Chapter 07 - Cost Allocation: Departments. Joint Products, and By-Products 7-2 Brookwood Medical Centerl "In 1990, a major insurer asked us to bid on performing all of their open-heart surgeries in the Southeast United States. We prepared a bid by pulling charges on all (not just Medicare) patients we had treated in the four diagnostic related groups (DRGs) and applying the hospital-wide cost-to-charge ratio. We did not get the bid and had no idea whether to be disappointed or relieved. From talks with third-party payers and major employers, we believed that by the mid- 1990s we would be bidding for portions of business, like open-heart surgeries, on a regular basis. We real- ized that we needed a much better understanding of costs at the DRG and individual patient levels if we're to be able to compete effectively." Carolyn Johnson, Vice President of finance INTRODUCTION By the end of the 1980s, cost management had become one of the most important issues faced by Brookwood Medical Center (BMC) administrators. BMC faced pressure from managed care providers such as health mainte- nance organizations (HMOs) and preferred pro\ider organizations (PPOs) to keep medical costs low while continu- ing to provide high-quality health care services. For the first time, BMC was asked to bid on specific health care services for members of managed care insurance plans. To provide bids that were competitive yet profitable, hospi- tal administrators needed detailed cost information about specific health care procedures. In addition. Medicare and other insurance providers moved to fixed fee reimbursement schedules, paying a defined fixed rate depending on a patient's diagnostic related group (DRG) and severity level. The use Of fixed payment rates provided incentives for BMC to identify costs associated with providing health care to specific patients in each DRG. Health care providers realized that reductions in the average length of stay (ALOS) as a result of shorter inpatient hospital stays and in- creased outpatient services could decrease costs without decreasing the quality of care. THE NEW COST SYSTEM As more payers moved to a fixed fee form of reimbursement, BMC administrators determined the existing cost system was not providing sufficiently accurate or detailed cost information. The old methodology provided aggre- gated cost data by department; but no reliable method existed to trace costs to individual patients or diagnostic groups. The new health care environment required hospitals to compete for managed care contracts and to make strategic decisions based on a solid understanding of costs. Jan Kelly, Director of cost accounting, identified the following issues to support the need for a new cost man- agement system: Unexplained variation in practice patterns. Physicians largely drove the health care delivery process through treatment protocols and medical orders that determined patient charges and length of stay. A new cost system could help identify costs associated with specific physician practice patterns. Concern with costs and more appropriate care. BMC recognized the opportunity to reduce tests and proce- dures for patients (e.g., ordering a component test rather than a whole profile on blood work). Some inpa- tient testing and care could be effectively done on an outpatient basis due to advances in medications and other technology. Many diagnostic tests and longer inpatient stays may not result in better patient out- comes. Questions regarding effectiveness. Questions concerning the effectiveness of care, especially when evaluat- ing new technology or treatments, were becoming increasingly commonplace. Thus, BMC required more sophisticated cost management tools. Beliefs regarding cost vs. value of cure. Balancing the quality Of care with the costs of providing care was a fundamental concern for BMC. For example, if a new surgical procedure allows early discharge or little scarring but costs 10 times more than an old procedure, is it necessary for the hospital to offer the new pro- Prepared by Ibomas L Albright and Robin Cooper, C Institute of Management Accountants, 1998. Used with permission. Blocher, Stout, Juras, Smith: Cost Management 8/e 7-5 Copynght C 20 ' 8 McGraw-Hill Education. All nghu rcrvcd. NO rcpcduction without prior written consent Of McGraw-Hill Chapter 07 - Cost Allocation: Departments, Joint Products, and By-Products cedure and incur additional costs? Executives had to identify a strategy for new technology and the existing methodology, management began to explore alternatives to the old cost accounting methodology. They re- quired a cost system that would provide