I don’t believe we lost money on both those patients. I’ve talked with the attending physicians who treated them and Peter ordered much simpler tests and procedures. He also didn’t use the ICU [intensive care unit]. Megan ordered some complex tests and procedures, and kept her patient in the ICU for two days.

The speaker was Sheila Leddy, M.D., chief of medicine at Owen Hospital. She was talking to Joe McCarthy, her departmental administrator, about the situation with two patients, each of whom had a discharge DRG that resulted in a payment of $5,600. The hospital records showed that the cost of care for each patient was $5,922. Having obtained the medical records, Dr. Leddy realized that the physicians who had treated these patients had ordered quite different tests and procedures and also had used the ICU differently. She continued:

I’ve obtained some summary information from fiscal affairs. Here’s an abbreviated cost report [Exhibit 1], and the data the folks in fiscal gave me that shows what they call the cost per unit [Exhibit 2]. They put that information together with their information on the patients’ use of tests, procedures, and bed days, and came up with this ludicrous set of number that shows both patients cost exactly the same [Exhibit 3].

The problem is that Peter’s patient [Patient #1] used pretty simple lab tests and x-rays, whereas Megan's [Patient #2] used much more complex tests and procedures. I know this is not a precise as you might like it to be, but it should be good enough to see if I’m right that the information from fiscal affairs is pretty worthless. Will you see if you can compute the costs when these differences are built in, and also figure out how to include the ICU costs, which, as far as I can tell, are lumped in with the costs for the DOM [Department of Medicine] overall.

In an effort to respond to Dr. Leddy’s request, Mr. McCarthy discussed costs in the pathology and radiology departments with his counterparts there, and obtained the information shown in Exhibit 4. He also did some research in hospital records and talked with the nursing staff in department of medicine. The results of those activities are also shown in Exhibit 4. He explained:

I’ve used round numbers since nothing is very precise, but I think I’ve come pretty close. In radiology and pathology, for example, they had done some time and motion studies to determine how much labor and supplies went into different tests and procedures. As you can see, in both departments they didn’t get very sophisticated, but the distinction between simple and complex is probably good enough for our purposes.

Getting department administrative costs was a little tricky, but I decided that if I multiplied the labor and material cost per unit by the number of units, I would get the total department direct costs that were also direct with regard to the test or procedure. Everything else must be administrative, or at least not directly associated with a test or procedure even though it’s direct for the department. . . .

Assignment

1. Using the data Mr. McCarthy has assembled, compute revised cost figures for the two patients. What assumptions, if any, did you need to make?
2. How valuable is the cost figure you computed? That is, how might Dr. Leddy use it for decision-making. Be as specific as you can concerning the kinds of decisions she might make with this new information: pricing, profitability, product cross-subsidization, product elimination, physician behavior, and so on.
3. How might you improve upon the data Mr. McCarthy has gathered? That is, if you had the opportunity, what additional data would you gather with what goals in mind?