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?
To calculate the average cost of DRG 209, we need to first calculate the total variable cost for each component and then sum them up.
1. Calculate the variable cost for each component:
- Routine charge: $3,600 x 0.80 = $2,880
- Operating Room: $2,657 x 0.80 = $2,125.60
- Anesthesiology: $293 x 0.80 = $234.40
- Lab: $1,035 x 0.70 = $724.50
- Radiology: $345 x 0.75 = $258.75
- Medical Supplies: $4,524 x 0.50 = $2,262
- Pharmacy: $1,230 x 0.50 = $615
- Other ancillary: $1,316 x 0.80 = $1,052.80
2. Calculate the total ancillary variable cost:
Total Ancillary = $11,400 x 0.75 = $8,550
3. Sum up all the variable costs:
Total Variable Cost = $2,880 + $2,125.60 + $234.40 + $724.50 + $258.75 + $2,262 + $615 + $1,052.80 + $8,550 = $19,703.05
4. Calculate the average cost per case:
Average Cost per Case = Total Variable Cost / Number of Cases
Since the HMO has offered a flat price of $10,000 per case, we can assume that the number of cases is 1.
Therefore, Average Cost per Case = $19,703.05 / 1 = $19,703.05
So, the average cost of DRG 209 would be approximately $19,703.05.
Next, let's calculate the estimated reduction in variable cost if the less expensive implant is used and the medical supply charges are reduced by $2,000.
1. Calculate the new variable cost for medical supplies:
New Medical Supplies Variable Cost = $2,262 - $2,000 = $262
2. Calculate the new total variable cost:
New Total Variable Cost = Total Variable Cost - Old Medical Supplies Variable Cost + New Medical Supplies Variable Cost
New Total Variable Cost = $19,703.05 - $2,262 + $262 = $17,703.05
3. Calculate the reduction in variable cost:
Reduction in Variable Cost = Total Variable Cost - New Total Variable Cost
Reduction in Variable Cost = $19,703.05 - $17,703.05 = $2,000
Therefore, the estimated reduction in variable cost is $2,000 if the less expensive implant is used.