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Similarities and Differences Module 4 – Cost Control. Rural Hospital Profitability. CAH. PPS. Profit Formula. CAH. PPS. Revenue per patient - Cost per patient Profit per patient To increase profits a business must: Increase revenues Decrease expenses. Cost Benefits of a CAH. CAH.

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Similarities and differences module 4 cost control

Similarities and Differences

Module 4 – Cost Control

Rural Hospital Profitability



Profit formula
Profit Formula



Revenue per patient

- Cost per patient

Profit per patient

  • To increase profits a business must:

    • Increase revenues

    • Decrease expenses

Cost benefits of a cah
Cost Benefits of a CAH


  • Allowable on-call coverage in ER, including mid-level providers

  • Relief from Federal regulations of full-time coverage in dietary, pharmacy, lab and xray

  • HUD 242 Mortgage Insurance relaxed qualifications

  • Reduced JCAHO accreditation fees

  • Technical assistance from Bureau of Primary Care and Rural Health

Fixed variable



Types of costs

Cost structure
Cost Structure



  • Fixed Costs

    • Expenses that do not change with increases or decreases in census

  • Variable costs

    • Costs that increase or decrease as volume or services change

Fixed costs
Fixed Costs



  • Examples:

    • Capital costs (Rent, depreciation, interest)

    • Utilities

    • Minimum staffing

    • Due to low volumes, rural hospitals usually have high fixed costs when compared to revenues.

Variable costs
Variable Costs



  • Some examples of variable costs are:

    • Supplies

    • Drugs

    • Meals

    • Services paid on a “per use” basis (MRI)

  • Variable costs generally are identified with specific patients.

Costs per patient day
Costs per patient day



As census increases, variable costs per patient day

will remain the same. Fixed cost per patient day will


Patient Volume


Break even point occurs when revenues cover fixed and variable costs. Profits will be generated after this point from payers who will pay in excess of costs.




Patient Volume


  • Effect of Cost Reduction

  • Profitability will be achieved at a lower census.

  • CAH cost based payer revenue may drop.

Former Break even Point

Revised Break even Point

Patient Volume

Reduce expenses
Reduce Expenses


  • If reductions in expenses causes Medicare revenue per day to drop, why should we cut costs?

    • At a 60% Medicare / 40% Commercial utilization, a $1 drop in costs will net the hospital $. 40 in profit.







Before After

Total Rev. $285 $270

Costs $225 $200

Profit $ 60 $ 70

1 share services
1. Share Services



  • Network when possible:

    • A relationship between a small and large hospital can create access to a wider array of support services and increases in efficiency.

      • Consolidation of certain functions

        • Purchasing

        • Human resources

        • Credentialing

        • Billing and collections

        • Finance

        • Legal services

        • Training

    • Obtaining pre-owned furniture and equipment

    • Consider contracting/consulting rather than employment

1 share services1
1. Share Services



  • Other cost sharing approaches

    • Use group purchasing contracts

    • Convert fixed costs to variable costs

      • Use floating nurses to cover different units

      • Cross train employees to perform more than one job function

      • Continuously evaluate staffing levels to minimize non-essential capacities, overtime and other HR costs

2 evaluate service lines
2. Evaluate Service Lines



  • Review the profitability of service lines

    • Collections v. cost of providing the service

      • Payer mix

      • Fixed cost contributions

      • Incremental costs

  • Use resources such as comparisons among hospital peers for costs and charges by service line.

3 bid and negotiate
3. Bid and Negotiate



  • Possible cost reductions

    • Obtain bids for all equipment and supplies

    • Substitute less expensive products that do not compromise quality

    • Negotiate lower utility rates

  • Physician input to management is needed, however avoid direct contact between physician and supplier! Let hospital management negotiate without physician interference.

3 bid and negotiate1
3. Bid and Negotiate



  • High dollar supplies should be reviewed.

    • Concentrate on the big dollars

    • Identify the top 20 most expensive items

    • Negotiate for lower costs

  • Do not substitute quality for cost savings! It will cost more in the long run.

3 bid and negotiate2
3. Bid and Negotiate



  • Examples of high cost items

    • Xray film

    • Disposable items v. reusable items

      • Dietary dishes, bedside water pitchers, OR trays

    • IV Solutions

    • Medications (drug formularies)

    • Medical supplies

    • Disposable linens

4 renegotiate contracts
4. Renegotiate Contracts



  • Renegotiate service contracts

    • Accounting services

    • Oxygen suppliers

    • Rental agreements

    • Dues

    • Maintenance agreements

    • Housekeeping, Laundry and Dietary

5 purchase options
5. Purchase Options


  • Capital policy

    • Increase capitalization policy to Medicare allowable

      • Up to $5000 can be expensed

        • Acquisitions (Prov. Reimb. Man., Part I, §108.1)If a depreciable asset has at the time of its acquisition an estimated useful life of at least 2 years and a historical cost of at least $5,000, its cost must be capitalized and written off ratably over the estimated useful life of the asset using one of the approved methods of depreciation. If a depreciable asset has a historical cost of less than $5,000, or if the asset has a useful life of less than 2 years, its cost is allowable in the year it is acquired, subject to the provisions of §106

5 purchase options1
5. Purchase Options


  • Is it better to sign an operating lease rather than to buy?

    • Capital lease v. operating lease

      • Capital leases are subject to the capitalization guidelines and may require a periodic expensing of depreciation

        • Current expenditures may be reimbursed in future years

      • Operating leases are deductible as the lease payments are made

        • Current expenditures are reimbursed in the current year

Cah cost reductions
CAH Cost Reductions


  • Cost reductions are good!

  • However a dollar saved does not necessarily mean a dollar of profits.

  • Cost-based payers only cover their portion of the COST.

    • Example: Cost based utilization is 60%

      • For every dollar saved, $. 40 goes to the bottom line.

Cost reduction caution
Cost Reduction Caution


  • Cost reductions will result in increased profitability however:

    • Interim reimbursement percentages and per diems must be monitored in relation to changes in current year costs.

Monitor Cash Flow Impacts!

Cost reductions
Cost Reductions



  • One more word of caution, sometimes you have to spend money to make money.

  • Don’t sacrifice patient perception by allowing facility to appear neglected.

    • Upgrade facility to increase marketability

    • Install new equipment to provide high quality services

    • Reinvest profits into capital upgrades

Related compliance issues
Related Compliance Issues

  • 2007 OIG Work Plan

    • We will review critical access hospital (CAH) cost reports to examine the administrative and other costs incurred by CAHs for inpatient and outpatient services before and after their conversion to CAH status. The Medicare Rural Hospital Flexibility Program, established in 1997, designated certain limited service hospitals as CAHs. The Medicare statute provides that CAHs be reimbursed reasonable costs for their inpatient and outpatient services.


Related compliance issues1
Related Compliance Issues

  • 2007 OIG Work Plan

    • Rebates Paid to Hospitals

      • OIG will determine whether hospitals are properly identifying purchase credits rebates as a separate line item in their Medicare cost reports. OIG will visit several large vendors and determine the amount of rebates paid to hospitals in a given year. It will then examine a sample of Medicare hospital cost reports to determine whether the rebates were properly credited on the Medicare cost reports.



Rural Hospital Profitability

If you have any questions or concerns regarding this course, please contact Cindy Dupree at [email protected]

Similarities and Differences



Module 4 – Cost Control