a product-line focus, i.e., open heart surgery, diabetes care, rehabil- itation, or respiratory therapy, and that would permit segmentation Of the patient population. Details of Ma- son's oncological study were reviewed, and the results reinforced the belief that costs calculated on a facili- ty-wide basis were not helpful for making decisions that were DRG-specific. In March 1991 , BMC executives hired an Atlanta-based CPA firm to work with Kelly to gain an understanding Of departmental operating costs and to build cost standards. They backloaded cost data for 20 months and identified two types of costs, direct and indirect. Meetings were held twice a week with key hospital administrators and clini- cians to determine activities that caused costs. BMC used a computerized information system known as Transition I (TSI) to assist with standard costing, fi- nancial modeling, and forecasting. The software allowed cost managers at BMC to identify activities, link activities to costs, and categorize costs based on predetermined or specific allocation bases. The system also generated simul- taneous algebraic equations used to allocate indirect costs to revenue-generating departments. TSI allowed the crea- tion of a database with cost and demographic information that could be sorted by both traditional and nontraditional demographic elements. Detailed information allowed BMC to obtain more accurate measurements of costs to pro- vide care and to monitor and improve the quality of care provided to patients. For example, the patient number, length of stay, total charges, direct costs, and indirect costs for all appendectomy patients treated during a specific time period were summarized by the TSI system (see Table I). DIRECT COSTS Direct costs could be traced to a patient or procedure and included resources consumed in providing testing ser- vices. supplies, pharmaceuticals, and nursing care. Costs for patient testing and procedures (including X-ray. labora- tory services, operating room costs, labor and delivery room costs) were associated with each patient, using the in- ternally calculated direct cost for each test or procedure. Major supplies and pharmaceuticals were individually as- signed to the patient based on the actual cost of the supply or drug. Nursing care costs were driven to the patient level through daily patient classification and room rate charges. These charges were based on the nursing skill level required to care for patients in each specialty area. as well as the average acuity levels in each specialty area. Nursing staff skill levels were divided into three classifications as fol- lows: registered nurse (RN), licensed practical nurse (LPN), and aide. Examples of specialty areas were obstetrics, surgical, psychiatric, and cardiovascular. BMC divided six acuity levels according to the level of clinical attention required by the patient. For example, a direct cost of $123 per day was incurred in the Nursing-MED/SURG de- partment acuity level I (see Table 2). The cost system produced departmental reports identifying the daily rate by acuity level and the underlying as- sumptions of the allocation routine (see Table 3). Because the number of minutes required to attend patients varied across acuity levels, the estimated (budgeted) volume of patient days was adjusted for daily service levels, expressed in minutes. The department's budgeted cost was allocated to each acuity level as a percentage of total budgeted minutes. Finally, a daily rate for each acuity level was calculated by dividing the allocated costs by the budgeted volume of days within each acuity level. INDIRECT COSTS Indirect costs such as depreciation, administrative, and general were allocated to revenue-producing activities using simultaneous algebraic equations. The calculations were performed by BMCs computerized accounting sys- tem using allocation percentages based on the amount of services provided to Other departments. The system allo- cated costs among several departments with reciprocal service relationships. For example, assume an organization has two support departments, housekeeping, information systems (IS). and two revenue-producing departments, operating room (OR) and emergency room (ER). The IS department manager estimated the housekeeping depart- ment consumed 10% of the IS department's activities, while the ER and OR required 40% and 50%, respectively. Thus, the IS depattment's direct costs of S 100,000 were allocated to housekeeping, OR, and ER consistent with the resources demanded (see Table 4). Next, the housekeeping department's direct ($60,000) and allocated ($10,000) costs of S70,000 were