A cost accounting system targeted to DGRs

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

As Figure V shows, the most labor-intensive chemistry work stations have lower efficiency ratios. We can improve productivity and efficiency by automating these areas of the lab. Many labs, however, spend lavishly to reautomate areas of chemistry and hematology that are already heavily automated. Often we replace an instrument with a more expensive one while the labor cost remains constant. As a result, direct costs rise faster than productivity--and overall efficiency drops.

The variable cost per test ratio can be useful as a pricing tool in marketing strategies aimed at physicians' offices and nursing homes. Additional or marginal costs, such as supplies and disposables, rise with increased volume.

The lab should set prices above the variable cost per test but below the total cost per test. In our example, as long as Valley prices its electrolytes and single-channel chemistries above $1.91, the resulting revenues contribute to profits. If Valley bases prices on the total cost per test of $7.07, it might not be competitive with the large commercial firms.

The breakeven volume is useful for determining whether a procedure should be performed in-house or sent to a reference facility. If the calculated breakeven volume is higher than current volume, it's not economically feasible to perform the test on-site.

Two other important parameters are the revenue per test and total cost per test. Revenue per test is the lab's income from performing and selling one test or procedure. Figures I and III show that Valley's serology department and several chemistry work stations operate at a loss; that is, total cost per test exceeds revenue. This happens because many labs price their procedures based on the sum of calculated variable costs and estimated fixed costs. Unfortunately, they often underestimate fixed costs.

Under the pressure of prospective payment, however, it's vital to determine an accurate total cost per test for each procedure. Comprehensive cost data also provide important ammunition when the hospital must compete for patients with HMOs and PPOs. Like DRGs, these prepaid health plans reimburse the hospital on a set scale. The lab that underestimates costs risks bidding too low and locking itself into unfavorable and unprofitable contracts. Sharp cost per test calculations enable the lab manager to put a correct price tag on laboratory services.

Accurate test-cost data open up another strategy: identifying the most lab-intensive DRG categories. With this kind of information, we can aim to cut costs and decrease length of stay through more effective lab utilization.

For instance, let's say that some of Valley Hospital's more common DRG categories relate to thyroid disorders, due to a number of endocrinologists on staff. The lab would do well to analyze its thyroid test menu. Are the tests offered frequently enough? Even if the volume of certain procedures is low, it may be worth running them daily to whittle down thyroid patients' length of stay.