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Chapter 23
Includes Supplements 12 through 13
Supplement Twelve
The Use of Case-Mix in Assessing Efficiency
Comparing Hospital Charges• Hospital charges are often used as a
surrogate for efficiency in comparing hospitals
• Patients assume that hospitals with lower cost are more efficient
• There is an attempt by some groups to publish price information in an effort to make hospitals more price competitive
The question is, what do you compare?• Some hospitals see more complex
cases than others. It is not fair to compare the average room rate, for example, of a primary care hospital with a tertiary care hospital.
The question is, what do you compare?• One way to adjust for the
difference in the difficulty of cases seen is to use a case-mix index.
Definition
•Case-mix refers to the acuity or severity of illness of the average patient seen in a particular hospital.–A hospital with a case-mix of 1.50 sees patients who on the average consume 1.50 more resources because of the severity of their illnesses.
Case-mix Indexes
• Medicare has assigned a case-mix index to each of its DRGs.
• These are published by Medicare.• These can be used to calculate the
case-mix index for a specific hospital as shown on the next slide.
ExampleThe Controller of Morgan Community Hospital has provided you with the following information on all of the cases seen at the hospital last year. Case-mix indexes were taken from Medicare.
DRG Case-mix Index
[B]
Cases Seen
[C]
DRG A 1.211 1,200
DRG B .8567 1,000
DRG C 1.809 900
DRG D 1.111 1,100
DRG E .7645 250
DRG F .6543 3,200
Total 7,650
ExampleMultiply the individual case-mix indexes by the number of cases seen.DRG Case-mix Index
[B]
Cases Seen
[C]
[B] x [C] =
[D]
DRG 1 1.211 1,200 1,453.20
DRG 2 .8567 1,000 856.70
DRG 3 1.809 900 1,628.10
DRG 4 1.111 1,100 1,222.10
DRG 5 .7645 250 191.125
DRG 6 .6543 3,200 2,093.76
Total 7,650 9,165.11
Now divide Column D by Column C (9,165.11/7,650) = 1.20 (the hospital’s case-mix index).
ExampleThis data can then be used to calculate the average case-mix adjusted charge as shown below:
DRG
[A]
Cases Seen
[B]
Charge forServices
Rendered*
[C]
Total
[B] x [C] =
[D]
DRG 1 1,200 $3,245 3,894,000
DRG 2 1,000 2,596 2,596,000
DRG 3 900 4,900 4,410,000
DRG 4 1,100 3,090 3,399,000
DRG 5 250 2,765 691,250
DRG 6 3,200 2,200 7,040,000
Total 7,650 $22,030,250
$22,030,250/7,650 = $2,879 average charge
$2,879/1.20 = $2,399.16 case mix adjusted charge
How do we use this information?Shown below is data on two competing community hospitals. Which hospital is the most cost effective?
Hospital Average Charge Case-mix Index
Bellevue Hospital $4,590 .8788
Renton Hospital $5,780 1.235
The average case-mix adjusted charge for Bellevue Hospital is $4,590/.8788 = $5,223.03.
The average case-mix adjusted charge for Renton Hospital is $5,780/1.235 = $4,608.16.
Renton is more cost effective!
Extra Credit Assignment• Go to http://www.ahd.com and
select– Free Services– I accept– Type in Ashland Community Hospital,
Ashland, OR 97520
Supplement Thirteen
Rolling up Standard Procedure Costs to Determine Product Costs
Review
Wes Douglas’ Approach to Saving Peter Brannan Community Hospital
He focused first on primary factors driving health care costs• Studied medical economics
– Impact of technology and duplication– Lack of market mechanism– Price inelasticity– Disparate information– Adverse incentives traditional
reimbursement
• Evaluated one approach to problem--managed care
Next he focused internally
• Analyzed existing costs– Direct labor--hospital association data
and Alma Cowdrey study– Direct materials--review of materials
management function
• Evaluated revenues– Volume– Pricing
Initiated the design of cost accounting system for PBCH• Reviewed theory and practice of cost
accounting in manufacturing – Identified elements he wanted (standard
costing, job-order and process-costing functions
• Evaluated information needs of managers
• Defined three levels of product detail
Initiated the design of cost accounting system for PBCH• Developed methodologies to
determine– Standard labor hours– Standard labor rates– Standard costs for direct materials– Standard costs for hospital overhead
• Investigated case-mix system
Next Step
• Cost roll-ups• Preparation of management
reports
Final Products
• Individual DRGs• Capitation days
Both are calculated by creating resource consumption profiles, then rolling up the costs of component primary and intermediate products.
To Calculate Capitation Payment• It is necessary to identify the
demographic characteristics of each of the employers participating in capitation payment– Hire an actuary to identify the number of
hospitalizations per 1,000 enrollees– From this data project cost per employer– Divide this number by the number of
capitation months each employer will pay
The End!