Examining the effect of PPS on cost accounting systems - prospective payment system

Healthcare Financial Management, March, 1993 by Zabihollah Rezaee

The most commonly used post-PPS standard cost systems in hospitals are microcosting, relative-value units, patient-acuity costing, and cost-to-charge ratios.(b) Because it requires a breakdown of all resources consumed by each procedure, only 11 percent of surveyed hospitals are using the microcosting technique. About 9 percent of surveyed hospitals are using relative-cost estimation, compared to 7 percent before PPS was implemented. About 20 percent of surveyed hospitals are currently using the relative value unit, and 10 percent are using a variation -- enhanced relative-value unit. More than 16 percent of surveyed hospitals are now using the patient-acuity costing method, compared to 5 percent before PPS implementation.

Conclusion

Survey results suggest that following PPS implementation, many hospitals adopted a more effective method of cost accumulation, assignment, and measurement. The results also indicate that hospital management is now paying more attention to the use of cost information for decision making and performance evaluation. The implementation of PPS would also seem to have spurred an increased level of sophistication of hospital cost accounting systems and promoted the use of standard cost systems for performance evaluation and variance analysis. Survey results further suggest that standard cost information can provide a basis for pricing decisions and for identifying areas of inefficiency and sub-standard care.

The traditional cost-to-charge ratio is still the most frequently used method used to establish a standard cost for each procedure or item provided by patient services cost centers. However, the use of more sophisticated and systematic standard cost systems, such as patient-acuity costing, microcosting, or the relative-value unit method is growing, thus enabling hospitals to more accurately determine the actual cost of care for patients in each DRG. This, in turn, results in a more accurate determination of total patient care costs and a closer match between costs incurred and reimbursement received.

a. Burda, David:"Cost accounting is useful, but don't expect too much from it" Modern Healthcare July 1984, p 168.

b. Burik, D. and Duvall, T.J.:"Hospital Cost Accounting: Implementing the System Successfully" Healthcare Financial Management May 1985, pp 76-88. de Mars, Martin P. and Boyer, F.J.: "Developing a Consistent Method for Costing Hospital Services" Healthcare Financial Management February 1985, pp 30-36. Gravell, J.R. and Selivanoff, P.: "Costing Method Stresses Accuracy, Cost Effectiveness" Healthcare Financial Management November 1986, pp 111-112. Rezaee, Zabihollah and Flesher, Dale L.: "Designing Cost Accounting Systems for the Healthcare Industry" Central State Business Review Winter 1989, pp 27-30.

Zabihollah Rezaee, PhD, CPA, CIA, CFE, CMA, is associate professor, department of accounting, Middle Tennessee State University, Murfreesboro, Tenn.