allocated to IS, OR, and ER using 30%, 40%. and 30%, respectively. Though the IS depart- ment had allocated all costs total S 100,000 in the first step, the housekeeping department transferred costs ($21,000) Blocher, Stout, Juras, Smith: Cost Management 8/e 7-6 Copy' Ight C 201 S McGaw-HilI Education. All rights rcqrved. NO reproduction or distribution without prior written conscnt of McGraw-Hill Education. Chapter 07 - Cost Allocation: Departments, Joint Products, and By-Products back into the department that had to be reallocated in the second iteration. Iterations continued until the costs re- maining in the support departments were too small to be significant. Thus, after multiple iterations, all support de- partment costs were transferred to the OR and ER (see Table 4). The cost system used by BMC simultaneously allocated costs associated with all indirect activities to revenue- producing activities based on cost drivers identified by BMC. For example. the education department allocated its costs to various departments including pain management. diabetic services, and emergency room using the percent- age of paid hours within each department as the allocation base. Though the process required multiple iterations (see Table 4), the cost management system produced reports after each allocation iteration (see Table 5). When the allo- cation procedure had completed the final iteration, all costs for support-related departments were contained in the accounts of revenue-producing departments. Thus, education costs were included in the emergency room indirect cost per hour of S 142 (see Table 2). As the health care environment changed, new information demands were placed on the cost reporting system. The Mason study (discussed in the BMC Introduction) added length of stay as well as direct costs within DRG eate- gories to the cost-to-charge ratio. According to Kelly, "TSI represented a significant step toward understanding and managing the costs of delivering health care services at BMC." REQUIRED: l. 2. 3. 4. 5. 6. Why didn't the cost data make any sense? What motivated the managers to build a new cost system? How does the TSI system attach costs to a patient or procedure? What are the major design issues? How is the daily rate determined for the Nursing MeWSurg department acuity level I ? How does the reciprocal method allocate indirect costs to revenue-producing depaflrnents? Given your understanding of the manner in which TSI allocates costs to patients, would you classify Brookwood's cost system as activity based? Blocher, Stout, Juras, Smith: Cost Management 8/e 7-7 Copynght 2018 McGraw-Hill All right' NO without thc prior Of McGraw-Hill Education. Chapter 07 - Cost Allocation: Departments, Joint Products, and By-Products Table 1 Brookwood Medical Center: Appendectomy Patient Listing Direct Cost Direct Cost Direct Cost Patient N umber 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Total Length of Stay 3 4 2 2 2 3 2 2 2 2 3 3 3 2 5 2 5 4 5 2 2 1 2 2 2 2 3 2 91 Total Charges $8,486 18,394 7,297 12,350 5,854 14,574 14,289 5,772 11,589 8,398 8,771 14,920 10,320 8,871 9,103 8,365 13,355 11,235 8,976 18,033 11,756 8,068 8,133 7,396 6,926 7,558 20,140 6,211 8.740 6,931 8,493 6,580 8,646 11.319 7.435 11,765 9,822 10,354 9.117 11,097 9,030 7.659 9,943 S443 309 Variable 751 2,960 926 2,069 765 1.966 2,440 856 I ,404 1,192 1,033 2.626 1,751 1,097 1,998 1,563 2,195 2,414 1,170 3,123 1,739 1,698 1.669 1,232 911 1,268 3.151 718 1 ,324 779 1345 1,041 1,328 1,214 1,042 1,564 1,443 1,929 1,117 1,623 1.558 1,619 67 688 Fixed Indirect Cost Total Cost 164 566 245 258 210 395 332 102 325 365 225 295 487 178 221 168 687 258 201 563 229 210 247 160 147 188 167 189 140 152 153 195 247 161 267 165 184 126 348 141 112 174 -202- 11017 1.187 3,106 1,280 1 ,556 1,152 2, 160 1 ,577 661 1,553 2,045 901 2,546 2.644 1,460 1,647 1,050 3,237 2,195 1,067 3,457 1,279 1,350 1,257 825 637 1,141 3,419 843 1,212 736 1,013 863 1,200 1,424 817 1,647 1,143 1,669 1,309 1,847 859 1,045 1,217 66 506 2, 102 6,631 2,451 3,884 2,126 4,522 4,349 1,619 3,282 3,601 2,159 5,466 4,882 2,735 3,865 2,781 6,119 4,867 2,438 7,143 3,247 3,258 3,174 2,217 1,695 2,598 7,037 1,728 2,724 1,656 2,510 2,056 2,723 2.885 2.020 3,478 2,752 3,782 2,552 3,818 1,901 2,716 3,010 145 210 Source: sample of appendectomy patients from TSI data. Blocher, Stout, Juras, Smith: Cost Management 8/e 7-8 Copyright C' 2018 McGraw-Hill Education. All rights rescrvcd. No reproduction or distribution without thc vior written consent Of Education. Chapter 07 - Cost Allocation: Departments, Joint Products, and By-Products Table 2. DRG 470 - Appendectomy