help with question 4.

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 incentive 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 University 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 delegated 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 their 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 financial performance. In the Department of Medicine, Dr. Julian had decentralized this responsibility to the directors of the vari ous divisions, such as general medicine, cardiology, 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 emergency), 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 of allocation 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. Because of this, the present cost accounting system is of little use for many cases. This is extremely frustrating, especially since the hospital is expecting me to use the average cost per day approach to manage costs in the department. The average figure simply does not account for the real use of clinical resources by patients undergoing procedures. It was because of this concern that Dr. Julian had asked Mr. Haskell to go to the finance office for assistance. However, when he described Dr. Julian's assessment of the problem to the finance office, he met with some resistance. He commented: 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 deput ments within the hospital. It also helps them compare the cost of a particular department at Carroll with a similar department at another hospital. Additionally, they can use the information to estimate the cost of treating an entire illness at Carroll According to the finance office figures, the cost of a patient with pancreatitis would be about $3.709 (5927.25 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 require more or fewer diagnostic and therapeutic interventions, depending on their admitting diagnoses. ERCP (Endoscopic Retrograde Cholangiol Pancreatography procedures, for example, are used exclusively by po tients in gastroenterology Somehow, a good cost accounting system must recognize these differences. I also don't want my de partment to appear overly costly simply because some patients don't conform to the norm. The current cost accounting system doesn't count for the differences among patients, and it doesn't give me the data I need to manage cost 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 cardiology, and a third for oncology. Ex- hibit 3 contains this information 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 other diagnoses. One was cardiac dysrythmia, which required a cardiac catheterization and some electrophysiology studies. The other was a patient with liver cancer, who would be tested and diagnosed in the oncology divi sion 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. Julian contin- ued to harbor some concerns. 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 nursing and medical care than others, even if both patients are in the oncology division. The same is true in other divisions. Even with the improvements we've made, we're 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. From a clinical perspective, this just isn'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. Working 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, housekeeping, and so forth. This would continue to be measured on the basis of a bed/day. By contrast, Dr. Julian decided that medical treatment could be measured with an index of non- nursing clinical intensity. 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 (MTU). She made some estimates for the rest of the activities in the de- partment and arrived at the total MTUs 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 wa mwito be a similarly complicated issue. Dr. Julian consulted with Levels of nursing care proved to be a similarly 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 described in Exhibit 4. A patient could change levels during his or her stay, and, within each level, a patient could 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: Diagnosis Bed-days MTUS Nursing Units Pancreatitis 4 8 5 Cardiac Dysrythmia 3 12 10 Liver Cancer 7 20 38 Dr. Julian was satisfied with the results of this cost accounting system. She believed that it ac- curately distinguished among the activities in the different divisions, and that the differences in costs reflected the actual differences in resources used by patients. She commented: With this new information, 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 further so that stan- dard unit requirements for each diagnosis become well-known by the division heads, as well as the attend- ings and residents in the department. Then I'll be able to analyze 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 experiment, and perhaps in the department overall. However, he wondered if it could be transferred to other departments in the hospital. He also was concerned about the complexity of the system for division heads, who, in his view, might 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 1. What is the cost of treating a patient with pancreatitis under each of the cost accounting systems? A pa tient with cardiac dysrythmia? A patient with liver cancer? What accounts for the changes from one sys- tem to the next? Which of the three systems is the best? Why? 2. 3 From a managerial perspective of what use is the information in the second and third systems? That is, how, if at all, would this additional information improve Dr. Julian's ability to control costs? What should Dr. Julian do