Using PCs for effective case-mix based budgeting - microcomputers

Healthcare Financial Management, June, 1993 by Asher K. Kramer, Robert J. Ellertsen

Precise statistical budgeting remains an underused cost-control technique in healthcare organizations, despite the increasing need for such techniques resulting from national movement toward prospective pricing and managed care. As revenues are capped, the use of precise case-mix based statistical budgeting to reduce unit costs has become one of the few strategies available to financial managers to assure profitability. The use of personal computers with database and spreadsheet software can facilitate effective case-mix based budgeting.

Many expensive, resource intensive, mainframe systems have been developed for case-mix based budgeting. The budgeting approach described in this article, however, was developed at a hospital at relatively low cost using personal computers. This approach can be replicated by any organization that has a staff well-versed in computer modeling and a case-mix module on its information system that can collect data relating to practice patterns (by diagnosis and physician) and can be downloaded to a personal computer.

Case-mix based budgeting is an approach that takes a holistic view of healthcare organizations. It contrasts with traditional budgeting approaches that consider individual departments, such as laboratory or radiology departments, as discrete entities, without reference to the patients treated in the organization. Case-mix based budgeting considers the operations performed by these departments as intermediate steps in an integrated process; they therefore cannot be budgeted for in isolation. Case-mix based budgeting is also consistent with the continuous quality improvement (CQI) movement, which emphasizes the interdependent nature of processes and departments in an organization.

In case-mix based budgeting all salary and nonsalary resources used in an organization are considered a function of the budgeted statistical framework. This allows for a rational "flexing" of the budget as volume changes.

Many organizations have instituted clinical case management which seeks, through collaboration with nursing staff and physicians, to understand and change the practice patterns within major diagnostic categories. While case management has helped some organizations change the practice patterns of their physicians, they have been far less successful in translating these changes into cost savings. By tying treatment profiles into the statistical budgets and by tying salary and non salary inputs into the statistical framework, case-mix based budgeting can solve this problem.

The six steps of case-mix budgeting

All patients seen at a hospital require a unique set of services that make up the course of their treatment. This set of services is termed the treatment profile. Each diagnosis, diagnosis-related group (DRG), or major service, such as surgery, has a standard treatment profile that reflects the practice patterns of staff physicians, the nursing standards of care, and diagnostic protocols developed for each admission or visit.

Under case-mix based budgeting, the volume projected for each Asher K. Kramer, FHFMA, CMPA, MBA, is chief financial officer at Quincy Hospital, Quincy, Mass., and vice president of the Massachusetts Chapter of HFMA.

Robert J. Ellertsen, FHFMA, CMPA, MBA, is senior vice president of Goldthwait Associates, Marblehead, Mass., and president of the Massachusetts Chapter of HFMA. ancillary department or nursing unit is dependent upon the mix of diagnoses expected and the treatment profiles common for those diagnoses. Much as General Motors will not know the number and types of bumpers it will need without knowing the number and types of cars it will build, a healthcare organization cannot accurately estimate the number of EKG's or laboratory tests it will perform without knowing the types of patients expected to be seen.

The following example illustrates the steps that should be taken to develop the statistical framework for a fiscal year budget.

Step 1--Separate treatment profiles should be developed for each payer within each of the major services and subspecialties shown in Exhibit 1. Each treatment profile should summarize the average number of patient days, tests, and procedures each patient in the categories shown actually received during a specified recent time period. For purposes of illustration, this article assumes an 18-month period, but this also assumes relative stability in the make-up of the medical staff and practice patterns at the hospital. Facilities that have experienced significant changes in staff or practice patterns may require a shorter sample period. Exhibit 2 presents a sample treatment profile for aggregate medical admissions.

[Exhibit 1 & 2 TABULAR DATA OMITTED]

Step 2--Historical utilization and projected future utilization by major physician groups should be analyzed next. To estimate accurately the overall hospital patient mix, an accurate projection of the admissions for each individual physician group will be needed. These projections can be arrived at through a combination of interviews with admitting physicians and an analysis of historical trends