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Your hospital has been approached by a major health maintenance organization (HMO) to perform all their diagnosis related group (DRG) 209 cases (major joint reattachment procedures). They have offered a flat price of $10,000 per case. You have reviewed your charges for DRG 209 during last year and found the following profile:
Average charge: $15,000
Average LOS: 12 days
Routine Charge Cost/Charge Variable Cost %

Routine charge $3,600 0.80 60
Operating Room 2,657 0.80 80
Anesthesiology 293 0.80 80
Lab 1,035 0.70 30
Radiology 345 0.75 50
Medical Supplies 4,524 0.50 90
Pharmacy 1,230 0.50 90
Other ancillary 1,316 0.80 60
Total Ancillary $11,400 0.75 50

In the above data set, assume that the hospital’s cost-to-charge ratio is 0.80for routine services
and 0.75 for all other ancillary services. Using this information, what would be the average cost of DRG 209 be?

Estimate the variable cost per DRG 209 using the department cost/charge ratio and variable
cost percentages.

The HMO in the above example has indicated that their doctors use less expensive joint
implants. If this less expensive implant is used, your medical supply charges would be reduced by $2,000. What is the estimated reduction in variable cost?

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