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HBSP Product Number TCG159 THE CRIMSON PRESS CURRICULUM CENTER THE CRIMSON GROUP, INC. Owen Hospital I don't believe we lost money on both those patients. I've talked with the attending physicians who treated them and Peter ordered much simpler tests and procedures. He also didn't use the ICU [intensive care unit]. Megan ordered s res, and kept her patient in the ICU for two days. The speaker was Sheila Leddy, M.D., chief of medicine at Owen Hospital. She was talking to Joe Mccarthy, her departmental administrator, about the situation with two patients, each of whom had a discharge DRG that resulted in a payment of $5,600. The hospital records showed that the cost of care for each patient was $5,922. Having obtained the medical records, Dr. Leddy realized that the physicians who had treated these patients had ordered quite different tests and procedures and also had used the ICU differently. She continued: I've obtained some summary information from fiscal affairs. Here's an abbreviated cost report [ Exhibit 1], and the data the folks in fiscal gave me that shows what they call the cost per unit [Exhibit 2]. They put that information together with their information on the patients' use of tests, procedures, and bed days, and came up with this ludicrous set of number that shows both patients cost exactly the same [ Exhibit 3]- The problem is that Peter's patient [ Patient #1] used pretty simple lab tests and x-rays, whereas Megan's patient [ Patient #2] used more complex tests and proced rise as you might like it to be, but it should be good enough to see if I'm right that the informati rimation from fiscal affairs is pretty worthless. Will you see if you can compute the costs when these differences are built in, and also figure out how to include the ICU costs, which, as far as I can tell, are lumped in with the overall inpatient care costs. In an effort to respond to Dr. Leddy's request, Mr. Mccarthy discussed costs in the pathology and radiology departments with his counterparts there, and obtained the information shown in Exhibit 4. He also did some research in hospital records and talked with the inpatient nursing staff. The results of his efforts are also shown in Exhibit 4. He explained: I've used round numbers since nothing is very precise, but I think I've come pretty close. In radiology and pathology, for example, they had done some time and motion studies to determine how much labor and supplies (such as reagents) went into different tests and procedures. As you can see, in both departments they didn't get very sophisticated, but the distinction between simple and complex is probably good enough for our purposes. Getting department administrative costs was a little tricky, but I decided that if I multiplied the labor and material cost per unit by the number of units, I would get the total department direct costs that were also direct with regard to the test or procedure. Everything else must be administrative, or at least not di- rectly associated with a test or procedure even though it's direct for the department. Inpatient care was a little more tricky, but not excessively so. I found as best I could all the depart- ment's costs that could be directly associated with a day of stay; this includes mainly nursing, but also some other personnel and some supplies. I then divided them between the main ward and the ICU based on where nurses were spending their time and how many nurses were in each place on a typical day This case was prepared by Professor David W. Young. It is intended as a basis for class discussion and not to illus. Irate either effective or ineffective handling of an administrative situation. Copyright @2018 by The Crimson Group, Inc. To order copies or request permission to reproduce this document, contact Harvard Business Publications (http://hbsp.harvard.edu/). Under provisions of United States and in- Hernational copyright laws, no part of this document may be reproduced, stored, or transmitted in any form or by any means without written permission from The Crimson Group (www.thecrimsongroup.org)TCG159 . Owen Hospital 2 of 4 Housekeeping was a service center cost allocated to the department, so I didn't include it in the direct cost figure. The same was true for the other service centers on the cost report [ Exhibit IJ. Instead, to figure out how