Change to survive: The SOPA approach to costing; this accounting practice aims to protect providers from being done in by prospective reimbursement. (Feature Article).

Accounting practices and philosophies have evolved, and facilities that still rely on the formulas of old are being left in the dust. Facilities can use new methods, however, to meet today's challenges. Before we move into the specific technique described in this article, let's review the new conditions under which operators are struggling.

The New Environment

First, provision of care in nursing homes has broadened to include subacute admissions, shorter lengths of stay, and altered staffing patterns. RN staffing, including nursing hours per resident day, has increased in some cases to accommodate the shift toward heavier-care residents. Second, nursing home providers have had to acclimate and adapt to a new language, new definitions, and new documentation requirements, such as RUGs-III classification, PPS, and MDS 2.0 methodologies.

A closer look at the PPS reveals crucial details necessitating change in nursing home business practices. Residents' lengths of stay have impact not only on nursing and rehabilitation departments but also on bookkeeping, dietary, social services, admission, administration, and housekeeping. All disciplines assume greater burdens because of the shorter stays and the resulting higher discharge rates.

For instance, in the past, when a resident's length of stay was one year, the social service cost was (hypothetically) $5 per day. Now, with lengths of stay as short as one month (1/12 of a year), the social service cost could conceivably increase as much as 12 times, to $60 per day. Length of stay is one link to understanding why a provider in New York, for example, receives approximately $100 per day more from Medicare than from Medicaid for an RMC classification (rehab: 150 minutes per week), even though the nursing home is performing essentially the same level of care for both.

Additionally, drug costs per resident, once a stable and predictable cost, have skyrocketed dramatically as a result not only of prices, but of short-stay and sub-acute admissions. And, as a final example of change related to length of stay, consider the change in occupancy rates. At one time, facilities were accustomed to occupancy rates approaching 99%; now they must endure occupancy rates at least 10% lower. This decrease in census, coupled with fixed labor costs, increases the cost of care per unit.

A Method for Predicting Costs

Embracing the necessary change in accounting practices to accommodate all these changes requires, more than ever, the cooperation and teamwork of all disciplines involved in care. Accurate and timely completion of the MDS 2.0 is obviously a must. When prepared in a meticulous manner by all professionals, the MDS 2.0 serves as a vital tool for the capture of legitimate reimbursement. On the other hand, haphazard, inconsistent, or sloppy completion of the MDS will almost certainly result in financial loss.

Appropriate completion of the MDS is equally important to making decisions, as a team, about admissions. Today's pricing-based methodologies demand that a facility be able to predict the costs of a resident prior to intake, i.e., either ensuring that the resident's reimbursement rate covers the services to be provided or, at the least, covers overhead during periods of low occupancy.

A provider can determine the financial feasibility of any resident prior to admission with the development of a simple cost-accounting system. Cost accounting of this type enables a facility to calculate its aggregate operational costs and reduce that aggregate to a unit cost. It allows the facility to visualize how expenses are incurred and whether this will happen according to plan. There is a particular approach to this that works with great clarity and accuracy: the Standard Off Par Approach (SOPA).

SOPA measures the difference between the average cost of all the units and a specific unit cost. The financial costs of operating a nursing facility, e.g., wage scales, utility, property costs, real estate taxes, etc., differ from facility to facility. The advantage of SOPA is that it takes into account the unique and individual cost structure of the particular nursing home. It requires the facility accountant or comptroller to:

1. "Componentize" all costs by department and account classification (e.g., salaries: management vs direct care; nonlabor: supplies vs utilities).

2. Obtain from all department heads the statistical data that measure these costs.

3. Relate average cost to a statistic (see Table); this can be expedited by use of a specialized computer program, such as a Microsoft Excel-based program one of the authors (A.L.M.) has developed. This will be the standard basis of developing unit costs for each service rendered at the facility.

4. Interview department heads to obtain specific statistical data relating to those of the 44 Resource Utilization Groups (RUGs) that are used by the facility.

5. Plug these data into the equation referred to in step 3 and shown in the Table. The result is a specific cost of providing a specific service offered by the particular provider.

6. Once the primary average program cost has been determined, the next step is to determine if there will be additional expenses above and beyond the primary cost. These additional expenses will relate to disciplines outside the primary program. The facility will calculate a cost to provide for each of these disciplines. Each cost will take into consideration direct and indirect costs, such as labor vs utility costs mentioned earlier. Pricing out the disciplines will be achieved in the same manner as the calculation of primary costs.

7. Verify the results of SOPA as follows: Multiply the unit cost of each program by the number of units serviced within the reporting period. Then add all programs together and reconcile them to the total costs of the facility for that same reporting period. (Variations between estimated [SOPA] and actual costs are anticipated because the number of residents serviced in each program on a daily basis will vary. This exercise will reveal the optimal level of staffing as it relates to the number of residents in a given program.)

8. Review all outcome results of SOPA with department heads before finalizing and producing a summary report that admissions personnel can use as a decision-making tool.

9. Summarize the primary program costs, along with the disciplines, on an easy-to-read chart (or grid). Admissions will use this chart to calculate the financial viability of a resident prior to admission. In addition, the chart should list the reimbursements associated with Medicare, Medicaid, managed care, and private pay.

As a byproduct of SOPA, a provider will be able to monitor its fiscal activities on a day-to-day basis. The information contained in the grid will be used to obtain a daily profit-and-loss statement based on the daily census.

Embrace the Metamorphosis

Making admission decisions under prospective payment is a very risky practice without understanding their financial impact. Estimating the cost of providing care at a program level will help make those difficult admission decisions easier because they will be based on factual data. This is change. Whether the message for change is shouted by a prophet on a mountaintop or downloaded from a computer file, astute nursing home managers know they need to embrace it if they are to grow and prosper in today's mercurial healthcare climate.

Table.

Projecting Specific Costs

Example: Cost center--direct nursing care

A. Average direct nursing cost of facility: $48.42
B. Average statistical data of direct nursing care of facility (3 hrs)
   1. RNs: 10 average min. of care per day at $28.50 per hr.
   2. LPNs: 30 average min. of care per day at $22.00 per hr.
   3. Aides: 140 average min. of care per day at $14.00 per hr.

Pricing out IV therapy program

C. Statistical data from department head to provide this service (4 hrs)
   1. RNs: 60 average min. of care per day at $28.50 per hr.
   2. LPNs: 40 average min. of care per day at $22.00 per hr.
   3. Aides: 140 average min. of care per day at $14.00 per hr.
D. specific direct nursing cost of IV therapy = $75.83

Anthony L. Morrone has been a partner in the New York accounting firm of Horan, Martello, Morrone, PC (HMM), since 1980. HMM provides specialized accounting, auditing, and reimbursement consultation to the healthcare industry. For further information, phone [phone]. Jill Smiller is administrator of Glen Cove Center for Nursing and Rehabilitation, Glen Cove, New York; for further information, phone [phone]. To comment an this article, send e-mail to [e-mail].