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A new way to determine test cost per instrument.

Cost analysis can provide a solid underpinning for lab decisions

on tests to be offered, instrumentation, and staffing.

Last month, we explained how the Instrument Cost Accounting Technique (ICAT) works. This simple and generic method, developed by the authors, is based on Generals Accepted Accounting Principles. It can be used in each section of any laboratory to assess the cost of tests on every instrument or manual method.

In this concluding article, we will discuss ICAT's uses as a management tool.

*Test cost analysis as a management control system. Cost analysis provides a fiscal foundation that helps to identify more economical batch sizes, justify the addition of new procedures, determine optimum test frequency, develop departmental objectives, and analyze staff performance and the efficiency of instrumentation. As laboratory methods change, cost analysis is useful for selecting cost-effective procedures and updating the testpricing structure.

Cost analysis also makes laboratory budgeting more effective. Data related to costs and workload allow managers to predict the effect of additional tests on staffing requirements. Labor represents the largest component of a laboratory's direct costs-60 to 70 per cent-and must be efficiently controlled, whether the lab intends to make a profit or simply needs to break even, as in nonprofit hospitals.

Laboratories have traditionally set test charges by one of two methods: 1) direct comparison pricing, based on a survey of other labs' charges in the community for the same procedures, or 2) industrial engineering techniques, including time studies, the interaction of past inputs (test orders) and outputs (patient results, standards, and controls), and an estimate of future cost relationships.

Direct comparison pricing is easy and relatively fast but unreliable. Costs associated with the same test vary considerably among laboratories due to different methods and instruments.

On the other hand, laboratory managers who use industrial engineering techniques now can employ microcomputer spreadsheets, software, and data storage capacity to build a new database for trend analysis; this is a considerable aid in preparing budgets and forecasting future expenses. ICAT's simplicity, combined with microcomputer capability in even the smallest of laboratories, can make the fiscal side of industrial engineering techniques less arduous.

* ICAT as a cost management foundation in for-profit hospitals. ICAT establishes the foundation for cost management when used as the basic analytic tool for identifying the major areas of laboratory cost-instrument-related, reagents/supplies, and salary expense . If charges have to be set for certain Part A or Part B tests (whether manual or automated), ICAT can be used to identify actual reagent and supply costs, Labor costs, instrument-related costs, and indirect costs. Using the total cost as a base, laboratory managers can project a realistic charge for each test and method.

* Measuring contribution. Once revenues are realized, the contribution of the for-profit laboratory can be determined. This is computed by deducting costs for which the laboratory section is responsible from the revenue gained through tests generated by that section. Contribution computations help the laboratory manager decide how to increase volume, allocate staff and other resources to sections, and improve productivity.

Nonprofit labs do not produce revenue and therefore cannot be compared with for-profit laboratories using generated revenue as an indicator of financial performance. Cost efficiency is the primary financial performance standard for nonprofit labs, and cost accounting becomes a key tool for managers of such labs as they seek to keep costs under control.

The analytic focus at nonprofit laboratories is quite different from the focus at for-profits .Instead of producing more tests for greater profit, nonprofit lab managers must avoid nonessential tests that drain valuable resources; eliminate infrequently requested procedures or send them out on a fee basis; and realign personnel to avoid duplication of effort. They must also carefully plan the use of automated instruments to conserve reagents and supplies, and cross-train personnel to avoid overuse of high-salaried staff on Labor-intensive instruments.

* Using ICAT to develop costs for laboratory DRGs. ICAT can also be used to ascertain actual costs for tests specific to particular disease categories in Diagnosis Related Groups. The authors believe that individual DRG categories are too broad-based and include too many disease categofies. Therefore, we took specific disease categories within selected DRGs and asked our senior physicians to choose the most specific tests required to identify these diseases. We then connected these groupings with their own ICAT test costs.

Figure I shows the total, direct, and indirect costs for one hospital treating a new admission with suspected diabetes. ICAT's flexibility and generic nature allow any hospital to follow this format to calculate its own costs per disease category. (For more information, write or call the senior author at (202) 233-2464.)

