Imaging Laboratory Tests Special procedures Radiotherapy 399,041 627,063 1,520,364 931436 571,228 2584,630 2,374310 2,749580 699 447 1,236659 $14,835855 3,704,787 4,947 871 4,804 441 1,236 659 $28,336020 0 0 $9 409,607 $4,090,558 Total Purchased Clinical Services Allocated Service Center Costs Patient Services $2,138 041 $294,958 $737396 $1,105687 Dietary Laundry Housekeeping Medical Records 120,325 95,874 68,542 52,886 293357 260923 165477 135869 195572 173949 135377 198 321 609,254 530,746 369,396 387,076 Social Services General Services Operation of plant Plant depreciation Employee benefits 109,302 163,457 409982 612963 273321 408 642 792,605 1,185 062 357,675 459,879 248,237 $1,971,135 928353 ,724,545 930888 $6,199,753 1501234 ,149597 620592 $5,762392 2,787261 3,334,121 1,799.717 $13,933 279 Administration Liability Insurance Total Allocated Service Center Costs $10,321,925 12,250 $25 846,720 $36,177389 $72,346033 Total Direct, Purchased, and Allocated Number of bed/days 22,158 18547 $842 61 $1,166.47 $1950.58 Cost per bed/day Note: The totals on this exhibit differ from tho se for the department as a whole since only three divisions are includod. CARROLL UNIVERSITY HOSPITAL EXHIBIT 4. Levels of Nursing Care Level 1 Basic Assistance (mainly for ambulatory patients) 1-3 units Feeds self without supervision or with family member. Toilets independently Vital signs routine- daily temperature, pulse and respiration. Bedside humidifier or blow bottle. Routine post-operation suction standby Bathes self, bed straightened with minimal or no supervision. Exercises with assi stance, once in 8 hours Treatments once or twice in 8 hours. Periodic Assistance 4-7 units Level 2 Feeds self with staff supervision; 1&O; or tubal feeding by patient. Toilets with supervision or specimen collection, or uses bedpan. Hemovac output. Vital signs monitored; every 2 to 4 hours Mist or humidified air when sleeping, or cough and deep breathe every 2 hours. Nasopharyngeal or oral suction prn. Bathed and dressed by personnel or partial bath given; daily change of linen. Up in chair with assistance twice in 8 hours or walking with assistance. Treatments 3 or 4 times in 8 hours. Level 3 Continual Nursing Care 8-10 units Total feeding by personnel or continuous IV or blood transfusions or instructing the patient. Tube feeding by personnel every 3 hours or less Up to toilet with standby supervision or output measurement every hour. Initial hemovac setup Vital signs and observation every hour or vital signs monitored plus neuro check. Blood pressure, pulse, respiration and neuro check every 30 minutes. Continuous oxygen, trach mist or cough and deep breathe every hour. IPPB with supervision every 4 hours. Tracheostomy suction every 2 hours or less. Bathed and dressed by personnel, special skin care, occupied bed. Bed rest with assistance in turning every 2 hours or less, or walking with assistance of two persons twice in 8 hours. Treatments more than every 2 hours. CARROLL UNIVERSITY HOSPITAL Exhibit 5. Level of Care System Daily Patient Maintenance Medical Nursing Care Costs Treatment Total Direct Costs Wages $31,823,300 3,968,471 $31,823,300 Nursing Clinical Support s158,739 $3,809332 7,936,942 Administration 1,060840 132,605 132,605 1,326,050 Supplies Administrative Supplies Medical Supplies 1,085,280 155,040 310,080 1,550,400 1,340,100 3350250 2,010,150 6,700,500 Capital Equipment Major equipment depeciation 400200 1,044000 295,800 1,740,000 Minor 68000 221,000 51,000 340,000 S51,417,192 Total Direct Costs $4,113,159 $8,712627 $38,591,406 Purch ased Services Pharmaceutical $21,185963 $21,185,963 7,873,610 7,568,994 Diagnostic Imaging Laboatory Tests Special Procedures Radiotherapy Total Purchased Services 7,873510 7.568 994 4,788729 4,788,729 2444060 2,444,060 $43,861356 $43,861,356 Allocated Service Center Costs Patient Services Dietary Laundry Housekeeping 6,264,300 $6,264,300 1,695,750 1,695,750 1,542,600 1,277,200 1,542,600 Medical Records 1,277,200 120,897 Social Services 1,088,073 1,208,970 Gener al Services Operation of Plant Plant depreciation Employee Benefits 2,364,500 2,364,500 3,826,800 3,826,800 223693 447386 3,802,783 4,473,862 Administration 12,054,500 12,054,500 Liability Insurance 4760800 649,200 5,410,000 $40,118,482 $30,337,416 $5329083 $4,451,983 Total Allocated Costs $57,903066 Total Costs $34,450,575 $43,043,389 $135,397,030 Total Days Care Cost per bed'day 146020 $236 Total Medical Treatment Units Cost per Medical Treatment Unit 318,000 $182 Total Nursing Units Cost per Nursing Unit 515,000 $84 Carroll University Hospital This report doesn 't describe where our costs are generated. We're applying one standard to all patients, regard- less of their level of care. What incenive is there to identify and account for the costs of each diagnosis? Ann Julian, M.D., Chief of the Department of Medicine (DOM) at Carroll Univers ity Hospital (CUH), was reviewing her most recent cost report. Disappointed with its contents, she was meeting with Jonathan Haskell, the department's administrator, who had worked with the hospital's finance office to generate the report. She continued: Unless I have better cost information, all our attempts to control costs will focus on decreasing the number of inpatient days. This limits our options. In fact, it's not even an appropriate response to the hospital's reim- bursement constraints. BACKGROUND With the advent of DRGs and the growth of managed care, CUH had felt the pinch of third parties' attempts to control hospital costs by putting hospitals at increased risk. Carroll, like many other tertiary care institutions, had dele gated cost control responsibility to its middle managers, re- quiring department heads to become involved in the hospital's budgeting process, and to be ac countable for the costs associated with the ir departments' activities. After some discussion with the board, the Vice President for Medical Affairs had agreed that each clinical department chief should assume responsibility for the costs associated with caring for patients in his or her department. By enlisting the participation of chiefs in the cost control efforts Carroll's senior management hoped to improve the hospital's overall financ ial performance. In the Department of Medicine, Dr. Julian had decentralized this responsibility to the directors of the vari- ous divisions, such as general medicine, cardiol ogy, oncology, and gastroenterology. THE PRESENT SYSTEM The hospital's present cost accounting system was based on an average standard costing unit applied to each department. For inpatient costs, the system used a cost-per-bed-per-day, known as a bed/day. For operating rooms (both inpatient and emerg ency), the standard unit was a cost per-op- eration or procedure To calculate unit costs, the finance office began with a department's direct costs (shown in Ex hibit 1). It then allocated indirect costs, such as maintenance and depreciation, according to a method that it had developed to report costs to third parties, such as Medicare. The method used al location bases such as square feet, salary dollars, and beds. For a given cost, the basis ofalocation was designed to distribute indirect costs fairly across departments. Once all direct costs had been assigned to departments, and indirect costs had been allocated, the finance staff would calculate the average cost per unit by dividing the department's total costs by the number of activity units for that department. Exhibit 2 shows the average cost per unit for several hospital departments. After reviewing the costs and activities of the DOM, Dr. Julian felt that while the costs in gen- eral medicine were fairly well-defined, the costs in divisions where there were procedures posed some problems. This was especially true in the divisions of gastroenterology, cardiology, and on cology. She commented: Costs in divisions where there are procedures are less amenable to assignment into cost categories. This is mainly because of the age range and diversity of the patients, but it's also due to the distinctions among the subspecialties in medicine. Bocaue of this, the present cost accounting system is of little use for many cases. This is ex tremely frustrating, especially since the hospital is expecing me to use the aveage cost per day approach to manage costs in the department. The average figure simply does not account for the real use of dinical resources by patient undergoing procedures It was because of this concern that Dr. Julian had asked Mr. Haskell to go to the finance office for assistance. Howe ver, when