COSTING

1. COSTING Principles of costing by case Ric Marshall 0900 FRI 9Dec11

2. OVERVIEW This session will provide participants with an introduction to the information needs for comprehensive case mix costing by case for hospitals It will also introduce the different ways in which case mix can be applied to foster greater efficiency in health service provision.

3. Agenda • Patient costing fundamentals • Costing standards and methods • The Idea of Patient Level Information and Costing • Allocating expenditure from accounts to activity • Key uses of patient cost data • The relation between costing and pricing

4. The fundamental of costing

5. Cost per case – bottom up

6. DRG based – top down

7. Australia National hospital cost data collection NATIONAL HOSPITAL COST DATA COLLECTION COST WEIGHTS FOR AR-DRG VERSION 5.1, Round 11 (2006-07)

8. NHCDC Reporting Standards http://www.health.gov.au/internet/main/publishing.nsf/Content/0FABA9D6DB24D7E8CA257712000C5D3C/$File/HospitalPatientCostingStandards_v1.1.pdf

9. Why do we need clinical costing? • Accurately value products – eg DRG’s for funding • Costweights for funding and payment • Activity analysis in weighted activity terms • Benchmark our hospital against others and over time • Properly manage performance – care profiles • Set achievement targets – ‘match the above average performers over the next two years’

10. Clinical Costing Standards Association

11. The importance of hospitals being able to analyse their costs of production • Clinicians are the control locus of expenditure • “Every clinical decision is an expenditure decision” • Hospitals must be able to provide feedback to clinicians on comparative use of resource (cost) with benchmarks • Both normative (peer hospitals) and best practice standards (clinical pathways)

12. The idea of fully absorbed costing • Starts with total expenditure of hospital. • Broken into overhead and direct. • INPATIENT FRACTION IS APPLIED *either here • Overhead costs are attributed to treatment units. Then become part of direct costs of treating patients. *orhere • Unit costs are attributed to patients according to their service utilisation and/OR • Direct patient costs allocated according to utilisation (activity) statistics.

13. Inpatient expenditure fractions • Cost centres in general ledger and/or • Inpatient ratio of staff utilisation • Inpatient ratio of floor space, utilty access points, service times, • Inpatient ratio of diagnostics orders • Weighted units of service provided (eg beddays, consultations,

14. Direct costs and overhead costs • Almost anything can be a direct cost if individual patient utilisation is recorded. • Many cost centres provide services to other cost centres. • It is important to have a standard sequence of distributing the costs of overhead cost centres to other cost centres.

15. The Yale cost model • A standard method of cost disaggregation from total hospital expenditure to patient episode or DRG. • Follows a set sequence of disaggregation from overhead cost centres to ‘intermediate product’ cost centres. • Allocates from intermediate products to patients according to utilisation or service weights.

16. Intermediate products of interest to hospital managers – examples • Cost per meal per patient per day for ward x compared to hospital average • Cost of Xray A compared to other providers • Cost per hour of nursing service in ICU (b) • Surgeon cost for operation x compared to other surgeons

17. The Purpose of Costing • To determine the costs of services provided • In order to better manage the hospital. • Resource Management / Performance Monitoring • Development of cost weights • Episode Funding • Paying for contracted work – eg referred patients • External Reporting requirements

18. Types of Costing 1/2 • Clinical Costing • bottom up costing approach • each patient episode is a product • requires data of all goods and services consumed in the treatment of individual patients • Data are then converted into cost estimates for each patient by reference to measures of the relative costs of providing these services • Allows analysis of resource use by individual patient episode

19. Types of Costing 2/2 • Cost Modelling • top down approach • Expenditure is allocated to groups of patients in each DRG based on measures of average consumption for the patients in each DRG • Relies on the use of service weights • and/or other generalised utilisation statistics.

20. Types of Costing - • Patient costing provides detail at the individual patient episode • Easier to apply patient costing to other patient types • Patient costing systems are a good data repository • Choice between the methodologies is dependent on information capture

21. Available costing systems • Most systems, available currently use both methods of costing • More precision is obtained by increasing clinical costing elements • Pure patient costing is not (always) feasible • Feeders can be expensive • Skills are not always available • A hybrid of clinical costing (preferred) and cost modelling (default) is usually the answer.

22. PLICS UK 2010 hospital survey • Over 95 acute organisations have either implemented a PLICS system, or are in the process of implementing a PLICS system. • Almost a further 20 acute organisations are planning to implement PLICS in the next few years. • Of the 51 organisations who have implemented PLICS,45 report that they have used PLICS data to inform their 2009/10 reference cost return • Nearly 90% of those organisations who have implemented a PLICS system, or are in the process of implementing a PLICS system report that they are using the Acute Clinical Costing Standards. • Of those planning not to implement PLICS, 31 are acute providers, with the remainder being PCT, Community, Ambulance and other • Take up or planned take of PLICS in the non-acute sector is primarily by Mental Health organisations

23. Cost allocation process GL costs, FTEs, Floor space Overhead Allocation Statistics Recurrent Expenditure Allocation Overhead Costs to Patient Care Cost Centres Program Fractions Inpatient Fractions Outpatients, Teaching and Research Remove non-Inpatient Costs Weights/Utilisation Patient Data Allocate Final Costs to products

24. Recurrent Expenditure • General Ledger information • Expenses eg • nursing salaries • medical/surgical supplies • cleaning • drugs • Group these into overhead and patient care cost centres

25. Overhead Allocation Statistics • Measures or estimates the cost of the services provided by one cost centre to the others • Cleaning costs are often distributed by cleaning staff rosters or floor space • Human Resources – staff headcount

26. Reciprocal Allocation Method Cleaning Finance Administration Cardiology

27. Program Fractions / Inpatient Fractions • Remove cost data that doesn’t have patient information • Non-inpatient costs • Teaching and research

28. Allocate Final Costs • Use service weights or utilisation data • Measure of the relative resource utilisation by DRG for patient services where data on actual resource use is not known • Estimated or actual cost and utilisation of service

29. Results • Average cost by DRG • Estimated cost by patient • Detailed service utilisation data by patient • Reports give average utilisation of major service type • Average nurse costs • Average medical costs • Average theatre costs • Average drug/imaging/pathology costs

30. COSTING SOFTWARE • VISASYS – COMBO PRODUCTS • http://www.visasys.com.au/products.htm • POWER HEALTH SOLUTIONS – PCM • http://www.powerhealthsolutions.com/products/PPM/CostManager/ • TRENDSTAR • http://www.yardleyconsulting.com/hospital-cost-accounting/90-hosptial-activity-based-coting-abc • ECLYPSYS – SUNRISE PRODUCTS • www.eclipsys.com/cb6d5ab4-2a9b-4117-86f8.../download.htm • HOME MADE SOLUTIONS – eg SAS based

31. Let’s look at a costweight report NHCDC PUBLIC COSTWEIGHTS TABLE R13 PubCWest60.xls http://www.health.gov.au/internet/main/publishing.nsf/Content/Round_13-cost-reports

32. KEY USES OF PATIENT COST DATA • PRICING AND CASE WEIGHTING • MANAGING EFFICIENCY AND QUALITY OF HOSPITAL SERVICES • BY COMPLETE OUTPUT UNITS • BY INTERMEDIATE PRODUCTS • CLAIMS OPTIMISATION -

33. The relationship between costs and price • Cost is ONE input into price considerations • Average cost, median cost, marginal cost can all be considered. • Variable, fixed and variable or full economic cost may be relevant for different purposes. • BASIC PRICE IS BUDGET/ACTIVITY