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PRACTICE CASE B OWEN HOSPITAL idon't believe we lost money on both those patients I've talked with the attend- ing physicians who treated them, and Peter ordered much simpler tests and procedures. He also didn't use the ICU fintensive care unit].(Megarl ordered some complex tests and procedures, and kept her patient in the ICU for two days. The speaker was Sheila Leddy, MD, chief of medicine at Owen Hospital. She was talking to Joe McCarthy, her departmental administrator, about the situation with two patients TER 5 ACTIVITY-BASED COSTING associated with a day of stay; these included mainly nursing costs, but they also hiincluded costs associated with some other personnel and some supplies. I the divided them between the main ward and the ICU based on where nun spending their time and how many nurses were in each place on a typical day nurses were Housekeeping was a support center cost allocated to each departme didn't include it in the direct cost figure. The same was true for the other support centers on the cost report (exhibit 58.1]. Instead, to figure out how much of a center's costs should be allocated within a department, I just extended the approach in the cost report. For example, in pathology, I dida rough measure of square footage and found that the simple tests took up about 30 percent of the space in the lab, whereas the complex tests took up about 70 percent. Of course, some space was used for other purposes, but I tried to divide it as fairly as I could between the two types of tests. I did the same for maintenance hours and salary dollars, although they were both easier, since there were maintenance records for all the machines and salary records for the technicians and other personnel. nt, so l I then did the same sort of thing for radiology and inpa were some minor problems in assessing some of the costs, but nothing too dificult. However, as I say,I kept the numbers rounded since nothing is com pletely precise. tient care. Again, there Mr McCarthy knew he needed to work quickly with the data he had gathered, becaus Dr. Leddy was expecting a report by late afternoon. Assignment 1. Using the data assembled by Mr. McCarthy, compute revised c cost figures for the two patients. What assumptions, if any, did you need to make? 2. How valuable are the cost figures you computed? That is, how might Dr. Leddy use them for decision making? Be as specific as you can in identifying the kinds of decisions she might make with this new information-decisions related to pricing, profitability analysis, product cross-subsidization, product elimination, physician behavior, and so on. How might you improve on the data Mr. McCarthy has gathered? That is, if you had the opportunity, what additional data would you gather, and with what goals in mind? 3. 158 Number of Units Cost per Unit 3 12 EXHIBIT 5B.2 Computing the Average Full Cost per U Full Cost $81.28 $18.59 30,000 150,000 4,500 7,000 25,000 $2438321150000$371.98 Mission Centers Radiology Laboratory Dialysis unit Inpatient care Outpatient department3,139212 Total cost 2.788,814 1,673,930 7,959,723 $1,13710 $125.57 $18,000,000 EXHIBIT 5B.3 Cost for 2 Patients Number of Units Cost per Unit Cost Patient 1 se xay l Spe Lab test 2 40.o2 $81.28 $16255 37.18 37.18 02$1,137.105,685,52 0.00 $5,922.44 2 900 $1859 Lab test 2 Inpatient stay Outpatient visits Total Patient 2 2q.00 $1859 1 5,t0150 $5,92244 Cder-X-ray 1 bralex-Lab test 1 TD.oD Lab test 2 Inpatient stay 2 1e.DO$1859 0 5YLl,vo, ee 162.55 37.18 37.18 ICA- $1859 3 2 $1,137.10 3200 Outpatient visits Outpatient visits0 Total 568552 $125.57 0.00 $5,922.44 EXHIBIT 5B.1 Abbreviated Hospital Cost Report Costs to Be Direct Costs Costs Allocated (Square Feet) Hours) (Square Depreciation Maintenance Housekeeping Administration (Salary Dollars) (Square Feet) Full Cost 4+5+ 6+7 3 1+24 8 1+2 Support Centers Building depreciation Building maintenance Housekeeping services Administration and general 1,300,000 381605 Mission Centers Radiology Laboratory Dialysis unit Inpatient care Outpatient d Total cost $1,200,000S0 $1,200,000 950,000 105,000 1,055,000 $105,000 300,000 154,555 454,55595,000 1,681,605 156.000 $59,555 158.250$67355 147,700 $336,321 386,769 235,425 1,750,000 688,321 2,000,000 788,814 1,250,000 423,930 7,000,000 959,723 nt2.250000 889212 140,000 160,000 50,000 2.788,814 1,673.930 22,455 158250 165,600 116,050 $1,200,000 $1,055,000 $454,555 $1,681,605 $18,000,000 $18,000,000 PRACTICE CASE B OWEN HOSPITAL idon't believe we lost money on both those patients I've talked with the attend- ing physicians who treated them, and Peter ordered much simpler tests and procedures. He also didn't use the ICU fintensive care unit].