he deseribed Dr. Julian's assessment of the problem to the finance The finance folks told me that Dr. Julian just doesn't understand. According to them, their system is ideal for comparative purposes. It allows them to quickly compare the costs of services among different depart- ments within the hosptal. It also helps them compare the cost of a particular department at Caroll with a similar department another hospital. Additionally, they can use the infomation to estimate the cost of treating an entire illness at Caroll. According to the finance office figures, the cost of a patient with pancreatitis would be about $3,709 (S927.25 x 4), since an average patient with this discharge diagnosis required about four days in the hospital (depending somewhat on the degree of complications). According to Dr. Jul- ian: Some patients, especially ones with complicated pancreatitis, use more resources than others. This is mainly because the testing and therapeutic treatment of patients varies widely. Some patients roquire more or fewer diagnostic and therapeutic interventions, depending on their admitting dagnoses. ERCPS Endoscopic Retrograde Cholangiol Pancreao graphy procedures], for example, ae used excdusively by pa tients in gastroenterology Somehow, a good cost accounting system must recognize these differences I also don't want my d partment to appear overly costly simply because some patients don't oonfom to the norm. The cuent cost accounting system doesn't acoount for the differences among patients, and it doesn't give me the daa Ineod to manage costs. THE USE OF CLINICAL DISTINCTIONS After some discussion. Dr. Julian and Mr. Haskell convinced the finance office that the average unit cost calculation could be revised to account for the differences among patients in different divi- sions. In an effort to address these differences, Mr. Haskell suggested that the finance office do an analysis of the patients in three of the divisions where there were procedures: Gastroenterology, Cardiology, and Oncology (although there were other divisions that did procedures, these were the major ones) With the help of Dr. Julian, Mr. Haskell calculated time and material estimates for each type of patient stay. For example, he estimated that, in general, more medication was used on oncology pa- tients than on general medicine patients. Also, oncology patients were likely to need more of a vari- ety of other resources, such as lab tests, drugs, and X-rays. Mr. Haskell conferred with the finance office about the best method to apportion indirect costs among the three divisions. After much discussion, they decided to apportion most of these costs ac- cording to the number of patient days per division. They made some adjustments to reflect unusual circumstances, however. Although this new system maintained bed/days as the standard costing unit, Mr. Haskell pointed out that it was more accurate than the one currently in use because there were now three av erage costs per bed/day: one for gastroenterology, one for cardio logy, and a third for oncology. Ex- hibit 3 contains this infomation. Dr. Julian and Mr. Haskell performed some calculations and compared the differences between the two systems. They computed the cost of a patient with pancreatitis using each system. Dr. Jul- ian estimated that a somewhat complicated pancreatitis patient required a 4-day stay in the Gastro- enterology division. They also compared the costs of patients with two odher diagnoses. One was cardiac dysrythmia, which required a cardiac catheterization and some electrophysio logy studies. The other was a patient with liver cancer, who would be tested and diagnosed in the oncology divi- sion 2 of 8 From their findings, Dr. Julian and Mr. Haskell concluded that this specialty-based system could greatly increase Dr. Julian's ability to identify and control costs. However, Dr. Ju lian contin- ued to harbor some concems. INTENSITIES OF CARE Although the specialty-based system was an improvement over the average bed/day calculation it still had problems. Dr. Julian was particularly disturbed about the intensities of medical and nurs- ing attention given to patients within each division. She explained: Some patients with cancer require more mursing and medical care than others, even if