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Lab budgeting and cost accounting under DRGs.

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

Under the DRG system, matching revenue with cost and evaluating appropriate utilization levels must be done on a patient-by-patient or case-by-case basis. These are hospital management functions. Overutilization of services for a patient will drive costs above the level of the fixed payment rate for a particular diagnosis.

Since the cost of a particular test can no longer be matched against a specific dollar amount of revenue, laboratory managers now will have the most significant impact by producing lab services as efficiently as possible in terms of costs. Controlling resource consumption is the lab's prime concern, and the cost/output ratio is 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 and independent physicians who determine the types and quantity of service the different centers provide.

Each of these centers--nursing, emergency room, radiology, and the laboratory, for example--has a unique set of economic factors affecting its ability to operate efficiently and maintain viability. The department head for each center has control over labor used, supplies consumed, 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 patient receives is irrelevant to the laboratory manager. But if hospital administrators succeed in reducing test utilization by persuading phsicians to curb unnecessary ordering, the laboratory must react appropriately. That means scaling down operations in a way that results in significant savings.

A mere decrease in the number of tests performed will not cut costs a great deal. For example, it may only shave reagent use and a bit off the electricity bill. Personnel and overhead costs continue at previous levels unless management does something about them.

We will suggest possible methods of reducing laboratory resource consumption, but our main purpose here is to outline a cost accounting system that gives lab managers the best cost data available on the operational components of the laboratory that they can do something about. Data on volume and expenses that the manager cannot control--such as tests ordered by different medical services and allocations for everything from the hospital security force to legal fees--confuse the laboratory performance measurement process and provide excuses for poor performance. to be a useful management tool, the cost accounting system must accurately measure cost per unit of service and determine what resources should have been consumed for the units of service provided. What are the elements of this system?

* It measures production, and some production sttistic must be maintained. We call it a "production measurement unit" (PMU). Depending on the health care service being measured, any of the following can serve as a PMU: the CAP workload recording unit; a similar relative value unit set individually for each hospital department; a patient day; a care plan day, which classifies a patient into one of several levels requiring different degrees of resource consumption (used commonly 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. For example, microbiology is heavily manual while chemistry is highly automated, and their outputs cannot be measured in the same manner. In selecting a reasonable PMU, consider the following criteria:

1. It is the single factor that most clearly causes resource consumption to vary. Note that this must relate to consumption--the use of labor and materials, and instrument costs--not to what the laboratory has been charging for a test.

2. It must be measurable and easily understood by laboratory personnel. If the staff cannot understand the PMUs, the system won't be effective.

3. It must be affected only by volume changes.

Laboratories have an advantage over other areas of health care through a long history of using CAP units as a statistical measure for volume. CAP units, however, may fall short when used to measure resource consumption. Some observers argue that workload recording relates quite well to labor consumed but may cause distortion in highly automated labs.

PMU measurements must be accurate, indicating the relative weight of 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, such as labor and supplies. Some expense classifictions, like supervision and instrument depreciation, will be fized. Their cost per unit of service will decline as volume increases. On the other hand, if the volume of supplies consumed is in direct proportion to the number of tests performed, supply costs per unit of service will remain constant regardless of volume.

* Resource consumption goals, based on cost behavior, must be an integral part of the cost accounting system. Since it is now essential to adjust costs upward or downward in relation to output, budgets have to be determined on the basis of actual units of production achieved. When volume declines, the laboratory manager must be able to identify those costs that behave in a variable fashio and control resource consumption at the appropriate level.

The tendency will probably be to make labor more variable. One West Coast hospital drove its labor expenses below 55 per cent of total costs, compared with a national average of 60 to 65 per cent, by offering voluntary unpaid time off. This hospital fills in with part-timers and draws on a pool of standby employees for the evening and night shifts. Standby employees receive full pay for hours worked and a half-time rate for being on call. Any employee working more than 20 hours per week receives full benefits. The idea is to make better use of 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 of consumables. 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 lbs. at $0.24 per 100 PMUs.

to judge performance, the number of PMUs produced in each accounting period will be matched against resources consumed. Figure I, a performance report for a hospital chemistry lab, itemizes the variances between actual costs per PMU and predetermined standard costs per PMU.

Variances from budget may be due to higher supply prices or to too much use of supplies; or similarly, to pay rates that are too high or to too many hours of labor used. It's obviously important, in analyzing the data, to distinguish between the cost of resources and excessive consumption.

Figure II lists some cost information elements and the different managers who should be controlling them. It points up the goal of cost accounting: to provide each manager with only the data that he or she has the power to control. Cost accounting is, in effect, responsibility accounting.
COPYRIGHT 1985 Nelson Publishing
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Copyright 1985 Gale, Cengage Learning. All rights reserved.

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Author:Cannon, W. Glenn
Publication:Medical Laboratory Observer
Date:Feb 1, 1985
Words:1245
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