Your hospital has been approached by a major HMO to perform all their MS-DRG 470 cases (major joint procedures). They have offered a flat price of $10,000 per case. You have reviewed your charges for MS-DRG 470 during the last year and found the following profile:

Average Charge	Average LOS 5 Days Routine Charge	Cost/Charge	Variable Cost %
$15,000	$3,600	0.80	60

	Average LOS 5 Days Routine Charge	Cost/Charge	Variable Cost %
Operating Room	$2,657	0.80	80
Anesthesiology	$293	0.80	80
Lab	$1,035	0.70	30
Radiology	$345	0.75	50
Medical Supplies	$4,524	0.50	90
Pharmacy	$1,230	0.50	90
Other Ancillary	$1,316	0.80	60
Total Ancillary	$11,400	0.75	50

In the above data set, assume that the hospital's cost to charge ratio is 0.80 for routine services and 0.75 for all other ancillary services. Using this information, what would the average cost of MS-DRG 470 be?

In economics, average cost and/or unit cost is equal to total cost (TC) divided by the number of goods produced (the output quantity, Q). It is also equal to the sum of variable costs (total variable costs divided by Q) plus average fixed costs (total fixed costs divided by Q).