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A new way to determine test cost per instrument.

This generic method, based on standard cost accounting techniques, can be used in each section of any laboratory to profile expenses associated with every instrument and test. Dr. Travers is director of pathology and laboratory medicine at the Veterans Administration and clinical associate professor of pathology and laboratory medicine at Georgetown University School of Medicine, Washington, D.C. At the time this article was written, Krochmal was director of management engineering systems for pathology service at the Veterans Administration in Washington He is currently medical district coordinator for the VA in Phoenix If one component of laboratory operations can be identified as the controlling influence on costs, it is instrument configuration. It determines most of the labor expense, which is the major portion of any laboratory's budget, and the actual cost of the next largest item-reagents and test supplies.

The information in this article and the one to follow next month will provide laboratory managers with a "from the bottom up" microcosting method for determining the cost of each test on each instrument. This is the basic starting point for any cost-accounting approach in the clinical laboratory (see Figure 1).

Green and McSherry cite four essential features of a management cost-control system:'

Cost data collected at the time the work is performed.

Truly comprehensive cost data from all the inputs (laboratory areas) required to characterize the process under scrutiny.

Standard costs for these inputs.

Variance of all relevant standard costs determined on a regular basis-monthly or quarterly.

Cost accounting is an important area of expertise for members of laboratory management, who must learn to identify costs for budget control. To decide whether to offer a test in-house and to set a fee for it, managers must know what the test actually costs. Unfortunately, most laboratories lack a cost accounting system that allows managers to determine the cost per test.

To fill this gap, a new management aspect of laboratory operation is emerging: Diagnosis Related Group-based test cost analysis. This accounting method deals with a number of basic costs-including the cost of materials per test, personnel and operating expenses, capital equipment amortization, and indirect costs-that can also be used to accumulate costs for tests needed for diseases within DRG categories.

*The Instrument Cost Accounting Technique. To the best of our knowledge, no standard accounting format has been developed for use in laboratories, nor have guidelines been established for test costs based on DRGs. The examples in standard accounting texts are not pertinent to most laboratories, and many of the problems they cite are irrelevant to laboratory operations.

For these reasons, the Veterans Administration developed the Instrument Cost Accounting Technique (ICAT). This method can be used in any laboratory for any instrument or combination of instruments in order to calculate the cost of any test or test profile.

ICAT is based on standard cost accounting techniques, derived from the literature and textbook principles. These techniques cover labor, materials, and instrument-related costs directly tied to test production.

Indirect costs are currently estimated and vary considerably from laboratory to laboratory, and between private- and public-sector laboratories, based on differences in hospital/laboratory reimbursement practices. Although indirect costs are not considered in the determination of direct test production costs, they are an important part of total cost. Commercial indirect expenses, such as outlays for marketing and administration, must also be assessed when determining the total operating cost of a hospital or reference laboratory (Figure 11).

*The ICAT format. The ICAT method deals with the three prime cost aspects of laboratory analysis: instrument-related costs, direct material costs, and labor costs. Since no two laboratories are alike in instrument configuration for chemistry, hematology, microbiology, and other sections, ICAT was designed to be generic. It can be used in any section of any lab to profile costs associated with every instrument or test method.

The direct material expenses listed on the ICAT form in Figure Ill consist of expenditures for supplies and reagents required to perform the tests. Direct labor costs are the total compensation required for personnel to perform all of the pre-analytical, analytical, and post-analytical steps of a test.

The College of American Pathologists' Workload Recording Method--a commonly used method for determining laboratory work effort in minutes-was not developed for the purpose of test pricing and consequently overlooks most pre- and post-analytical work. ICAT does encompass pre- and post-analytical efforts, which are important, labor-intensive aspects of test production and test pricing. It thus provides more information on labor costs than a time study method that uses analytical lab work as the sole determinant of work effort, as is the case with the CAP method.

By dividing all test production activities into the three work segments, ICAT allows managers to establish which aspect of test production has the greatest impact on staffing and, subsequently, on overall costs. We should note that the time definition for the analytical portion of the ICAT test segment was closely correlated with the definitions established in the CAP's "Manual for Laboratory Workload Recording Method.".sub.2

* Instrument cost analysis. The nine entries on Part I of the ICAT form (Figure 111) provide the basis for instrument/test cost calculations. These notations include the instrument's name, model number, manufacturer's name, purchase price, life expectancy (in years), annual maintenance cost, cost of site preparation, length of the evaluation period (in days), and starting and completion dates for the evaluation.

This information is used in three equations to calculate each instrument's depreciation, maintenance, and site preparation costs per test or profile (Figure IV).