Utilization Report Department Description NURSING - MED/SURG OPERATING ROOM OPERATING ROOM SUPPLIES RECOVERY CENTRAL STORES LABORATORY SERVICES CARDIOLOGY / EKG PHARMACY RESPIRATORY THERAPY EMERGENCY ROOM DIETARY LAUNDRY / LINEN Product Description Acuity level 1 daily rate Acuity level 2 daily rate Major surgery I hour Sutures Basic surgical pack Additional OR supplies* Recovery level II 1/4 hours Central store supplies Blood profile. potassium, renal profile EKG 3 channel w/o physician in Pharmaceuticals* Incentive spirometer New start spirometer & oxygen ER visit level IT intensive Daily hospital service Daily hospital service Direct Cost S123.oo 140.00 174.00 17.00 17.00 118.00 24.00 25.50 29.50 13.00 163.50 4.00 6.00 80.00 24.00 9.00 Indirect Cost Quantity M 90.00 229.00 170.00 7.00 6.00 50.00 11.00 58.00 11.00 12.00 133.00 3.00 4.00 142.00 18.00 6.00 1 2 5 3 2 5 3 3 Total Cost $313.00 738.00 344.00 120.00 23.00 168.00 105.00 83.50 81.00 25.00 296.50 35.00 10.00 222.00 126.00 45.00 2,735.00 Detail of specific items charged collapsed into one line item Chapter 07 - Cost Allocation: Departments. Joint Products, and By-Products 7-2 Brookwood Medical Centerl "In 1990, a major insurer asked us to bid on performing all of their open-heart surgeries in the Southeast United States. We prepared a bid by pulling charges on all (not just Medicare) patients we had treated in the four diagnostic related groups (DRGs) and applying the hospital-wide cost-to-charge ratio. We did not get the bid and had no idea whether to be disappointed or relieved. From talks with third-party payers and major employers, we believed that by the mid- 1990s we would be bidding for portions of business, like open-heart surgeries, on a regular basis. We real- ized that we needed a much better understanding of costs at the DRG and individual patient levels if we're to be able to compete effectively." Carolyn Johnson, Vice President of finance INTRODUCTION By the end of the 1980s, cost management had become one of the most important issues faced by Brookwood Medical Center (BMC) administrators. BMC faced pressure from managed care providers such as health mainte- nance organizations (HMOs) and preferred pro\ider organizations (PPOs) to keep medical costs low while continu- ing to provide high-quality health care services. For the first time, BMC was asked to bid on specific health care services for members of managed care insurance plans. To provide bids that were competitive yet profitable, hospi- tal administrators needed detailed cost information about specific health care procedures. In addition. Medicare and other insurance providers moved to fixed fee reimbursement schedules, paying a defined fixed rate depending on a patient's diagnostic related group (DRG) and severity level. The use Of fixed payment rates provided incentives for BMC to identify costs associated with providing health care to specific patients in each DRG. Health care providers realized that reductions in the average length of stay (ALOS) as a result of shorter inpatient hospital stays and in- creased outpatient services could decrease costs without decreasing the quality of care. THE NEW COST SYSTEM As more payers moved to a fixed fee form of reimbursement, BMC administrators determined the existing cost system was not providing sufficiently accurate or detailed cost information. The old methodology provided aggre- gated cost data by department; but no reliable method existed to trace costs to individual patients or diagnostic groups. The new health care environment required hospitals to compete for managed care contracts and to make strategic decisions based on a solid understanding of costs. Jan Kelly, Director of cost accounting, identified the following issues to support the need for a new cost man- agement system: Unexplained variation in practice patterns. Physicians largely drove the health care delivery process through treatment protocols and medical orders that determined patient charges and length of stay. A new cost system could help identify costs associated with specific physician practice patterns. Concern with costs and more appropriate care. BMC recognized the opportunity to reduce tests and proce- dures for patients (e.g., ordering a component test rather than a whole profile on blood work). Some inpa- tient testing and care could be effectively done on an outpatient basis due to advances in medications and other technology. Many diagnostic tests and longer inpatient stays may not result in better patient out- comes. Questions regarding effectiveness. Questions concerning the effectiveness of care, especially when evaluat- ing new