Carroll University Hospital PDF

Carroll University Hospital
This report doesnt describe where our costs are generated. Were 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, its not even an appropriate response to the hospitals 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 hospitals 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,
Carrolls senior management hoped to improve the hospitals 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 hospitals 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 departments 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:
HBSP Product Number TCG 1
THE CRIMSON PRESS CURRICULUM CENTER
THE CRIMSON GROUP, INC.
_____________________________________________________________________________________________
This case was prepared by Professor David W. Young with assistance from Robert Goldszer, M.D. It is intended as a
basis for class discussion and not to illustrate either effective or ineffective handling of an administrative situation.
Copyright 2012 by David W. Young and The Crimson Group, Inc. To order copies or request permission to re-
produce this document, contact Harvard Business Publications (http://hbsp.harvard.edu/). Under provisions of
United States and international 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)
This document is authorized for use by Steven Blubaugh, from 8/16/2013 to 11/16/2013, in the course:
MBA 8550 FLEX: Healthcare Financial Management and Planning - Ketsche (Fall 2013), Georgia State University.
Any unauthorized use or reproduction of this document is strictly prohibited.
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 its 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. Julians assessment of the problem to the finance
office, he met with some resistance. He commented:
The finance folks told me that Dr. Julian just doesnt understand. According to them, their system is ideal
for comparative purposes. It allows them to quickly compare the costs of services among different depart-
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 ($927.25 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. ERCPs
[Endoscopic Retrograde Cholangiol Pancreatography procedures], for example, are used exclusively by pa-
tients in gastroenterology.
Somehow, a good cost accounting system must recognize these differences. I also dont want my de-
partment to appear overly costly simply because some patients dont conform to the norm. The current cost
accounting system doesn't account for the differences among patients, and it doesnt give me the data I need
to manage costs.
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.
_____________________________________________________________________________________________
Carroll University Hospital June 2012 2 of 8
From their findings, Dr. Julian and Mr. Haskell concluded that this specialty-based system
could greatly increase Dr. Julians 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 departments 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 (MTUs). 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.
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 Ill 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?
2. Which of the three systems is the best? Why?
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. Julians ability to control costs?
4. What should Dr. Julian do?
_____________________________________________________________________________________________
CARROLL UNIVERSITY HOSPITAL
Exhibit 1. Cost Center Report for Department of Medicine*
Number of available bed/days 164,250
Number of occupied bed/days 146,020
Occupancy rate 88.9%
Direct Costs
Wages: Nursing service $31,823,300
Clinical support staff 7,936,942
Administrative staff 1,326,050 $41,086,292
Supplies: Administrative supplies $1,550,400
Medical supplies 6,700,500 8,250,900
Capital Depreciation on major purchases $1,740,000
Equipment Minor purchases 340,000 2,080,000
Total Direct Costs $51,417,192
Purchased Services Costing unit
Pharmaceutical Prescription $21,185,963
Diagnostic imaging Procedure 7,873,610
Laboratory tests Test 7,568,994
Special procedures Procedure 4,788,729
Radiotherapy Procedure 2,444,060 43,861,356
Allocated Service Center Costs Allocation Basis
Patient Dietary Meals $6,264,300
Services: Laundry Pounds 1,695,750
Housekeeping Square Feet 1,542,600
Medical records # of Records 1,277,200
Social Service Hrs. of Service 1,208,970 11,988,820
General Operation of plant Square Feet $2,364,500
Services Plant depreciation Square Feet 3,826,800
Employee benets Salary Dollars 4,473,862
Administration # of Employees 12,054,500
Liability Insurance Square Feet 5,410,000 28,129,662
Total Purchased Services and Allocated Costs $83,979,838
Total Costs $135,397,030
Average cost per day at full capacity $824.34
Average cost per day at occupied capacity $927.25
Exhibit 2. Cost Summary by Department*
Average Cost
Costing Total at Occupied
Inpatient Costs by Specialty Unit Cost Capacity
General Surgery bed/day $76,375,940 $996.70
Orthopedic Surgery bed/day 23,146,360 1,172.80
Neurosurgery bed/day 11,713,050 1,382.25
Medicine bed/day 135,397,030 927.25
Obstetrics and Gynecology bed/day 24,036,250 819.12
Pediatrics bed/day 11,803,640 661.71
Anesthesia in Inpatient Operating Rooms 13,789,475
Major/General Anesthesia procedure $1,197
Major/Epidural or Spinal procedure 1,163
Major/Local or Regional procedure 760
Minor/General Anesthesia procedure 589
Minor/Epidural or Spinal procedure 485
Minor/Local or Regional procedure 274
Anesthesia in Emergency Operating Rooms 4,842,631
Minor/General Anesthesia procedure $486
Minor/Local or Regional procedure 388
Minor/No anesthesia procedure 178
Total Costs $301,104,376
* Clinical care costs only. Research and other costs were reported separately.