both patients are in the oncolbgy division. The same is true in other divisions. Even with the improvements we've made, were not considering this. The system makes it appear as if all oncology patients receive the same amount of care on a given day in the hospital. Froma dinical penspoctive, this just isa't true. Because of this problem, Dr. Julian felt that the divisional breakdown was still not a sufficiently accurate measure of the costs of care rendered to different patients. Work ing on her own, she de- veloped a third cost accounting methodology based on levels of care delivered by the nursing and medical teams. In developing this new approach, she divided the entire department's costs into three categories that were quite different from those in the specialty-based system: daily patient mainte- nance, medical treatment, and nursing care. The daily patient maintenance category was for the basic hotel and meal portion of a patient's costs. It included dietary, laundry, housekceping, and so forth. This would continue to be measured on the basis of a bed/day By contrast, Dr. Julian decided that me dical treatment could be measured with an index of non- nursing clinical intens ity. She worked with two other physicians in the department to determine the amount of laboratory. diagnostic radiology, therapeutic radiology, special procedure, and pharmacy resources that would be used by a typical pancreatitis patient. She did the same for patients with cardiac dysrythmia and liver cancer. She then translated these resources into units that she called medical treatment units (MTUS). She made some estimates for the rest of the activities in the de- partment and amived at the total MTTUS that were used. Dr. Julian knew that this type of information was not completely accurate. For example, a pa- tient with pancreatitis, but otherwise in relatively good health, would need fewer tests and drugs than a somewhat older patient, or a patient with complications. This could result in higher or lower medi- cal intensity, even though the number of MTUS would be the same for all patients with the same condition.Despite these problems, she felt that she now had a way to measure medical resource use fairly accurately Levels of nursing care proved to be a simil arly complicated issue. Dr. Julian consulted with nurses on the medicine floors and, with them, developed a system to measure patient care needs. They defined three basic levels of nursing care, which are descrilbed in Exhibit 4. A patient could change levels during his or her stay, and, within each level, a patient coukd be assigned a range of units, depending upon the intensity of nursing services being provided. In this third method, Dr. Julian expected to use a combination of bed/days, average medical treatment units, and average nursing units to determine the cost of each diagnosis. Mr. Haskell as sisted her in devising a way to distribute costs among the three categories in her new system. The resulting cost summary is shown in Exhibit 5. COMPARISON OF COSTS To compare her new system with the others, Dr. Julian again calculated costs for the same three diagnoses. According to her calculations, each required the following Nursing Units MTUS Diagnosis Pancreatitis Cardiac Dysrythmia 3 Bed-days 12 20 10 38 Liver Cancer Dr. Julian was satisfied with the results of this cost accounting system. She believed that it ac- curately disting uished among the activities in the different divisions, and that the differences in costs reflected the actual differences in resources used by patients. She commented: 3 of 8 With this new infomation, I can identify cost problems easily since all costs are now categorized according to the nature as well as the intensity of the services. I plan to develop this system even futher so that stan- durd unit requirements for each diagnosis become wel-known by the division heads, as well as the atend- ings and residents in the department Then I'll be able to analye costs according to the particular patient mix being treated, and in terms of the services being provided by different divisions and physicians Mr. Haskell agreed with Dr. Julian that this third system might work well in the three divisions chosen as an expenment, and perhaps in the department overall. However, he