Management and regulation of hospital costs

1. Management and
Regulation of Hospital
Costs

2. Why do hospital cost more than
others?

3. How do managers control costs?
- Managers control hospital costs
through the budget process.

4. Types of Budget Process
1. Fixed Budget (Standard Budget)
2. Flexible Budget
3. Operating Budget
4. Strategic Budget (Long-run capital
Budget

5. Fixed Budget (Standard Budget)
- a budget that does not change
with volume.
- is fixed for the entire period
covered by the budget, with no
changes based on actual activity.

6. Flexible Budget
- A budget that change in volume.
-is financial plan of estimated
revenues and expenses based on
the current actual amount of output.

7. Operating Budget
- A hospital or medical group
practice creates an operating budget
that projects all anticipated expenses
for the next year.

8. Strategic Budget (Long-run capital
Budget)
- A budget that focuses on trends
in the number of patients and capital
renovations and expansions.

9. How Organizations Deal with
Change.
1. Intermediate-run changes – changes
occur during the next two to five years
2. Known short-run variations – dealt with
by making limited changes in the number
of staff scheduled.
3. Known long-run change – such as
declining trend in admissions due to the
closure of a local manufacturing plant,
calls for a permanent reduction in
capacity.

10. 4. Random short-run fluctuations – are
dealt with primarily by building in some
excess reserve capacity, making the staff
work faster or slower, and allocating less
immediate tasks to the slower days.
5. Unforeseen long-run changes – provide
the test of the organization’s ability to control
costs.

11. Cost per day in the hospital varies for
many reasons:
1. Differences in quality and type of services
offered
2. Cost shifting to pay for research and
teaching
3. Severity of patient illness
4. Prices of labor and other inputs
5. Differences in production efficiency.

12. Some of common mistakes made
in accounting for the true costs of
medical care.
1. Provider costs misallocated (displaced in
time, overhead, or wrong department)
2. Patient costs not counted (wait time,
transportation, family care)
3. Emotional costs not counted (pride, fear,
pain, lack of respect)

13. Hospitals are Multiproduct Firms
- Hospitals are complex institutions,
providing many types of care; thus,
comparisons of cost per day or per case
may not be very meaningful indicators of
how efficiently a hospital is producing care.

14. Technology
- Has tended to increase total spending
in health care because generous insurance
payments and costs reimbursement have
given little incentive to develop cost –
reducing techniques or to give up a little
quality for large reduction in cost.
- An increase in capability to improve
health often makes more spending
worthwhile.

15. Type of Regulation to Control
Hospital Costs
Certificate of need (CON) - legislation
required that a planning body conduct a
study and approve any capital project that
would increase the number of hospital
beds in the region
Certificate of Need allows health care
providers to establish new facilities or
services, make certain capital
expenditures

16. Utilization review (UR) – a process to
eliminate unnecessary surgery and other
services by having a panel of doctors and
nurses in a professional standards review
organization (PSRO) review patients chart
to find cases of inappropriate care.
Utilization review(UR) is a safeguard
against unnecessary and inappropriate
medical care.

17. Professional standards review
organization (PSRO) -
an organization established to monitor
health care services paid for through
Medicare, Medicaid, and Maternal and
Child Health programs to assure that
services provided are medically
necessary, meet professional standards,
and are provided in the most economic
medically appropriate health care agency
or institution.

18. Budgetary review – was much more
labor – intensive process involving the
line-by-line examination of spending plans.

19. Administered prices (DRGs, PPS, BBA)
DRGs (Diagnostically related groups)–
used for setting federally administered
prices per discharge covering the entire
patient stay.
PPS (Prospective payment system)- is a
method of reimbursement in which
Medicare payment is made based on a
predetermined, fixed amount.
BBA (Balanced Budget Act of 1997)- it
directly reduced Medicare payments to
physicians, hospitals and hoe – health

20. Thank you for listening 