technology or treatments, were becoming increasingly commonplace. Thus, BMC required more sophisticated cost management tools. Beliefs regarding cost vs. value of cure. Balancing the quality Of care with the costs of providing care was a fundamental concern for BMC. For example, if a new surgical procedure allows early discharge or little scarring but costs 10 times more than an old procedure, is it necessary for the hospital to offer the new pro- Prepared by Ibomas L Albright and Robin Cooper, C Institute of Management Accountants, 1998. Used with permission. Blocher, Stout, Juras, Smith: Cost Management 8/e 7-5 Copynght C 20 ' 8 McGraw-Hill Education. All nghu rcrvcd. NO rcpcduction without prior written consent Of McGraw-Hill Chapter 07 - Cost Allocation: Departments, Joint Products, and By-Products cedure and incur additional costs? Executives had to identify a strategy for new technology and the existing methodology, management began to explore alternatives to the old cost accounting methodology. They re- quired a cost system that would provide a product-line focus, i.e., open heart surgery, diabetes care, rehabil- itation, or respiratory therapy, and that would permit segmentation Of the patient population. Details of Ma- son's oncological study were reviewed, and the results reinforced the belief that costs calculated on a facili- ty-wide basis were not helpful for making decisions that were DRG-specific. In March 1991 , BMC executives hired an Atlanta-based CPA firm to work with Kelly to gain an understanding Of departmental operating costs and to build cost standards. They backloaded cost data for 20 months and identified two types of costs, direct and indirect. Meetings were held twice a week with key hospital administrators and clini- cians to determine activities that caused costs. BMC used a computerized information system known as Transition I (TSI) to assist with standard costing, fi- nancial modeling, and forecasting. The software allowed cost managers at BMC to identify activities, link activities to costs, and categorize costs based on predetermined or specific allocation bases. The system also generated simul- taneous algebraic equations used to allocate indirect costs to revenue-generating departments. TSI allowed the crea- tion of a database with cost and demographic information that could be sorted by both traditional and nontraditional demographic elements. Detailed information allowed BMC to obtain more accurate measurements of costs to pro- vide care and to monitor and improve the quality of care provided to patients. For example, the patient number, length of stay, total charges, direct costs, and indirect costs for all appendectomy patients treated during a specific time period were summarized by the TSI system (see Table I). DIRECT COSTS Direct costs could be traced to a patient or procedure and included resources consumed in providing testing ser- vices. supplies, pharmaceuticals, and nursing care. Costs for patient testing and procedures (including X-ray. labora- tory services, operating room costs, labor and delivery room costs) were associated with each patient, using the in- ternally calculated direct cost for each test or procedure. Major supplies and pharmaceuticals were individually as- signed to the patient based on the actual cost of the supply or drug. Nursing care costs were driven to the patient level through daily patient classification and room rate charges. These charges were based on the nursing skill level required to care for patients in each specialty area. as well as the average acuity levels in each specialty area. Nursing staff skill levels were divided into three classifications as fol- lows: registered nurse (RN), licensed practical nurse (LPN), and aide. Examples of specialty areas were obstetrics, surgical, psychiatric, and cardiovascular. BMC divided six acuity levels according to the level of clinical attention required by the patient. For example, a direct cost of $123 per day was incurred in the Nursing-MED/SURG de- partment acuity level I (see Table 2). The cost system produced departmental reports identifying the daily rate by acuity level and the underlying as- sumptions of the allocation routine (see Table 3). Because the number of minutes required to attend patients varied across acuity levels, the estimated (budgeted) volume of patient days was adjusted for daily service levels, expressed in minutes. The department's budgeted cost was allocated to each acuity level as a percentage of total budgeted minutes. Finally, a daily rate for each acuity level was calculated by dividing the allocated costs by the budgeted volume