wondered if it could be transferred to other departments in the hospital. He also was concemed about the complexity of the system for division heads, who, in his view, mightt not have the inclination to use it effectively or might not feel it worth the time to collect all of the necessary information. Dr. Julian disagreed. She planned to present her system at the next meeting of division heads. If that went well, she then would present it to the chiefs of the other clinical departments in the hos- pital so that they all would have the opportunity to benefit from it. Assignment What is the cost of treating a patient with pancre anitis under each of the cost accounting systems? A pa- tient with cardia: dy srythmia? A patient with livercancer? What accounts for the changes from one sys- tem to the next I 2. Which of the three systems is the best? Why? 3. From a managerial perspective, of what ue is the information in the second and third systems? That is, how, if at all, would this additional information improve Dr. Julian's ability o conrol costs? 4. What should Dr. Julian do? 4 of 8 CARROLL UNIVERSITY HOSPITAL Exhibit 1. Cost Center Report for Department of Medicine" Number of avaiable bed/days Number of occupied bed/days Occupancy rate 164250 146020 88.9% Direct Costs Wages Nursing service Clinical support staff Administative staff $31 823 300 7936942 1326050 $41086,292 Supplies: $1550400 6200,500 Administative supplies Modical supplies 8250,900 Capital Equipment Minor purchases Depeeciation on mjor purchases $1740000 340000 2080,000 351417,192 Total Direct Costs Furchased Services Costing unit Prescription Procedure Test Procodure Procedure Pharmaceutical Diagnotic imaging Laboratory tests Spocial peocedures Radiotherapy Allocated Service Center Costs Dieary Laundry ousekorping Medical reconds $21,185,963 7873 610 7568 994 4,788,729 2444060 43861,356 Allocation Basis Meals Paticat Services $6264,300 1695,750 154200 1277200 1208970 Pounds Square Feet #of Records Social Service Hrs. of Service 11,988820 General Services Operation of plant Plant deprociation Employoe benefits Administation Liability Insurance Total Purchased Services and Allocated Costs $2364 500 3826800 Square Feet Square Feet Salary Dollars #of Employees Square Feet 4,473862 12054 500 5410000 28.129.662 $83,979,838 Total Costs $135397,0 Average cost per day at full capacity |Average cost per day at occupied capacity $82434 $92725 Exhibit 2. Cost Summary by Department Average Cost at Occupied Capacity $996.70 117280 1382 25 92725 819.12 Costing Unit Tatal Cost $76375 940 23,146360 Lnpatient Costs by Specialty General Surgery Ordhopedic Surgery Neurosurgery Medicine Obstetrics and Gynecology Podiarics bed/day bed/day bod/day bod/day bed/day bod/day 1,713050 135397030 24036250 1,803640 661.71 Anesthesia in Inpatient Operating Rooms MajouGeneral Anesthesia Majo Epidural or Spinal MajoLocal or Regional Mino/General Anesthesia Minoe/Epidural or Spinal MinoeLocal or Regional 13,789,475 procedure procodure procedure procedure procedure prcedure $1,197 1,163 60 589 485 274 Anesthesia in Emergency Operating Roams MinoeGeneralAnesthesia Minoe/Local or Regional Minoe/No anesthesia 484263 procedure procedure procedure $486 388 178 Total Costs $301.104376 Clinial cae costs only. Reseah and other costs were ported sepantely CARROLL UNIVERSITY HOSPITAL Exhibit 3. Cost Breakdown for Three Divisions Gastroenterology Costs Cardiology Oncology Total Direct Costs Wages $2,342,500 $5 602,382 $10,586241 2,785496 275 84 $18,531 ,123 Nursing service Clinical support staff Administrative staff 641,238 267,850 2548,256 288936 5,974,990 832,627 Supplies Administrative supplies Modical supplies 310,080 619,787 341088 1,161,287 325584 ,409039 976,752 3,190,113 Capital Equipment Depreciation on major purchases Minor purchases 65,472 13,305 $4,260,232 245519 49892 $10237,360 163679 33 262 $15579,142 474,670 96,459 $30,076,734 Total Direct Costs Purchased Clinical Services $1,544,090 $4322,313 $7,775859 $13,642 262 Phamaceutical Diagnostic Imaging Laboratory Tests Special procedures Radiotherapy 399,041 627,063 1,520,364 931436 571,228 2584,630 2,374310 2,749580 699 447 1,236659 $14,835855 3,704,787 4,947 871 4,804 441 1,236 659 $28,336020 0 0 $9 409,607 $4,090,558 Total Purchased Clinical Services