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Chapter 23

Chapter 23. Includes Supplements 12 through 13. Supplement Twelve. The Use of Case-Mix in Assessing Efficiency. Comparing Hospital Charges. Hospital charges are often used as a surrogate for efficiency in comparing hospitals Patients assume that hospitals with lower cost are more efficient

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Chapter 23

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  1. Chapter 23 Includes Supplements 12 through 13

  2. Supplement Twelve The Use of Case-Mix in Assessing Efficiency

  3. Comparing Hospital Charges • Hospital charges are often used as a surrogate for efficiency in comparing hospitals • Patients assume that hospitals with lower cost are more efficient • There is an attempt by some groups to publish price information in an effort to make hospitals more price competitive

  4. The question is, what do you compare? • Some hospitals see more complex cases than others. It is not fair to compare the average room rate, for example, of a primary care hospital with a tertiary care hospital.

  5. The question is, what do you compare? • One way to adjust for the difference in the difficulty of cases seen is to use a case-mix index.

  6. Definition • Case-mix refers to the acuity or severity of illness of the average patient seen in a particular hospital. • A hospital with a case-mix of 1.50 sees patients who on the average consume 1.50 more resources because of the severity of their illnesses.

  7. Case-mix Indexes • Medicare has assigned a case-mix index to each of its DRGs. • These are published by Medicare. • These can be used to calculate the case-mix index for a specific hospital as shown on the next slide.

  8. Example The Controller of Morgan Community Hospital has provided you with the following information on all of the cases seen at the hospital last year. Case-mix indexes were taken from Medicare.

  9. Example Multiply the individual case-mix indexes by the number of cases seen. Now divide Column D by Column C (9,165.11/7,650) = 1.20 (the hospital’s case-mix index).

  10. Example This data can then be used to calculate the average case-mix adjusted charge as shown below: $22,030,250/7,650 = $2,879 average charge $2,879/1.20 = $2,399.16 case mix adjusted charge

  11. How do we use this information? Shown below is data on two competing community hospitals. Which hospital is the most cost effective? The average case-mix adjusted charge for Bellevue Hospital is $4,590/.8788 = $5,223.03. The average case-mix adjusted charge for Renton Hospital is $5,780/1.235 = $4,608.16. Renton is more cost effective!

  12. Extra Credit Assignment • Go to http://www.ahd.com and select • Free Services • I accept • Type in Ashland Community Hospital, Ashland, OR 97520

  13. Supplement Thirteen Rolling up Standard Procedure Costs to Determine Product Costs

  14. Review Wes Douglas’ Approach to Saving Peter Brannan Community Hospital

  15. He focused first on primary factors driving health care costs • Studied medical economics • Impact of technology and duplication • Lack of market mechanism • Price inelasticity • Disparate information • Adverse incentives traditional reimbursement • Evaluated one approach to problem--managed care

  16. Next he focused internally • Analyzed existing costs • Direct labor--hospital association data and Alma Cowdrey study • Direct materials--review of materials management function • Evaluated revenues • Volume • Pricing

  17. Initiated the design of cost accounting system for PBCH • Reviewed theory and practice of cost accounting in manufacturing • Identified elements he wanted (standard costing, job-order and process-costing functions • Evaluated information needs of managers • Defined three levels of product detail

  18. Initiated the design of cost accounting system for PBCH • Developed methodologies to determine • Standard labor hours • Standard labor rates • Standard costs for direct materials • Standard costs for hospital overhead • Investigated case-mix system

  19. Next Step • Cost roll-ups • Preparation of management reports

  20. Final Products • Individual DRGs • Capitation days Both are calculated by creating resource consumption profiles, then rolling up the costs of component primary and intermediate products.

  21. To Calculate Capitation Payment • It is necessary to identify the demographic characteristics of each of the employers participating in capitation payment • Hire an actuary to identify the number of hospitalizations per 1,000 enrollees • From this data project cost per employer • Divide this number by the number of capitation months each employer will pay

  22. The End!

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