Cost management is crucial in both service and product industry; the price of commodities is dependent on the costs incurred when producing the commodity. In hospital cost management, cost can be managed using different cost drivers.
In the case of Beach Street office of Getwell Clinics, the management manages DRG treatment using three cost drivers namely DRG, DRG P, and DRG P. This report analysis the cost drivers and advises the management on the best strategy to increase the facility income.
DRG Break even analysis
At break even revenue collected is equivalent to the cost incurred:
Breakeven point: Total revenue = total costs
DRG M
Charge = 1700
Variable costs = 1000
Fixed costs = 500,000
Shared fixed costs = (0.5*830,000) = 415,000
Contribution per treatment = 1700 – 1000
Break even = total fixed costs/contribution per treatment
Let X be the number of treatments at breakeven then
Break even then
1700X = 1000X + 500,000 + 415,000
700X= 915,000
X= 1308 treatments.
DRG J
Charge = 2600
Variable costs = 1200
Fixed costs = 280,000
Shared fixed costs = (0.3*830,000) =249,000
Contribution per treatments 2600 – 1200= 1400
Break even = total fixed costs/contribution per treatment
Let X be the number of treatments at breakeven then
Break even then
2600X = 280,000+249,000+1200X
1400X = 529,000
X= 378 patients
DRG P
Charge = 900
Variable costs = 600
Fixed costs = 110,000
Shared fixed costs = (0.2*830,000) =166,000
Contribution per treatment = 300
Break even = total fixed costs/contribution per treatment
Let X be the number of treatments at breakeven then
Break even then
900X= 110,000+166000+600X
300X= 276,000
X= 920
Which DRG must be promoted in an advertising program if the office has excess capacity? Explain why
The DRG to be advertised more is DRG M, this is because the service can be offered in two hours and each treatment is giving a contribution of $700 translating to $350 per hour. DRG J has a contribution of 280 per hour and DRG P has 300 per hour. The high contribution of DRG M makes it the service that should be advertised more since it would earn a higher income to the hospital than others (Cleverly & Cameron, 2007).
Which DRG must be promoted if the office is almost at maximum capacity in terms of available hours? Explain
The DRG to be a promoted more is DRG M, because the service can be offered in two hours and each treatment is giving a contribution of $350 per hour. DRG J has a contribution of 280 per hour and DRG P has 300 per hour. The high contribution of DRG M makes it the service that should be promoted more since it would earn a higher income to the hospital than others would.
What rationale may be used to support the use of DRGs as an approach to allocating costs?
When using DRGs as the basis of gauging the cost of in a hospital, they are used as cost centres to determine the contribution they bring to the hospital. Analyzing each sector separately assists in setting of prices and establishing the areas of inefficiency in the hospital for strategic decision-making.
The method creates a level of independency of departments thus management can concentrate on areas of inefficiency to develop cost management programs, which will benefit the entire facility (Finkler, Ward, & Baker, 2007).
References
Cleverly, W. O., & Cameron, A. E. (2007). Essentials of health care finance. Sudbury, MA: Jones and Bartlett.
Finkler, S.A., Ward, D.M., & Baker, J.J. (2007). Essentials of Cost Accounting for Health Care Organizations. Sudbury, MA: Joseph and Bartlett Publishers, Inc.