The three formulas are vital to any instrument cost analysis. Each is part of the "hidden" (indirect) costs associated with operation of laboratory instruments and is borne by the hospital or corporation that maintains the lab.

Instrument depreciation costs reflect how fast the value of the capital investment decreases after the hospital or corporation purchases the instrument. Maintenance costs represent the expense of cleaning, repairing, and maintaining each instrument to insure that it lasts its expected lifetime. Site preparation costs are the expenses incurred during installation and may include renovation of the work area; electrical, plumbing, or ventilation contracting; or any air-conditioning work necessary for the instrument to function properly.

*Test performance analysis. It is important to analyze the cost of direct materials used to produce each test or panel on a given instrument. If the instrument performs both discrete and batch testing, evaluation on a separate ICAT form should be done for each test mode. After the name of every test or panel has been listed (part IIA, Figure 111), direct test performance costs are divided into four segments:

1. The total number of patient tests or profiles performed during the evaluation period (part IIB).

2. The cost of reagents per test or profile during the evaluation period (part IIC).

3. The estimated cost of test-associated disposables used per test or profile, based on the total cost of disposables used during the evaluation period (part IID).

4. The cost of any other instrument-related disposables per test or profile used during the evaluation period (part IIE).

Laboratory activities and consumables to be considered in testperformance analysis include some or all of the following (several of the choices indicated depend on whether kits or containerized reagents and batched or discrete tests are involved):

1. Price per kit or total reagent costs.

2. Number of tests per kit or total reagent volume.

3. Number of controls run per test or profile.

4. Number of standards run per test or profile.

5. Single or replicate analysis for each test or profile.

6. Price per batch or specimen for expendable items used to perform the test.

7. Expense of specimen collection and processing.

8. Total number of tests or profiles performed during the evaluation period.

Figure V shows the formula for direct material costs per test or profile. The number of tests or profiles (see items 2-5 and 8 above) is divided into the cost of reagents (item 1), test-associated disposables (item 6), and instrument-related disposables (item 6).

* Labor costs. These expenses are divided into three labor-intensive segments of test performance: pre-analytical, analytical, and post-analytical time. The total number of full-time equivalents required to produce a test (measured in minutes with a stopwatch) and the total dollar compensation (annual salary plus cost of benefits) of personnel performing the work are entered for each segment.

Pre-analytical time starts with phlebotomy, or specimen pickup at laboratory central receiving, and runs untit testing begins. It covers any such preparatory procedures as worklist gathering, centrifugation, start-up, specimen-cup preparation, and preparation of the instrument's daily quality controls and standards.

Several types of staff members-phlebotomists, aides, technicians, technologists-may perform the various pre-analytical steps. Time spent by each and differences in dollar compensation should be taken into account, since higher-salaried personnel will increase the total cost per test.

Analytical time is the time it takes to analyze the specimen and perform all routine procedures up to result reporting. It covers calculations and checking but does not include test repeats.

Post-analytical time accounts for the labor required to report results manually or to enter them into a computer. It also includes sorting, filing, and telephoning related to the final reports, and routine daily maintenance and shutdown time.

The formula for determining the labor cost for a test or profile is shown in Figure VI. First, t get the staff member's hourly pay rate, divide his or her annual salary by the number of paid hours per year (commonly 2,080 hours for a full-time employee, or 40 hours x 52 weeks).

Then divide the hourly pay rate by 60 to get salary cost per minute. Multiply that result by the number of minutes spent on the test. This provides salary cost per test. Finally, multiply salary cost per test by the laboratory or hospital fringe benefit factor, which can be provided by the human resources department. The 1.09 fringe benefit factor in Figure VI is just an example; each organization will have its own factor, usually expressed as a percentage.

* Indirect costs of test production. These are costs that cannot be traced to a test (unit of output) or to a segment ofthe equipment or operational structure required to produce the test. As illustrated in Figure 11, they include the cost of certain materials, indirect labor, and other items that cannot conveniently be charged to laboratory sections, jobs, or output.

While indirect materials are needed for producing a test, their consumption is so small or so complex that it is not practical to treat them as direct materials. Pencils and paper clips are examples. Hospital indirect costs, on the other hand, involve such complex issues as allocating administrative costs, leases, cafeteria and library expenses, third-party reimbursement, and losses.

Indirect labor does not directly affect the production of the final test result. It includes the cost of supervisors, laboratory assistants, and maintenance or other service personnel who are not directly involved in test production.

Total indirect costs incurred in operating an organization or department must be recovered through pricing of products or services. They are commonly added on as a percentage of the direct costs of tests, rather than as individual amounts for each item. In other words, the total cost of performing a test or procedure equals direct costs associated with that test (operational, labor, and instrument costs) plus a proportionate share of the indirect costs.

