Cost accounting supports clinical evaluations.

COST CONTAINMENT

This article describes how a hospital cost accounting system was used to evaluate the financial impact of the use of a new and expensive drug at a 700-bed academic medical center.

Hospital cost accounting systems have changed considerably in recent years. Prior

to the advent of Medicare's prospective payment system, the Medicare Cost Report was the only approximation of cost accounting in most hospitals. As hospital payment methods have changed, so have the concepts of cost accounting for hospitals.(a) Today, most hospitals that have invested in new cost accounting systems have done so to improve productivity and cost management, to evaluate the profitability of various services or products, or to evaluate managed care contracts.(b)

Concurrent with the advances in cost accounting have been the changes in clinical practice as new procedures, technologies and products emerge. Since many of these new products are extremely expensive, hospitals have had an increasingly vested interest in evaluating their financial and clinical impact before or shortly after their introduction.

Traditionally, analysts have used costs-to-charges ratios developed from data taken from the Medicare Cost Report to approximate costs at the patient level. These cost estimates have suffered from a number of biases that have been noted elsewhere.(c) Today's new cost accounting systems can provide much better evaluations, as illustrated in the following example of Thomas Jefferson University Hospital (TJUH), a 700-bed academic medical center in Philadelphia, Pennsylvania, and how it used its cost accounting system to evaluate the financial impact of a new and very expensive drug, Zofran.

The cost accounting system

The clinical financial management system (CFMS) at TJUH integrates clinical and financial data from the medical records, billing and cost accounting systems. The cost accounting component of the system uses a bottom-up approach that begins with cost determinations at the procedural level. The CFMS system utilizes relative value units determined by management engineering studies to estimate each cost component of a procedure. Unit costs are divided into fixed and variable as well as direct and indirect components. For example, the cost for a complete blood count would include direct variable costs for labor and supplies, direct fixed costs for equipment and space, and a fair share of indirect overhead costs such as medical records, utilities, or housekeeping. Unlike the traditional step-down allocation method used in the Medicare Cost Report, the CFMS system offers a customized allocation of indirect costs, first to departments and then to procedures within a department.