Data Metrics & Analysis
By William O. Cleverley and Jamie O. Cleverley
A Better Way to Measure Volume—and
Benchmark Costs
When inpatient charges represented 90 percent of total volumes, using
adjusted patient days or adjusted discharges as a volume metric made perfect sense. However, outpatient volumes continue to trend upward. In
2009, inpatient charges accounted for only about 50 percent of hospital
volumes. It is time to adopt a more realistic volume metric that allows healthcare finance leaders to better compare activity and costs—and identify
savings potential.
For at least the last 50 years, the predominant measures of hospital volume
have been either adjusted patient days or
adjusted discharges.a The computation
of each metric involves dividing outpatient charges by the average inpatient
charge for either patient days or discharges.
Adjusted Discharges Discharges Discharges (Outpatient
Charges/Inpatient Charges)
Healthcare finance leaders and policy
analysts regularly express displeasure
with these current volume metrics. Yet
a. Throughout the rest of the article, we will only reference “adjusted discharges” because that seems to be
the primary metric employed, and the points made
regarding adjusted discharges apply equally to adjusted patient days.
they feel obliged to continue using
adjusted discharges for lack of an
acceptable alternative.
We propose a better metric: equivalent
patient units. As we will show, cost per
equivalent patient unit appears to be a far
more reliable measure than cost per
adjusted discharge. Benchmarking costs is
a crucial exercise for healthcare finance
leaders as they respond to declining reimbursements by identifying opportunities
for reducing expenses. However, accurate
benchmarking requires accurate metrics.
What’s Wrong with Adjusted Discharges?
The major increase in outpatient activity
in recent decades does not, in and of
itself, make adjusted discharges an
invalid metric of overall hospital activity.
The bigger problem: the metric has
become an unreliable measure for
benchmarking volumes and costs.
The primary purpose for the adjusted
discharge metric is to permit some type
of comparative analysis. This comparative analysis usually takes one of two
forms: cost or revenue divided by adjusted discharges for one or multiple hospitals in one or multiple time periods. For
example, we may want to compare the
change in cost between 2009 and 2008 at
one facility—or the cost per adjusted discharge across multiple hospitals within a
given time period. However, for several
reasons, adjusted discharges no longer
works well as a comparative metric.
Pricing effects. Ratios of cost to charge
(RCC) are not uniform across inpatient
and outpatient procedures and are
changing at different rates. Changing
RCCs—resulting from pricing strategies—
create a strong bias in the measurement
of both adjusted discharges and adjusted
patient days. The exhibit below illustrates this pricing impact. In the example, the only change is an overall price
How Pricing Impacts Adjusted Discharges
Inpatient
Discharges
Inpatient
Charges
Outpatient
Charges
Total
Charges
Adjusted
Discharges
Inpatient
Case Mix
Case Mix
Adjusted
Discharges
Current
situation
10
$100,000
$100,000
$200,000
20
2.0
40.0
With a 20% increase
in outpatient prices
10
$100,000
$120,000
$220,000
22
2.0
44.0
Model
Source: Cleverley & Associates, Inc. Reprinted with permission.
When outpatient prices increase by 20 percent, adjusted discharges increase by 10 percent—even though there is no activity increase.
6 Fall 2010 Strategic Financial Planning
increase
using publicly
of 10 percent,
availablebut
data
thefor
entire
two not- assumption that outpatient complexity is However, how can we add the two metCase Example:
Comparing
Two Volume
Metrics
rics—equivalent
discharges and equivaequivalent.
This would
mean that a hosprice
for-profit
increase
hospitals
is allocated
in theto
same
outpatient
geolent
visits—to
get
equivalent patient
with
an
inpatient
CMI
of
2.0
would
procedures.
graphic areaThe
(seeresult:
the exhibit
A 10 percent
at right). To pital
Step 1. Calculating Cost per Adjusted Discharge, Case Mix Adjusted
units? The answer may be found in
have an outpatient case mix complexity
increase
illustrateindifferences,
adjusted discharges
we will compute
(from
Hospital A
Hospital B
Medicare payment rates. For example,
factor also about double the average
20
twotooverall,
22). facilitywide cost metrics:
Values required to compute the metric
let’s assume that Medicare pays a hospivalue. From our annual State of the
> Cost per adjusted discharge, case mix
Gross inpatient revenue
$909,743,000
$20,735,870
tal $5,000
for an inpatient discharge
Hospital
Industry,
we
know
that
larger
adjustedRCC data for acute care hospiHistorical
Gross outpatient revenue
$601,621,000
$74,977,216
with a$1,511,364,000
hospitals
often have
higher inpatient
> Cost
patient
unit (which
tals
(seeper
theequivalent
exhibit below)
implies
that
CMI of 1.0, and $50 for
an outpaGross patient
revenue
$95,713,086
CMIOperating
values relative
reflects
inpatient
outpatient
case
charge
increases
are and
being
shifted from
tient visit
with a RW of 1.0. $58,409,570
With this
expenseto smaller hospitals;
$768,986,760
Total inpatient
discharges
1,919
the relative
intensity
inpatient
to adjustment)
outpatient and ancillary areas. however,
information,20,873
we can take the relative
degree of outpaMedicare
CMI
1.8553
1.2604
Many hospitals are raising outpatient pro- tient complexity is not of the same mag- payment ratio of outpatient to inpatient
cedure
Calculating
pricescost
at rates
per adjusted
greaterdischarge,
payment of 0.01 ($50/$5000) and create
nitude. As a result, larger hospitals
than inpaAdjusted discharges
34,676
8,858
case procedures
mix adjusted.because
an equivalent64,334
patient unit.