much of a center's cost should be allocated within a department, I just extended the approach in the cost report. For example, I did a rough measure of square footage, and found that the simple tests look up about 30 percent of the space in the lab, whereas the space needed to conduct complex tests took up about 70 percent. Of course, some space was used for other purposes, but I tried to divide it as fairly as I could between the two types of tests. I did the same for maintenance hours and salary dollars, although they were both easier, since there were maintenance records for all the machines and salary records for the technicians and other personnel. I then did the same sort of thing for radiology and inpatient care. Again, there were some minor prob. lems in assessing some of the costs, but nothing too difficult. However, as I say, I kept the numbers round- ed since nothing is completely precise. Mr. Mccarthy knew he needed to work quickly with the data he had gathered since Dr. Led- dy was expecting a report by late afternoon. Assignment 1. Using the data Mr. Mccarthy has assembled, compute revised cost figures for the two patients. What as- sumptions, if any, did you need to make? 2. How valuable is the cost figure you computed? That is, how might Dr. Leddy use it for decision-making. Be as specific as you can concerning the kinds of decisions she might make with this new information: pricing. profitability, product cross-subsidization, product elimination, physician behavior, and so on. 3. How might you improve upon the data Mr. Mccarthy has gathered? That is, if you had the opportunity, what additional data would you gather with what goals in mind?OWEN HOSPITAL Exhibit 1. Abbreviated Hospital Cost Report Costs Allocations Direct Allocated to be Depreciation Maintenance Housekeeping A&G Full Costs Costs Allocated (5q FO) (Hours) (5q FO (Salary $) Cost 234+5+6+7 1+2 8=1+2 Support Centers Building depreciation 1 200 000 1.200.000 Building maintenance 950 000 105,000 1,055,000 105,000 Housekeeping services 300 000 154.555 454.555 95,000 59.555 Admin & General 1 300 000 381.605 1.681.605 156.000 158.250 67 355 Mission Center Radiology 1,750 000 688 321 140,000 147.700 64 300 336 321 2,438,321 Laboratory 2 000 000 788 814 160,000 172.545 69 500 386,769 2,788,814 Dialysis Unit 1 250 000 423.930 50.000 116.050 22 455 235 425 1.673.930 Inpatient Care 7 000 000 959.723 350.000 158.250 165 600 285 873 7.959.723 Outpatient Department 2 250 000 889.212 144.000 242.650 65 .345 437 217 3,139.212 Total cost 18 000 000 1.200.000 1.055.000 454.555 1 681 605 18,000,000 Exhibit 2. Departmental Breakdown Exhibit 3. Cost for Two Patients Number Cost Number Cost per Cost Item Total Cost of Units per Unit of Units Unit Cost Inpatient Care Patient #1 Nursing $5 800 000 X-Ray #1 81 28 $ 162.55 Departmental administration 1 200 000 Lab Test #1 1859 37.18 Allocated hospital depreciation 350,000 Lab Test #2 1859 37.18 Allocated maintenance 158,250 Inpatient stay 1,137.10 5,685.52 Allocated housekeeping 165.600 Outpatient visits 125.57 Allocated administration and general 285.873 Tola $ 5.922.44 Inpatient total $7 959 723 7000 days 1137.10 Patient #2 Radiology $2 438 321 30,000 x-my's 81.28 X-Ray #1 81 28 $ 162.55 Laboratory 2,788 814 150,000 tests 18.59 Lab Test # 1 18 59 37.18 Dialysis 1.673,930 4.500 treatments 371.98 Lab Test #2 18.59 37.18 Outpatient care 3,139,212 25,000 visits 125.57 Inpatient stay 1,137.10 5,685.52 $18 000 000 Outpatient visits 125.57 Total $ 5,922.44Exhibit 4. Information Obtained by Mr. Mccarthy Labor & Number " of of Material of Space Maint. Salary Cost/Unit Units Occupied Hours Dollars 2 3 4 5 Radiology Simple x-ray 40.00 25 000 10% 20% 80% Complex x-ray 70.00 5000 60% 10% Total 30 000 Department Administrative Costs $400.000 Pathology Simple test 9.00 125 000 30% 40% 60% Complex test 16.00 25 000 70% 60% 40% Total 150 000 Department Administrative Costs $475.000 Inpatient Care Ward 700.00 6000 30% 20% 70% Intensive Care Unit 1.600 00 1 000 70%% 30% Total 7 000 Department Administrative Costs $1.200,090 Notes: 1. Computed based on time and motion studies; includes both technician time and materials used. 2. Computed from departmental records. See Exhibit 2 3. Obtained from hospital records, and computed for areas in department where units are produced 4. Obtained from hospital records 5. Computed from departmental records