Question:A hospital has five service departments and five clinical departments and five outputs DRG1, DRG2, DRG3, DRG4 and DRG5. The costs of the service department must first be passed onto the clinical departments. Then the costs of the clinical department must be allocated to DRG categories to determine the per-unit cost of each DRG.

Budgeted patient numbers for 2010 for each DRG category is:

DRG1 2,200

DRG2 1,200

DRG3 300

DRG4 350

DRG5 550

Budgeted costs for the service departments are:

Administration $300,000

Cleaning $410,000

Security $120,000

Medical records $400,000

Laundry $750,000

The direct costs of the clinical departments are:

Radiology $1,400,000

Laboratory $1,000,000

Physiotherapy $140,000

Nursing $2,400,000

Oncology $2,000,000

Administration costs are to be allocated on the basis of staff numbers.

Cleaning costs are to be allocated on the basis of area occupied.

Security is to be allocated equally among the clinical departments.

Medical records are to be allocated according to patient episodes of care.

Laundry is to be allocated on the basis of kilos of laundry handled.

Staff Numbers Area Occupied Episodes of Care Kilos of laundry

Radiology 30 220 sq ft 3000 115

Laboratory 40 270 sq ft 4000 265

Physiotherapy 20 95 sq ft 4800 165

Nursing 0 370 sq ft 9800 695

Oncology 30 210 sq ft 4100 155

The costs of the clinical departments are to be allocated to DRG categories on the basis of service weights only.

The service weights are as follows:

DRG1 DRG2 DRG3 DRG4 DRG5 Total

Radiology 2 2.5 4.5 1 0 10

Laboratory 0.5 3.5 4 1 1 10

Physiotherapy 2 3 1 1 3 10

Nursing 3 0 2 4 1 10

Oncology 2.5 0.5 2 3 2 10

a. Given the above information, calculate the unit costs of each DRG.

b. The government pays the following reimbursements for these DRG categories:

DRG1 $1,000

DRG2 $1,200

DRG3 $7,000

DRG4 $6,000

DRG5 $3,500

Given that this hospital is funded on a casemix basis, explain how the government would calculate these reimbursement rates.

c. Given the hospital's cost structure and these reimbursement rates, what actions should this hospital take with regard to the provision of these DRG services.

d. Suppose that instead of casemix funding the hospital was simply reimbursed for its actual costs in providing the above DRG services. eg. if the hospital incurred costs of $1,500 to provide DRG1 it was reimbursed $1,500 for each DRG1 patient. How would this payment system affect the way in which the hospital provided these services - i.e. would the hospital's reaction be different to the way it would have acted in your answer to part 3?