More than 50 chemistry, hematology, microbiology, immunology, and urinalysis analyzers have been evaluated with ICAT in more than 70 Veterans Administration Medical Center laboratories. As expected, we found vast differences in test costs.

For instance, the total cost of performing a creatinine ranged from $0.10 to $6.40 (Figure 11). Such variability is due to the type of analyzer used (batch, discrete, etc.), reagent and supply costs, and-by far the biggest factor-the salary level of the technologists running the test. Even two hospitals in a major city, sharing the same administration and supply sources, using the same analyzer model, had different test costs.

This evidence leads to the general conclusion that each hospital or corporate laboratory has its own unique test cost profile, based on its salary scales, "Its work flow efficiencies, and variable discounts for reagents and supplies. ICAT's significance looms larger: If the laboratory manager uses a vendor's test cost values instead of the lab's actual test costs, errors can distort determinations of test prices, contribution, and break-even points.

When a system of laboratories-such as a group of facilities owned and operated by a corporation-shares the same cost accounting format, top management can compare costs among peer labs, identify the most cost-effective labs, and develop historical test cost databases to remove less efficient instrumentation.

*Prospective costing. This tech

nique is used to evaluate the potential cost of instruments and/or methods before making final purchasing decisions or test menu changes. It is more abstract than retrospective costing (i.e., the ICAT method) and requires considerably more thought and effort. Access to operator's manuals, various vendor documents, and current users may all be key elements of assessing projected costs. The essential components include:

Projected total testing.

Projected usage of consumables.

Projected usage of disposables.

Projected cost of cons and disposables.

A practical approach to prospective costing is presented in considerable detail, with examples and worksheets, in draft cost accounting guidelines developed by the National Committee for Clinical Laboratory Standards.'

In summary:

*Instrument cost accounting techniques lead to improved management control by allowing laboratory managers to identify economic batch sizes, determine the optimum operating frequency and optimum staffing for each instrument, and select the most economical reagents and supplies.

*Through instrument cost analysis, the test price structure can be more responsive to changes in laboratory volume and methods.

*The use of 'instrument cost accounting techniques to identify actual costs helps produce real istic charges and prices that optimize revenue.

* In nonprofit laboratories with prospectively allocated budgets (and in profit-making labs), instrument cost accounting techniques can help identify those instruments and methods that drain valuable resources. For example, personnel can be redeployed by grade and salary level to avoid overusing highsalaried staff on inefficient, laborintensive instruments.

* Instrument cost accounting techniques can also be used to determine the combined cost of tests in a profile used to diagnose a specific disease. This has important implications if a third-party payer decides not to fully reimburse such tests. By presenting worksheet information similar to that in Figure 1, a hospital can show a third-party payer all of the sources of costs in a profile.

*Each laboratory, regardless of its location in a hospital or corporate seaing, has its own unique cost profile for tests. This stems from different salary scales, work flow efficiencies, and discounts for reagents and supplies.

' * A simple, generic, and complete instrument cost accounting technique helps laboratories avoid costly errors in estimating test costs. Manufacturers' test cost data only include reagent and supply costs and cannot begin to accurately estimate each laboratory's unique set of Labor costs and other accumulated expenses.

*Uniform instrument cost accounting techniques within a group of laboratories owned by a corporation, or within large nonprofit or for-profit chains, can provide a cost analysis database for peer laboratory comparison and indicate the most cost-effective instrument configurations and Labor utilization patterns.
COPYRIGHT 1988 Nelson Publishing
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1988 Gale, Cengage Learning. All rights reserved.

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Title Annotation:part 2
Author:Travers, Eleanor M.; Krochmal, Charles F.
Publication:Medical Laboratory Observer
Date:Nov 1, 1988
Previous Article:Staffing: problems and solutions in 19 New England laboratories.
Next Article:Six steps to deal with complaints about lab service.

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