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

• There is an attempt by some groups to publish price information in an effort to make hospitals more price competitive

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.

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.

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.

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.

ExampleThe 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.

DRG Case-mix Index

[B]

Cases Seen

[C]

DRG A 1.211 1,200

DRG B .8567 1,000

DRG C 1.809 900

DRG D 1.111 1,100

DRG E .7645 250

DRG F .6543 3,200

Total 7,650

ExampleMultiply the individual case-mix indexes by the number of cases seen.DRG Case-mix Index

[B]

Cases Seen

[C]

[B] x [C] =

[D]

DRG 1 1.211 1,200 1,453.20

DRG 2 .8567 1,000 856.70

DRG 3 1.809 900 1,628.10

DRG 4 1.111 1,100 1,222.10

DRG 5 .7645 250 191.125

DRG 6 .6543 3,200 2,093.76

Total 7,650 9,165.11

Now divide Column D by Column C (9,165.11/7,650) = 1.20 (the hospital’s case-mix index).

ExampleThis data can then be used to calculate the average case-mix adjusted charge as shown below:

DRG

[A]

Cases Seen

[B]

Charge forServices

Rendered*

[C]

Total

[B] x [C] =

[D]

DRG 1 1,200 $3,245 3,894,000

DRG 2 1,000 2,596 2,596,000

DRG 3 900 4,900 4,410,000

DRG 4 1,100 3,090 3,399,000

DRG 5 250 2,765 691,250

DRG 6 3,200 2,200 7,040,000

Total 7,650 $22,030,250

$22,030,250/7,650 = $2,879 average charge

$2,879/1.20 = $2,399.16 case mix adjusted charge

How do we use this information?Shown below is data on two competing community hospitals. Which hospital is the most cost effective?

Hospital Average Charge Case-mix Index

Bellevue Hospital $4,590 .8788

Renton Hospital $5,780 1.235

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!

Extra Credit Assignment• Go to http://www.ahd.com and

select– Free Services– I accept– Type in Ashland Community Hospital,

Ashland, OR 97520

Supplement Thirteen

Rolling up Standard Procedure Costs to Determine Product Costs

Review

Wes Douglas’ Approach to Saving Peter Brannan Community Hospital

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

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

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

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

Next Step

• Cost roll-ups• Preparation of management

reports

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.

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

The End!