Change to survive: The SOPA approach to costing; this accounting practice aims to protect providers from being done in by prospective reimbursement - Feature Article

Nursing Homes, Feb, 2003 by Anthony L. Morrone, Jill Smoller

Accounting practices and philosophies have evolved, and facilities that still rely on the formulas of old are being left in the dust. Facilities can use new methods, however, to meet today's challenges. Before we move into the specific technique described in this article, let's review the new conditions under which operators are struggling.

The New Environment

First, provision of care in nursing homes has broadened to include subacute admissions, shorter lengths of stay, and altered staffing patterns. RN staffing, including nursing hours per resident day, has increased in some cases to accommodate the shift toward heavier-care residents. Second, nursing home providers have had to acclimate and adapt to a new language, new definitions, and new documentation requirements, such as RUGs-III classification, PPS, and MDS 2.0 methodologies.

A closer look at the PPS reveals crucial details necessitating change in nursing home business practices. Residents' lengths of stay have impact not only on nursing and rehabilitation departments but also on bookkeeping, dietary, social services, admission, administration, and housekeeping. All disciplines assume greater burdens because of the shorter stays and the resulting higher discharge rates.

For instance, in the past, when a resident's length of stay was one year, the social service cost was (hypothetically) $5 per day. Now, with lengths of stay as short as one month (1/12 of a year), the social service cost could conceivably increase as much as 12 times, to $60 per day. Length of stay is one link to understanding why a provider in New York, for example, receives approximately $100 per day more from Medicare than from Medicaid for an RMC classification (rehab: 150 minutes per week), even though the nursing home is performing essentially the same level of care for both.

Additionally, drug costs per resident, once a stable and predictable cost, have skyrocketed dramatically as a result not only of prices, but of short-stay and sub-acute admissions. And, as a final example of change related to length of stay, consider the change in occupancy rates. At one time, facilities were accustomed to occupancy rates approaching 99%; now they must endure occupancy rates at least 10% lower. This decrease in census, coupled with fixed labor costs, increases the cost of care per unit.

A Method for Predicting Costs

Embracing the necessary change in accounting practices to accommodate all these changes requires, more than ever, the cooperation and teamwork of all disciplines involved in care. Accurate and timely completion of the MDS 2.0 is obviously a must. When prepared in a meticulous manner by all professionals, the MDS 2.0 serves as a vital tool for the capture of legitimate reimbursement. On the other hand, haphazard, inconsistent, or sloppy completion of the MDS will almost certainly result in financial loss.

Appropriate completion of the MDS is equally important to making decisions, as a team, about admissions. Today's pricing-based methodologies demand that a facility be able to predict the costs of a resident prior to intake, i.e., either ensuring that the resident's reimbursement rate covers the services to be provided or, at the least, covers overhead during periods of low occupancy.

A provider can determine the financial feasibility of any resident prior to admission with the development of a simple cost-accounting system. Cost accounting of this type enables a facility to calculate its aggregate operational costs and reduce that aggregate to a unit cost. It allows the facility to visualize how expenses are incurred and whether this will happen according to plan. There is a particular approach to this that works with great clarity and accuracy: the Standard Off Par Approach (SOPA).

SOPA measures the difference between the average cost of all the units and a specific unit cost. The financial costs of operating a nursing facility, e.g., wage scales, utility, property costs, real estate taxes, etc., differ from facility to facility. The advantage of SOPA is that it takes into account the unique and individual cost structure of the particular nursing home. It requires the facility accountant or comptroller to:

1. "Componentize" all costs by department and account classification (e.g., salaries: management vs direct care; nonlabor: supplies vs utilities).

2. Obtain from all department heads the statistical data that measure these costs.

3. Relate average cost to a statistic (see Table); this can be expedited by use of a specialized computer program, such as a Microsoft Excel-based program one of the authors (A.L.M.) has developed. This will be the standard basis of developing unit costs for each service rendered at the facility.

4. Interview department heads to obtain specific statistical data relating to those of the 44 Resource Utilization Groups (RUGs) that are used by the facility.

5. Plug these data into the equation referred to in step 3 and shown in the Table. The result is a specific cost of providing a specific service offered by the particular provider.