Exhibit 3. Cost Breakdown for Three Divisions
Costs Gastroenterology Cardiology Oncology Total
Direct Costs
Wages
Nursing service $2,342,500 $5,602,382 $10,586,241 $18,531,123
Clinical support staff 641,238 2,548,256 2,785,496 5,974,990
Administrative staff 267,850 288,936 275,841 832,627
Supplies
Administrative supplies 310,080 341,088 325,584 976,752
Medical supplies 619,787 1,161,287 1,409,039 3,190,113
Capital Equipment
Depreciation on major purchases 65,472 245,519 163,679 474,670
Minor purchases 13,305 49,892 33,262 96,459
Total Direct Costs $4,260,232 $10,237,360 $15,579,142 $30,076,734
Purchased Clinical Services
Pharmaceutical $1,544,090 $4,322,313 $7,775,859 $13,642,262
Diagnostic Imaging 399,041 931,436 2,374,310 3,704,787
Laboratory Tests 627,063 1,571,228 2,749,580 4,947,871
Special procedures 1,520,364 2,584,630 699,447 4,804,441
Radiotherapy 0 0 1,236,659 1,236,659
Total Purchased Clinical Services $4,090,558 $9,409,607 $14,835,855 $28,336,020
Allocated Service Center Costs
Patient Services
Dietary $294,958 $737,396 $1,105,687 $2,138,041
Laundry 120,325 293,357 195,572 609,254
Housekeeping 95,874 260,923 173,949 530,746
Medical Records 68,542 165,477 135,377 369,396
Social Services 52,886 135,869 198,321 387,076
General Services
Operation of plant 109,302 409,982 273,321 792,605
Plant depreciation 163,457 612,963 408,642 1,185,062
Employee benets 357,675 928,353 1,501,234 2,787,261
Administration 459,879 1,724,545 1,149,697 3,334,121
Liability Insurance 248,237 930,888 620,592 1,799,717
Total Allocated Service Center Costs $1,971,135 $6,199,753 $5,762,392 $13,933,279
Total Direct, Purchased, and Allocated $10,321,925 $25,846,720 $36,177,389 $72,346,033
Number of bed/days 12,250 22,158 18,547
Cost per bed/day $842.61 $1,166.47 $1,950.58
Note: The totals on this exhibit differ from those for the department as a whole since only three divisions are included.
EXHIBIT 4. Levels of Nursing Care
1
Level 1 Basic Assistance (mainly for ambulatory patients) 1-3 units
Feeds self without supervision or with family member.
Toilets independently.
Vital signs routine - daily temperature, pulse and respiration.
Bedside humidifier or blow bottle.
Routine post-operation suction standby.
Bathes self, bed straightened with minimal or no supervision.
Exercises with assistance, once in 8 hours.
Treatments once or twice in 8 hours.
Level 2 Periodic Assistance 4-7 units
Feeds self with staff supervision; I&O; or tubal feeding by patient.
Toilets with supervision or specimen collection, or uses bedpan. Hemovac output.
Vital signs monitored; every 2 to 4 hours.
Mist or humidified air when sleeping, or cough and deep breathe every 2 hours.
Nasopharyngeal or oral suction prn.
Bathed and dressed by personnel or partial bath given; daily change of linen.
Up in chair with assistance twice in 8 hours or walking with assistance.
Treatments 3 or 4 times in 8 hours.
Level 3 Continual Nursing Care 8-10 units
Total feeding by personnel or continuous IV or blood transfusions or instructing the
patient. Tube feeding by personnel every 3 hours or less.
Up to toilet with standby supervision or output measurement every hour. Initial
hemovac setup.
Vital signs and observation every hour or vital signs monitored plus neuro check.
Blood pressure, pulse, respiration and neuro check every 30 minutes.
Continuous oxygen, trach mist or cough and deep breathe every hour. IPPB with
supervision every 4 hours.
Tracheostomy suction every 2 hours or less.
Bathed and dressed by personnel, special skin care, occupied bed.
Bed rest with assistance in turning every 2 hours or less, or walking with assistance
of two persons twice in 8 hours.
Treatments more than every 2 hours.
1
Adapted from Poland, M., et al, PETO - A System for Assisting and Meeting Patient Care Needs, American
Journal of Nursing, 70:1479 July 1970.
_____________________________________________________________________________________________
Exhibit 5. Level of Care System
Daily
Patient Medical Nursing
Costs Maintenance Treatment Care Total
Direct Costs
Wages
Nursing $31,823,300 $31,823,300
Clinical Support $158,739 $3,809,732 3,968,471 7,936,942
Administration 1,060,840 132,605 132,605 1,326,050
Supplies
Administrative Supplies 1,085,280 155,040 310,080 1,550,400
Medical Supplies 1,340,100 3,350,250 2,010,150 6,700,500
Capital Equipment
Major equipment depreciation 400,200 1,044,000 295,800 1,740,000
Minor 68,000 221,000 51,000 340,000
Total Direct Costs $4,113,159 $8,712,627 $38,591,406 $51,417,192
Purchased Services
Pharmaceutical $21,185,963 $21,185,963
Diagnostic Imaging 7,873,610 7,873,610
Laboratory Tests 7,568,994 7,568,994
Special Procedures 4,788,729 4,788,729
Radiotherapy 2,444,060 2,444,060
Total Purchased Services $43,861,356 $43,861,356
Allocated Service Center Costs
Patient Services
Dietary 6,264,300 $6,264,300
Laundry 1,695,750 1,695,750
Housekeeping 1,542,600 1,542,600
Medical Records 1,277,200 1,277,200
Social Services 1,088,073 120,897 1,208,970
General Services
Operation of Plant 2,364,500 2,364,500
Plant depreciation 3,826,800 3,826,800
Employee Benets 223,693 447,386 3,802,783 4,473,862
Administration 12,054,500 12,054,500
Liability Insurance 4,760,800 649,200 5,410,000
Total Allocated Costs $30,337,416 $5,329,083 $4,451,983 $40,118,482
Total Costs $34,450,575 $57,903,066 $43,043,389 $135,397,030
Total Days Care 146,020
Cost per bed/day $236
Total Medical Treatment Units 318,000
Cost per Medical Treatment Unit $182
Total Nursing Units 515,000
Cost per Nursing Unit $84

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