Allocated Service Center Costs Patient Services $2,138 041 $294,958 $737396 $1,105687 Dietary Laundry Housekeeping Medical Records 120,325 95,874 68,542 52,886 293357 260923 165477 135869 195572 173949 135377 198 321 609,254 530,746 369,396 387,076 Social Services General Services Operation of plant Plant depreciation Employee benefits 109,302 163,457 409982 612963 273321 408 642 792,605 1,185 062 357,675 459,879 248,237 $1,971,135 928353 ,724,545 930888 $6,199,753 1501234 ,149597 620592 $5,762392 2,787261 3,334,121 1,799.717 $13,933 279 Administration Liability Insurance Total Allocated Service Center Costs $10,321,925 12,250 $25 846,720 $36,177389 $72,346033 Total Direct, Purchased, and Allocated Number of bed/days 22,158 18547 $842 61 $1,166.47 $1950.58 Cost per bed/day Note: The totals on this exhibit differ from tho se for the department as a whole since only three divisions are includod. CARROLL UNIVERSITY HOSPITAL EXHIBIT 4. Levels of Nursing Care Level 1 Basic Assistance (mainly for ambulatory patients) 1-3 units Feeds self without supervision or with family member. Toilets independently Vital signs routine- daily temperature, pulse and respiration. Bedside humidifier or blow bottle. Routine post-operation suction standby Bathes self, bed straightened with minimal or no supervision. Exercises with assi stance, once in 8 hours Treatments once or twice in 8 hours. Periodic Assistance 4-7 units Level 2 Feeds self with staff supervision; 1&O; or tubal feeding by patient. Toilets with supervision or specimen collection, or uses bedpan. Hemovac output. Vital signs monitored; every 2 to 4 hours Mist or humidified air when sleeping, or cough and deep breathe every 2 hours. Nasopharyngeal or oral suction prn. Bathed and dressed by personnel or partial bath given; daily change of linen. Up in chair with assistance twice in 8 hours or walking with assistance. Treatments 3 or 4 times in 8 hours. Level 3 Continual Nursing Care 8-10 units Total feeding by personnel or continuous IV or blood transfusions or instructing the patient. Tube feeding by personnel every 3 hours or less Up to toilet with standby supervision or output measurement every hour. Initial hemovac setup Vital signs and observation every hour or vital signs monitored plus neuro check. Blood pressure, pulse, respiration and neuro check every 30 minutes. Continuous oxygen, trach mist or cough and deep breathe every hour. IPPB with supervision every 4 hours. Tracheostomy suction every 2 hours or less. Bathed and dressed by personnel, special skin care, occupied bed. Bed rest with assistance in turning every 2 hours or less, or walking with assistance of two persons twice in 8 hours. Treatments more than every 2 hours. CARROLL UNIVERSITY HOSPITAL Exhibit 5. Level of Care System Daily Patient Maintenance Medical Nursing Care Costs Treatment Total Direct Costs Wages $31,823,300 3,968,471 $31,823,300 Nursing Clinical Support s158,739 $3,809332 7,936,942 Administration 1,060840 132,605 132,605 1,326,050 Supplies Administrative Supplies Medical Supplies 1,085,280 155,040 310,080 1,550,400 1,340,100 3350250 2,010,150 6,700,500 Capital Equipment Major equipment depeciation 400200 1,044000 295,800 1,740,000 Minor 68000 221,000 51,000 340,000 S51,417,192 Total Direct Costs $4,113,159 $8,712627 $38,591,406 Purch ased Services Pharmaceutical $21,185963 $21,185,963 7,873,610 7,568,994 Diagnostic Imaging Laboatory Tests Special Procedures Radiotherapy Total Purchased Services 7,873510 7.568 994 4,788729 4,788,729 2444060 2,444,060 $43,861356 $43,861,356 Allocated Service Center Costs Patient Services Dietary Laundry Housekeeping 6,264,300 $6,264,300 1,695,750 1,695,750 1,542,600 1,277,200 1,542,600 Medical Records 1,277,200 120,897 Social Services 1,088,073 1,208,970 Gener al Services Operation of Plant Plant depreciation Employee Benefits 2,364,500 2,364,500 3,826,800 3,826,800 223693 447386 3,802,783 4,473,862 Administration 12,054,500 12,054,500 Liability Insurance 4760800 649,200 5,410,000 $40,118,482 $30,337,416 $5329083 $4,451,983 Total Allocated Costs $57,903066 Total Costs $34,450,575 $43,043,389 $135,397,030 Total Days Care Cost per bed'day 146020 $236 Total Medical Treatment Units Cost per Medical Treatment Unit 318,000 $182 Total Nursing Units Cost per Nursing Unit 515,000 $84