(Megarl ordered some complex tests and procedures, and kept her patient in the ICU for two days. The speaker was Sheila Leddy, MD, chief of medicine at Owen Hospital. She was talking to Joe McCarthy, her departmental administrator, about the situation with two patients TER 5 ACTIVITY-BASED COSTING associated with a day of stay; these included mainly nursing costs, but they also hiincluded costs associated with some other personnel and some supplies. I the divided them between the main ward and the ICU based on where nun spending their time and how many nurses were in each place on a typical day nurses were Housekeeping was a support center cost allocated to each departme didn't include it in the direct cost figure. The same was true for the other support centers on the cost report (exhibit 58.1]. Instead, to figure out how much of a center's costs should be allocated within a department, I just extended the approach in the cost report. For example, in pathology, I dida rough measure of square footage and found that the simple tests took up about 30 percent of the space in the lab, whereas the complex tests took up about 70 percent. Of course, some space was used for other purposes, but I tried to divide it as fairly as I could between the two types of tests. I did the same for maintenance hours and salary dollars, although they were both easier, since there were maintenance records for all the machines and salary records for the technicians and other personnel. nt, so l I then did the same sort of thing for radiology and inpa were some minor problems in assessing some of the costs, but nothing too dificult. However, as I say,I kept the numbers rounded since nothing is com pletely precise. tient care. Again, there Mr McCarthy knew he needed to work quickly with the data he had gathered, becaus Dr. Leddy was expecting a report by late afternoon. Assignment 1. Using the data assembled by Mr. McCarthy, compute revised c cost figures for the two patients. What assumptions, if any, did you need to make? 2. How valuable are the cost figures you computed? That is, how might Dr. Leddy use them for decision making? Be as specific as you can in identifying the kinds of decisions she might make with this new information-decisions related to pricing, profitability analysis, product cross-subsidization, product elimination, physician behavior, and so on. How might you improve on the data Mr. McCarthy has gathered? That is, if you had the opportunity, what additional data would you gather, and with what goals in mind? 3. 158 Number of Units Cost per Unit 3 12 EXHIBIT 5B.2 Computing the Average Full Cost per U Full Cost $81.28 $18.59 30,000 150,000 4,500 7,000 25,000 $2438321150000$371.98 Mission Centers Radiology Laboratory Dialysis unit Inpatient care Outpatient department3,139212 Total cost 2.788,814 1,673,930 7,959,723 $1,13710 $125.57 $18,000,000 EXHIBIT 5B.3 Cost for 2 Patients Number of Units Cost per Unit Cost Patient 1 se xay l Spe Lab test 2 40.o2 $81.28 $16255 37.18 37.18 02$1,137.105,685,52 0.00 $5,922.44 2 900 $1859 Lab test 2 Inpatient stay Outpatient visits Total Patient 2 2q.00 $1859 1 5,t0150 $5,92244 Cder-X-ray 1 bralex-Lab test 1 TD.oD Lab test 2 Inpatient stay 2 1e.DO$1859 0 5YLl,vo, ee 162.55 37.18 37.18 ICA- $1859 3 2 $1,137.10 3200 Outpatient visits Outpatient visits0 Total 568552 $125.57 0.00 $5,922.44 EXHIBIT 5B.1 Abbreviated Hospital Cost Report Costs to Be Direct Costs Costs Allocated (Square Feet) Hours) (Square Depreciation Maintenance Housekeeping Administration (Salary Dollars) (Square Feet) Full Cost 4+5+ 6+7 3 1+24 8 1+2 Support Centers Building depreciation Building maintenance Housekeeping services Administration and general 1,300,000 381605 Mission Centers Radiology Laboratory Dialysis unit Inpatient care Outpatient d Total cost $1,200,000S0 $1,200,000 950,000 105,000 1,055,000 $105,000 300,000 154,555 454,55595,000 1,681,605 156.000 $59,555 158.250$67355 147,700 $336,321 386,769 235,425 1,750,000 688,321 2,000,000 788,814 1,250,000 423,930 7,000,000 959,723 nt2.250000 889212 140,000 160,000 50,000 2.788,814 1,673.930 22,455 158250 165,600 116,050 $1,200,000 $1,055,000 $454,555 $1,681,605 $18,000,000 $18,000,000

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