of days within each acuity level. INDIRECT COSTS Indirect costs such as depreciation, administrative, and general were allocated to revenue-producing activities using simultaneous algebraic equations. The calculations were performed by BMCs computerized accounting sys- tem using allocation percentages based on the amount of services provided to Other departments. The system allo- cated costs among several departments with reciprocal service relationships. For example, assume an organization has two support departments, housekeeping, information systems (IS). and two revenue-producing departments, operating room (OR) and emergency room (ER). The IS department manager estimated the housekeeping depart- ment consumed 10% of the IS department's activities, while the ER and OR required 40% and 50%, respectively. Thus, the IS depattment's direct costs of S 100,000 were allocated to housekeeping, OR, and ER consistent with the resources demanded (see Table 4). Next, the housekeeping department's direct ($60,000) and allocated ($10,000) costs of S70,000 were allocated to IS, OR, and ER using 30%, 40%. and 30%, respectively. Though the IS depart- ment had allocated all costs total S 100,000 in the first step, the housekeeping department transferred costs ($21,000) Blocher, Stout, Juras, Smith: Cost Management 8/e 7-6 Copy' Ight C 201 S McGaw-HilI Education. All rights rcqrved. NO reproduction or distribution without prior written conscnt of McGraw-Hill Education. Chapter 07 - Cost Allocation: Departments, Joint Products, and By-Products back into the department that had to be reallocated in the second iteration. Iterations continued until the costs re- maining in the support departments were too small to be significant. Thus, after multiple iterations, all support de- partment costs were transferred to the OR and ER (see Table 4). The cost system used by BMC simultaneously allocated costs associated with all indirect activities to revenue- producing activities based on cost drivers identified by BMC. For example. the education department allocated its costs to various departments including pain management. diabetic services, and emergency room using the percent- age of paid hours within each department as the allocation base. Though the process required multiple iterations (see Table 4), the cost management system produced reports after each allocation iteration (see Table 5). When the allo- cation procedure had completed the final iteration, all costs for support-related departments were contained in the accounts of revenue-producing departments. Thus, education costs were included in the emergency room indirect cost per hour of S 142 (see Table 2). As the health care environment changed, new information demands were placed on the cost reporting system. The Mason study (discussed in the BMC Introduction) added length of stay as well as direct costs within DRG eate- gories to the cost-to-charge ratio. According to Kelly, "TSI represented a significant step toward understanding and managing the costs of delivering health care services at BMC." REQUIRED: l. 2. 3. 4. 5. 6. Why didn't the cost data make any sense? What motivated the managers to build a new cost system? How does the TSI system attach costs to a patient or procedure? What are the major design issues? How is the daily rate determined for the Nursing MeWSurg department acuity level I ? How does the reciprocal method allocate indirect costs to revenue-producing depaflrnents? Given your understanding of the manner in which TSI allocates costs to patients, would you classify Brookwood's cost system as activity based? Blocher, Stout, Juras, Smith: Cost Management 8/e 7-7 Copynght 2018 McGraw-Hill All right' NO without thc prior Of McGraw-Hill Education. Chapter 07 - Cost Allocation: Departments, Joint Products, and By-Products Table 1 Brookwood Medical Center: Appendectomy Patient Listing Direct Cost Direct Cost Direct Cost Patient N umber 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 Total Length of Stay 3 4 2 2 2 3 2 2 2 2 3 3 3 2 5 2 5 4 5 2 2 1 2 2 2 2 3 2 91 Total Charges $8,486 18,394 7,297 12,350 5,854 14,574 14,289 5,772 11,589 8,398 8,771 14,920 10,320 8,871 9,103 8,365 13,355 11,235 8,976 18,033 11,756 8,068 8,133 7,396 6,926 7,558 20,140 6,211 8.740 6,931 8,493 6,580 8,646 11.319 7.435 11,765 9,822 10,354 9.117 11,097 9,030 7.659 9,943 S443 309 Variable 751 2,960 926 2,069 765 1.966 2,440 856 I ,404 1,192 1,033 2.626 1,751 1,097 1,998 1,563 2,195 2,414 1,170 3,123 1,739 1,698 1.669 1,232 911 1,268 3.151 718 1 ,324 779 1345 1,041 1,328 1,214 1,042 1,564 1,443 1,929 1,117 1,623 1.558 1,619 67 688 Fixed Indirect Cost