A cost accounting system targeted to DGRs

Medical Laboratory Observer, Sept, 1985 by James W. Sharp

Prospective payment is taxing the skills of hospital laboratory managers. Until recently, their main responsibility was to provide timely, high-quality lab service. But in the past three years, the emphasis has shifted toward cost efficiency and delivering quality service as inexpensively as possible.

These new challenges demand new resources. And today's lab decision makers need a thorough understanding of laboratory economics, along with access to detailed quantitative cost data. Unfortunately, those essential data may not be available because most hospital laboratories lack sophisticated accounting systems.

This article should help fill that gap. It outlines the development and implementation of a practical laboratory cost accounting system, and shows how information derived from this system can help solve a host of lab problems from purchasing to productivity.

Ideally, a cost accounting system should accomplish several tasks. It should track the flow of laboratory revenues and expenses; establish standards to determine whether resources are used appropriately; define and measure productivity; and analyze resource utilization by specific DRG categories.

The system must also work smoothly from an operations standpoint. It should be easy to implement, provide useful and timely data to the right people, be flexible enough for expansion or contraction in large or small hospitals, and be inexpensive to run.

Let's see how such a system works, using data from hypothetical Valley Hospital--a 425-bed, nonteaching, acute care hospital. Using basic information from Valley's annual laboratory operating report, we'll design a system that allows Valley's lab manager to accurately track expenses and make cost-effective management decisions.

We can examine laboratory expenses from several perspectives: those of the total lab, lab subsection, or individual department work station. The object of the game is to track all lab expenses through each of these three levels. Ultimately, we will allocate a portion of total expenses to each unit of lab output--the billable test procedure. This may look like a daunting task, but we have accomplished it with only a few hours' work with a calculator or computer spreadsheet.

Before we set out to track costs, we need to draw up an operating model of the lab broken into its component parts. Valley's lab is organized along traditional lines into six major departments or production centers: chemistry, hematology, serology, microbiology, blood bank, and histology.

Figure I lists the billable procedures performed and full-time equivalents employed for each department along with their associated expenses, from equipment maintenance to professional fees. A billable procedure is a test result actually billed to a patient; this unit gives a more accurate portrayal of labor and supply utilization than the raw number of tests performed. For example, a chemistry profile with 20 determinations counts as one billable procedure, not 20 tests. The hospital billing office can provide a breakdown of billable procedures by lab department.

It's easy to figure the technical personnel costs in this budget: Just count the number of technical staff members in each department and list their total salaries. But what about nontechnical support staff such as pathology secretaries and lab receptionists? They aren't usually assigned to a particular department, but their work benefits the entire lab. How should their salaries be allocated?

To handle this step, we must devise an allocation schedule (Figure II). This schedule uses formulas to assign the costs of nontechnical personnel, equipment, and miscellaneous items to each production center. The formula may differ for each group or item allocated; the only requirement is that it realistically reflect the department's use of that item.

For example, Valley spends some $224,000 on phlebotomy salaries. The phlebotomists draw all patient blood specimens, so the formula allocates phlebotomy expenses based on each department's percentage of billable procedures. We won't allocate any phlebotomy costs to the histology department since most of its 21,000 billable procedures a year do not require blood specimens.

The chemistry department performs 176,000 billable procedures a year. To determine its fair share of phlebotomy costs, divide this sum by the difference between the lab's total number of procedures (415,000) and the number of procedures that do not require blood specimens (21,000). When we multiply the result by 100, we discover that 44 per cent of all phlebotomy costs should be allocated to chemistry.

Valley Hospital employs five pathologists. The pathologists spend half their time performing histology work, and the other half dealing with clinical lab problems. Therefore half of their $625,000 in professional fees is allocated to histology. The remaining $325,000 is divided equally among the five clinical lab departments, for an allocation of $62,500 per department.