Includes Supplements 4 through 8

1
Chapter 23

• Includes Supplements 4 through 8
• Accounting Version

2
The Revenue Equation
3
Supplement Four

• Pricing products and services
• Billed charges
• Cost reimbursement
• DRG reimbursement
• Capitation payment

4
Billed Charges

• Used by individuals and small insurance companies
  that cannot negotiate discounts or prospective
  payment
• The only way to lose money under billed charges
  is not to set your prices at a level that covers
  costs

5
Cost Reimbursement

• Historical payment system for Medicare
• Hospital was paid estimate of cost during fiscal
  year
• Actual costs (per patient day) were audited at
  year end
• Cost reimbursement provides few incentives for
  cost control

6
DRG Reimbursement

• Now used by Medicare, Medicaid and some insurance
  companies
• Each DRG has fixed payment
• To make money a hospital must
• Admit a patient
• Keep costs under charges

7
Capitation Payment

• First used by HMOs
• Hospital is paid fixed payment per month per
  enrollee
• To make money
• Keep expensive services such as hospital
  admissions to a minimum
• Capitation and DRG both require sophisticated
  costing information

8
Supplement Five

• Information Needs of Managers

9
Cost data is needed for . . .

• Pricing
• Cost Control
• Strategic Planning
• Measurement of Comparative Efficiency

10
Wes Learns That . . .

• Since the early 1980s, rural hospitals have
  experienced revenue decreases due to
• Shorter length of stays caused by DRG
  reimbursement
• Caps on payment by insurance companies
• Out-migration to larger metropolitan hospitals

11
He can increase volumes by

• Offering new products and services
• Capturing volume from competing hospitals

12
Supplement Six

• Cost Accounting Taxonomies

13
Should the costing system be?

• Job-order-costing or process-costing?
• Actual, normal, or standard costing system?

14
Job-order-costing systems

• Used by firms that manufacture unique products
• Costs are accumulated on a job ticket
• Direct labor
• Direct materials
• Overhead
• Examples include custom home builders, and auto
  repair shops

15
Process Costing Systems

• Used by companies that manufacture homogeneous
  products
• Costs are accumulated by department, then
  allocated to the products passing through the
  department that period
• Examples of companies that use process-costing
  include manufacturers of petroleum and ball
  bearings.

16
Should the system be . . .

• An actual cost accounting system?
• Debit WIP for actual direct labor, actual direct
  materials, and actual overhead
• A normal cost accounting system?
• Debit WIP for actual direct labor, actual direct
  materials, but use overhead rate
• A standard cost accounting system?
• Debit WIP for standard direct labor, standard
  direct materials, and standard overhead

17
Possible advantages of standard costing system

• More accurate information on why the hospital is
  losing money
• Easier methodology for assigning costs to
  patients
• Better inventory and cash control

• Mechanism for involving employees in cost savings
  through bonuses
• Better methodology for implementation of
  responsibility accounting

18
Supplement Seven

• Designing Accounting Reports to Meet Information
  Needs

19
What is the difference between data and
information?

• Data are numbers processed by the accounting
  system
• Information is data that is useful for decision
  making

20
The information needed is different to manage
each of these contracts

• Prospective payment contracts
• DRG Reimbursement
• Capitation Payment
• Retrospective payment contracts
• Billed Charges
• Cost Reimbursement

21
Questions to ask in designing management reports

• How does the hospital make or lose money on this
  particular type of contract?
• What variables, therefore, should the manager
  monitor?
• What information must be sent on these variables?

22
Questions to ask in designing management reports

• How will we gather the data to prepare the
  reports?
• What format should the information take?
• How timely must the information be?

23
Identifying Information Needs

• Capitation payment demonstrated

24
How do we lose money under capitation payment?

• Unnecessary hospital admissions
• Longer than necessary length of stay
• Treatment of patients with higher levels of care
  than necessary
• Failure to keep patients well through preventive
  medicine
• Failure to prevent hospital infections and
  complications

25
Variables to monitor

• Admissions
• Patient days
• Costs
• Preventive medicine programs
• Infections control programs
• Etc.

26
Variables to monitor

• Admissions per 1000 population
• Average length of stay per diagnosis
• Intensity and volume of services provided
• Preventive medicine services rendered
• Infection rates, mortality and morbidity rates
• Cost per capita per year for each employee

27
Sources of data

• Medical records
• Outpatient clinics
• Physicians records
• Admissions and Business Office
• Accounting
• Actuarial data

28
How Timely?

• At least monthly

29
Global Functions of Proposed Costing System

• Cost determination
• Activity forecasting
• Functional cost center budgeting
• Performance reporting on a
• Product level
• Functional level

30
Supplement Eight

• Designing the Pricing Module

31
Product Costing Detail
Final Product
Intermediate Product
Intermediate Product
Primary Product
Primary Product
Primary Product
32
Standard Labor Cost
Standard Labor Cost
Standard Hours
Standard Hourly Wage
X

Three Options 1. Industrial engineer study 2.
Borrow standards 3. Use historical average
as standard (use RVUs to determine)
Take from Alma Cowdrey study
33
Using RVUs to Determine Standard Hours

• What is an RVU?
• A unit of measure of resource consumption (labor)
• Who develops RVU schedules
• Professional associations such as the American
  College of Pathologists

34
RVU Procedure

• Separate total labor into fixed and variable
  labor costs with linear regression
• Determine total RVUs by multiplying total
  procedures done by category by their respective
  RVU
• Divide total labor cost by total RVUs to get cost
  per RVU
• Multiply each test by its RVU cost