The general formula for laboratory indirect costs is operational plus labor plus instrument costs multiplied by the percentage allocated for institutional indirect costs. (The financial department can provide this percentage, which may run as high as 148 per cent in some private-sector facilities.)

Ultimately, to determine the total operating cost per test, all the factors in the righthand column of Figure 11 must be added together-i.e. , prime cost plus overhead plus commercial expenses. Prime cost is determined by sections It (materials) and Ill (labor) of the ICAT worksheet (Figure 111). Laboratory indirect costs related to instruments are determined by section I of the ICAT worksheet. Other costs in Figure 11 (indirect labor, materials, marketing, administrative) are estimated by percentage as discussed above.

The value of the Instrument Cost Accounting Technique and its many applications to laboratory financial management lies in its simplicity of design, its generic nature, and its completeness.

The technique has been used more than four years in laboratories administered by the Veterans Administration Department of Medicine and Surgery for test cost analysis to determine the cost-effectiveness of laboratory instruments, as well as to establish test costs for what we in the VA call Diagnostic Patterns of Care (DPCs).

ICAT results were used in 1987 by the Bureau of Quality Control of the Health Care Financing Administration for comparison of outpatient costs and charges. The technique is also currently under evaluation in private-sector hospitals in Washington, D.C., and it is the major retrospective method emphasized in draft cost accounting guidelines developed by the National Committee for Clinical Laboratory Standards. 3

In summary:

* The laboratory's instrument configuration determines how much labor, reagents, and supplies will be used in test production and thus is the major controlling influence on lab costs.

* The basic starting point for determining actual instrument and test costs is a microcost analysis, "bottom-up" method that accurately records all costs for labor (the greatest single expense), reagents, supplies, and disposables used in test production.

* Effective test cost analysis must include 1) cost data collected at the time of testing and 2) truly comprehensive cost data from all areas involved in the test production process.

*Instrument cost analysis provides data to laboratory managers for pricing tests, optimizing staff effectiveness, deciding whether to "make or buy" tests, and calculating laboratory costs for comparison with DRG test ordering patterns.

*The instrument cost accounting method incorporates the three prime cost aspects of microcost analysis: instrument-related costs, direct material costs, and labor costs. It also provides greater indepth analysis of labor costs than laboratory workload recording methods since it includes pre- and post-analytical time for labor as well as the analytical time that workload recording focuses on.

* Instrument-related costs are important in the cost analysis because they constitute hidden expenses borne by the hospital or laboratory corporation. These costs reflect the rate of loss of the capital investment, the expense of maintenance and repair, site prep aration and installation, and envi ronmental and safety condition required to operate the instru ment.

* Direct material costs include reagents, supplies, and instrument related disposables.

*Labor is the most critical cost category, accounting for the major portion of any test cost. It is important to consider all aspects of labor expended to produce a test or group of tests, including the time required to collect, prepare, and separate the specimen, plus all aspects of result reporting, routine maintenance, and shutdown.

* Indirect test costs include any materials, labor, and other expenses related to test production that cannot be traced directly back to the test. Indirect costs in instrument microcost analysis are more difficult to identify. They are related to the nontechnical aspects of the production process or operation of the business-sales, marketing, administration-and to maintaining an adequate work environment.

*The percentage of total costs claimed by indirect expenses varies from laboratory to laboratory. There is as yet no standardized method for identifying and classifying these costs.

Next month, in the conclusion of this two-part report, we will discuss ICAT as a management control system. 1. Green, H H , and McSherry, E New case m x management tools tor the DRG era VA Practitioner 2: 64, 1985

2 "Manual for Laboratory Workload Recording Method," pp, 1-2 Skokie, Ill , College of American Pathologists, 1985

3 National Committee tor Clinical Laboratory Standards. 'Draft Guidelines on Laboratory Cost Accounting " Villanova, Pa , NCCLS, 1987

Determining labor cost per test

Step 1 Annual salary /2,080 paid hours/year [devided by] 60 minutes = salary cost/minute

Step 2 Salary cost/minute x minutes to perform test = salary cost/test

Step3 Salarycost/test x 1.09 fringe benefit factor = totallaborcost/test

The 1 .09 fringe benefit factor shown here is just an example. The factor, usually available from the human resources department, varies from organization to organization.
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Title Annotation:part 1
Author:Travers, Eleanor M.; Krochmal, Charles F.
Publication:Medical Laboratory Observer
Date:Oct 1, 1988
Previous Article:Congress, HCFA race toward new lab regulation.
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