Lab budgeting and cost accounting under DRGs

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Cost accounting is not a solution to management problems. It is amanagement tool designed to provide information that facilitates sounddecisions. The two primary objectives of cost accounting are 1) tomatch cost with revenue and 2) to match resource consumption with theunits of service provided.

Under the DRG system, matching revenue with cost and evaluatingappropriate utilization levels must be done on a patient-by-patient orcase-by-case basis. These are hospital management functions.Overutilization of services for a patient will drive costs above thelevel of the fixed payment rate for a particular diagnosis. Since the cost of a particular test can no longer be matchedagainst a specific dollar amount of revenue, laboratory managers nowwill have the most significant impact by producing lab services asefficiently as possible in terms of costs.

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Controlling resourceconsumption is the lab’s prime concern, and the cost/output ratiois the laboratory manager’s key performance measurement. In hospitals, two distinct management components require cost data:individual service centers providing unique aspects of patient care andindependent physicians who determine the types and quantity of servicethe different centers provide. Each of these centers–nursing, emergency room, radiology, and thelaboratory, for example–has a unique set of economic factors affectingits ability to operate efficiently and maintain viability. Thedepartment head for each center has control over labor used, suppliesconsumed, and support services consumed (laundry, housekeeping, etc.

),and is expected to absorb some administrative overhead. Physicians, however, control the center’s scheduling function.They do so by ordering tests and other services. Which patients receive lab services or how much each patientreceives is irrelevant to the laboratory manager.

But if hospitaladministrators succeed in reducing test utilization by persuadingphsicians to curb unnecessary ordering, the laboratory must reactappropriately. That means scaling down operations in a way that resultsin significant savings. A mere decrease in the number of tests performed will not cut costsa great deal. For example, it may only shave reagent use and a bit offthe electricity bill.

Personnel and overhead costs continue at previouslevels unless management does something about them. We will suggest possible methods of reducing laboratory resourceconsumption, but our main purpose here is to outline a cost accountingsystem that gives lab managers the best cost data available on theoperational components of the laboratory that they can do somethingabout. Data on volume and expenses that the manager cannotcontrol–such as tests ordered by different medical services andallocations for everything from the hospital security force to legalfees–confuse the laboratory performance measurement process and provideexcuses for poor performance. to be a useful management tool, the costaccounting system must accurately measure cost per unit of service anddetermine what resources should have been consumed for the units ofservice provided.

What are the elements of this system? * It measures production, and some production sttistic must bemaintained. We call it a “production measurement unit” (PMU).Depending on the health care service being measured, any of thefollowing can serve as a PMU: the CAP workload recording unit; a similarrelative value unit set individually for each hospital department; apatient day; a care plan day, which classifies a patient into one ofseveral levels requiring different degrees of resource consumption (usedcommonly in nursing); or some time increment, a minute or an hour, say,which could be suitable for surgery. Each laboratory section will probably have its own set of PMUs.

Forexample, microbiology is heavily manual while chemistry is highlyautomated, and their outputs cannot be measured in the same manner. Inselecting a reasonable PMU, consider the following criteria: 1. It is the single factor that most clearly causes resourceconsumption to vary. Note that this must relate to consumption–the useof labor and materials, and instrument costs–not to what the laboratoryhas been charging for a test.

2. It must be measurable and easily understood by laboratorypersonnel. If the staff cannot understand the PMUs, the systemwon’t be effective. 3.

It must be affected only by volume changes. Laboratories have an advantage over other areas of health carethrough a long history of using CAP units as a statistical measure forvolume. CAP units, however, may fall short when used to measureresource consumption. Some observers argue that workload recordingrelates quite well to labor consumed but may cause distortion in highlyautomated labs.

PMU measurements must be accurate, indicating the relative weightof each procedure in comparison with other procedures. The tabulation method should also be capable of summarizing PMUs by patient. * Natural expense classifictions are used in grouping costs, suchas labor and supplies. Some expense classifictions, like supervisionand instrument depreciation, will be fized.

Their cost per unit ofservice will decline as volume increases. On the other hand, if thevolume of supplies consumed is in direct proportion to the number oftests performed, supply costs per unit of service will remain constantregardless of volume. * Resource consumption goals, based on cost behavior, must be anintegral part of the cost accounting system. Since it is now essentialto adjust costs upward or downward in relation to output, budgets haveto be determined on the basis of actual units of production achieved.

When volume declines, the laboratory manager must be able to identifythose costs that behave in a variable fashio and control resourceconsumption at the appropriate level. The tendency will probably be to make labor more variable. OneWest Coast hospital drove its labor expenses below 55 per cent of totalcosts, compared with a national average of 60 to 65 per cent, byoffering voluntary unpaid time off. This hospital fills in withpart-timers and draws on a pool of standby employees for the evening andnight shifts.

Standby employees receive full pay for hours worked and ahalf-time rate for being on call. Any employee working more than 20hours per week receives full benefits. The idea is to make better useof employees and have them in the hospital only when needed. We are also sure to see a drive to automate as much as possible,along with procedural changes aimed at reducing consumption ofconsumables.

There will be more batching of tests and fewer Stats. Laboratory budgets of the future may not show fixed dollar amounts.Rather, they may have formula entries like these: supervision,$5,500/month; technical labor, 0.10 hours/PMU at $13.

50 per hour;supplies, $0.45/PMU; purchased services, $0.25/PMU; and laundry, 10 $0.

24 per 100 PMUs. to judge performance, the number of PMUs produced in eachaccounting period will be matched against resources consumed. Figure I,a performance report for a hospital chemistry lab, itemizes thevariances between actual costs per PMU and predetermined standard costsper PMU. Variances from budget may be due to higher supply prices or to toomuch use of supplies; or similarly, to pay rates that are too high or totoo many hours of labor used.

It’s obviously important, inanalyzing the data, to distinguish between the cost of resources andexcessive consumption. Figure II lists some cost information elements and the differentmanagers who should be controlling them. It points up the goal of costaccounting: to provide each manager with only the data that he or shehas the power to control. Cost accounting is, in effect, responsibilityaccounting.

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Lab budgeting and cost accounting under DRGs. (2017, Nov 20). Retrieved from

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