Total Cost 164 566 245 258 210 395 332 102 325 365 225 295 487 178 221 168 687 258 201 563 229 210 247 160 147 188 167 189 140 152 153 195 247 161 267 165 184 126 348 141 112 174 -202- 11017 1.187 3,106 1,280 1 ,556 1,152 2, 160 1 ,577 661 1,553 2,045 901 2,546 2.644 1,460 1,647 1,050 3,237 2,195 1,067 3,457 1,279 1,350 1,257 825 637 1,141 3,419 843 1,212 736 1,013 863 1,200 1,424 817 1,647 1,143 1,669 1,309 1,847 859 1,045 1,217 66 506 2, 102 6,631 2,451 3,884 2,126 4,522 4,349 1,619 3,282 3,601 2,159 5,466 4,882 2,735 3,865 2,781 6,119 4,867 2,438 7,143 3,247 3,258 3,174 2,217 1,695 2,598 7,037 1,728 2,724 1,656 2,510 2,056 2,723 2.885 2.020 3,478 2,752 3,782 2,552 3,818 1,901 2,716 3,010 145 210 Source: sample of appendectomy patients from TSI data. Blocher, Stout, Juras, Smith: Cost Management 8/e 7-8 Copyright C' 2018 McGraw-Hill Education. All rights rescrvcd. No reproduction or distribution without thc vior written consent Of Education. Chapter 07 - Cost Allocation: Departments, Joint Products, and By-Products Table 2. DRG 470 - Appendectomy Utilization Report Department Description NURSING - MED/SURG OPERATING ROOM OPERATING ROOM SUPPLIES RECOVERY CENTRAL STORES LABORATORY SERVICES CARDIOLOGY / EKG PHARMACY RESPIRATORY THERAPY EMERGENCY ROOM DIETARY LAUNDRY / LINEN Product Description Acuity level 1 daily rate Acuity level 2 daily rate Major surgery I hour Sutures Basic surgical pack Additional OR supplies* Recovery level II 1/4 hours Central store supplies Blood profile. potassium, renal profile EKG 3 channel w/o physician in Pharmaceuticals* Incentive spirometer New start spirometer & oxygen ER visit level IT intensive Daily hospital service Daily hospital service Direct Cost S123.oo 140.00 174.00 17.00 17.00 118.00 24.00 25.50 29.50 13.00 163.50 4.00 6.00 80.00 24.00 9.00 Indirect Cost Quantity M 90.00 229.00 170.00 7.00 6.00 50.00 11.00 58.00 11.00 12.00 133.00 3.00 4.00 142.00 18.00 6.00 1 2 5 3 2 5 3 3 Total Cost $313.00 738.00 344.00 120.00 23.00 168.00 105.00 83.50 81.00 25.00 296.50 35.00 10.00 222.00 126.00 45.00 2,735.00 Detail of specific items charged collapsed into one line item Detail of specific items charged collapsed into one line item Blocher, Stout, Juras, Smith: Cost Management 8/e 7-9 Copynght C' 201 g McGraw-Hill Education. All right' No 'rpxhRtion or distribution without tin prior written consent Of Educatit. Chapter 07 - Cost Allocation: Departments, Joint Products, and By-Products Table 3. Brookwood Medical Center, Department 6103, Nursing MED/SURG _(2J20Q0) Description Acuity level I Acuity level 2 Acuity level 3 Acuity level 4 Observation Observation All others Total Budgeted Volume in Days 18 199 25 165 133 211 Minutes Daily Ser- vice 346 394 547 40 30 200 Budgeted Minutes 92,336 13,675 6,600 3.990 42 200 269.045 Budget Percent Allocation 0.343 0.051 0.025 0.015 0.157 1.000 Table 4. Calculations for Reciprocal Service Department Allocation Service Departments S95,759 Allocation s.32,864 4,867 2,349 1,420 15020 95 759 OR Daily Rate 0 S165 195 14 11 71 Revenue Departments Beginning balance IS allocation (100,000) Balance after allocation Housekeeping allocation Balance after allocation 2nd IS allocation Balance after allocation 2nd housekeeping allocation Balance after allocation 3rd IS allocation Balance after allocation 3rd housekeeping allocation Balance after allocation Transfer minimal balances Ending ba lance 100,000 10,000' 21.000 630 630 19 19 19 '$100,000 * 10% 2SlOO,OOO * 5000 Housekeeping 60,000 50,000? 70,000 _C?P2Q00) 2100 2,100 63 63 (63) JSIOO,OOO $70,000 * 40 0003 50,000 28 0005 78, ooo 10.500 88,500 840 89,340 315 89,655 25 89,680 10 89.690 40.000 21 61,000 8 400 69,400 630 70,030 252 70,282 19 70,301 9 70 310 870.000 40% "$70,000 30% Blocher, Stout, Juras, Smith: Cost Management 8/e 7-10 Copyright e 20 IS McGraw-Hill Education. All nghcs NO or distribution without thc prior Wnttcn Of McGrawHill Chapter 07 - Cost Allocation: Departments, Joint Products, and By-Products Table 5. Brookwood Medical Center, Education Allocation to Emergency Room Department Pain Management Diabetic Services Emergency Room Monitoring Services Quality Assurance Dietary Collections Outpatient Registration All others Total Paid Hours 2.083 8,993 124,212 40,634 21,314 167,411 13,650 19,776 4 488 783 4 886 856 Allocation base: paid hours Budget $500,000 Percentage of paid hours by department 0.279320 0.404677 91.854210 100.00% Amount allocated Sl,396.60 S2,023.39 $500.000.00 Blocher, Stout, Juras, Smith: Cost Management 8/e 7-11 Copynght C 201S McGraw-Hill Education. All rights rcrvcd. No reproduction or distribution without prior written cutscnt of McGraw-Hill