Your Hospital Has Been Approached By A Major HMO To Perform

Your Hospital Has Been Approached By A Major Hmo To Perform All Their

Your hospital has been approached by a major HMO to perform all their MS-DRG 470 cases (major joint procedures). They have offered a flat price of $10,000 per case. You have reviewed your charges for MS-DRG 470 during the last year and found the following profile: Average Charge: $15,000; Average Length of Stay: 5 Days. The cost details include: Routine Charge $3,600 with a 0.80 cost/charge ratio and 60% variable cost; Operating Room $2,657 with a 0.80 ratio and 80% variable cost; Anesthesiology $293 with a 0.80 ratio and 80% variable cost; Lab $1,035 with a 0.70 ratio and 30% variable cost; Radiology $345 with a 0.75 ratio and 50% variable cost; Medical Supplies $4,524 with a 0.50 ratio and 90% variable cost; Pharmacy $1,230 with a 0.50 ratio and 90% variable cost; Other Ancillary $1,316 with a 0.80 ratio and 60% variable cost. The total ancillary charges sum to $11,400. The hospital’s cost to charge ratios are 0.80 for routine services and 0.75 for all other ancillary services. Based on this, what is the average cost of MS-DRG 470? Additionally, estimate the variable cost per MS-DRG 470 case, considering departmental cost/charge ratios and variable cost percentages. The variable cost per procedure is given as $8,000, calculated via the variable cost percentage formula. The HMO indicates that less expensive joint implants will be used, reducing supplies charges by $2,000. What is the estimated reduction in variable cost? Furthermore, management’s analysis of housekeeping work patterns estimates the number of hours as 1,500 hours per month plus 0.50 RVUs per case. If the expected RVUs for the coming month are 5,800, what should be the budgeted labor hours for that month?

Paper For Above instruction

The approaching negotiation scenario between a hospital and a major Health Maintenance Organization (HMO) presents a complex analytical challenge that requires a detailed understanding of healthcare costing, departmental cost allocation, and operational budgeting. To evaluate the financial feasibility and potential impacts of the HMO’s proposal, the first step involves calculating the average cost per MS-DRG 470 case based on historical data, followed by estimating the variable costs associated with such procedures in light of departmental cost/charge ratios and variable cost proportions. Additionally, understanding the financial implications of using less expensive implants and accurately forecasting labor costs in support functions like housekeeping are crucial for making informed strategic decisions.

Calculating the Average Cost of MS-DRG 470

To determine the average cost of MS-DRG 470, which encompasses major joint procedures, we first extract relevant charge and cost data from historical figures. The average charge per case is $15,000, with an average length of stay of 5 days, indicating considerable resource utilization. Using the hospital’s cost-to-charge ratios—0.80 for routine services and 0.75 for ancillary services—the total costs attributable to each component can be estimated:

  • Routine services: $3,600 / 0.80 = $4,500
  • Operating Room: $2,657 / 0.80 = $3,321.25
  • Anesthesiology: $293 / 0.80 = $366.25
  • Lab: $1,035 / 0.70 = $1,477.14
  • Radiology: $345 / 0.75 = $460
  • Medical Supplies: $4,524 / 0.50 = $9,048
  • Pharmacy: $1,230 / 0.50 = $2,460
  • Other Ancillary: $1,316 / 0.80 = $1,645

Summing these, the total estimated cost per case is approximately:

$4,500 + $3,321.25 + $366.25 + $1,477.14 + $460 + $9,048 + $2,460 + $1,645 ≈ $23,278.03

Given the complexity and overlapping resource utilization, a more approximate yet practical approach involves considering the total ancillary costs ($11,400) and total charges ($15,000). If the hospital’s cost to charge ratio averages 0.80 for routine services and 0.75 for ancillary services, the total approximate cost per case is around $12,000 to $15,000 based on simplified methods. For more accurate financial planning, it's reasonable to estimate the average cost of MS-DRG 470 at about $12,000, aligning with the report’s data on hospital reimbursement and actual charges.

Estimating the Variable Cost per MS-DRG 470 Case

The variable cost per case is essential for understanding true marginal costs and for pricing decisions under capitation arrangements. Based on the provided variable cost percentage formula:

VC% = Variable Cost / Sales Revenue

and with a total charge of $15,000, the variable cost per case can be calculated as:

0.80 × $15,000 = $12,000

However, the problem explicitly states that the variable cost per procedure is $8,000, derived from the departmental analysis and the formula:

VC = VC% × SR

which indicates that the hospital’s total variable costs per case are approximately $8,000, representing a significant portion of total expenses and a critical figure in cost-volume-profit analysis.

Impact of Using Less Expensive Implants on Variable Costs

The HMO's indication that a less expensive implant will be employed leads to a reduction of $2,000 in supplies charges. Since supplies constitute part of the variable costs, this reduction directly affects the total variable costs. The original supply charges are $4,524, with a 90% variable cost component, implying that supplies' variable costs are:

0.90 × $4,524 ≈ $4,072

Reducing supplies charges by $2,000 decreases the supplies’ variable costs to:

$4,072 - $2,000 = $2,072

Thus, the new estimated total variable cost per case becomes:

$8,000 (initial variable cost) - $2,000 (supply cost reduction) = $6,000

This reduced variable cost could significantly improve the hospital’s profitability under the flat-fee arrangement, assuming other costs remain unchanged.

Budgeted Labor Hours for Housekeeping

The hospital's management estimates that housekeeping hours depend on a fixed base and case volume, expressed as:

Hours worked = 1,500 + 0.50 × RVUs

With an expected 5,800 RVUs in the coming month, the forecasted housekeeping hours are:

1,500 + 0.50 × 5,800 = 1,500 + 2,900 = 4,400 hours

This projection offers a basis for staffing and resource planning, ensuring adequate housekeeping coverage aligned with patient volume and activity levels.

Conclusion

In conclusion, the hospital's evaluation of costs and operational parameters vis-à-vis the HMO’s flat-rate proposal underscores the importance of meticulous cost analysis in healthcare contracting. By calculating the average cost per MS-DRG 470, estimating variable costs, analyzing the impact of less expensive implants, and forecasting labor requirements, hospital management can strategically negotiate terms that sustain financial health without compromising care quality. These steps exemplify sound financial stewardship in a complex healthcare environment where cost control and resource optimization are paramount.

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