appear
to
have
more
adjusted
distient
of the
Six values
aregreater
required would
Adjusted discharges CMI*
11,164
(and
less cost-per-adjusted
disincidence
of this
discount-from-billed
to compute
metric (see Step 1charge
in the charges
Cost per
adjusted
discharge (CMI adjusted)
$11,953
$5,232
charge)
smaller
hospitals
Equivalent Patient Units Equivalent
payments
in the
outpatient arena. Given
exhibit). The
case-mix-adjusted
dis* Adjustedcompared
Discharges CMI to
Adjusted
Discharges
Medicare CMI
when inpatient case mix adjustments
Discharges (Payment Ratio no
othermeasure
changes,isthis
shiftoncreates
an
charge
based
the multipliwere
included.
Equivalent Visits)
increase
the number
of adjusted
discation ofinadjusted
discharges
by the
Step 2. Calculating Cost per Equivalent Patient Unit
charges,
which
overstateatthe
actual
Medicare
CMI.would
For example,
Hospital
Hospital
A
B
increase
in facility
volume.
A, the cost
per adjusted
discharge, CMI
For example,
if a hospital
has Hospital
15 equivaA Possible Solution: Equivalent
Equivalent
65,375
2,055
adjusted, would be:
lent discharges
and 1,500 equivalent
visPatient
Units inpatient discharges*
Gross inpatient revenue
$909,743,000
$20,735,870
its, we can create the equivalent patient
Further complicating the application of
Creating a hospitalwide output measure
Inpatient Medicare charge per discharge,
adjusted
discharges:
hospital has
Operating
ExpensesEvery
($768,986,760)
units as follows:
15 (0.01 $10,092.40
1,500) = 30
requires
a method for adding inpatient
CMI adjusted
$13,915.72
†
experienced
different(34,676)
rates of change
for volumes
Adjusted Discharges
to
outpatient
volumes.
There
are
2,841,919
367,735
Equivalent outpatient visits
Gross
outpatient
revenue
$601,621,000
inpatient
Medicareand
CMIoutpatient
(1.8553) $11,953
widely
accepted
case-mix-adjusted
volThe concept
appears to make$74,977,216
sense.
RCCs,
which
outpatient
charge
per visit,
RW adjusted
$211.70
$203.89
umeMedicare
measures
available
for both
inpaAssuming that
Medicare is trying
to relate
makes benchmarking among hospitals
‡
87,386
Equivalent
patient
units
The advantage of using a Medicare CMI
tient and outpatient areas:
payment to underlying reasonable6,236
cost,
unreliable.
Outpatient payment to inpatient payment ratio
0.7745%
1.1371%
> Equivalent discharges for inpatient
which is a stated objective, the use of relais based solely on its availability. The
areas:
By equivalent
using Medicare-severity
payment rates may$9,366
be valid.
Medicare
CMI canMany
be used
for virtually
Case
mix complexity.
hospitals
will
Cost per
patient unit‡ diag- tive Medicare
$8,800
nosis
related
group
(MS-DRG)
case
It
is
not
perfect,
but
it
should
represent
a
every U.S.
acute care
hospital.
The drawmodify
the adjusted
discharge
metric
to
*Equivalent Inpatient Discharges Gross Inpatient Revenue Inpatient Medicare Charge per Discharge, CMI Adjusted
† Equivalent Outpatient Visits Gross Outpatient Revenue Medicare Outpatient Charge per Visit
weights,
we can determine that a hospi- major improvement from the adjusted
back to Medicare
CMI is thatby
it multiplydoes not
recognize
case mix complexity
‡Equivalent Patient Units Equivalent Inpatient Discharges (Payment Ratio X Equivalent Visits); Cost per Equivalent Patient Unit Operating
Expenses
Patient Units and an average
tal
with Equivalent
10 discharges
discharge measure of hospital output.
adequately
reflect
patients
in nontradiing
the adjusted
discharge
value
by the hosCMI of 2.0 has 20 equivalent discharges
tionalinpatient
Medicarecase
areas
obstetpital’s
mix(primarily,
index (CMI).
(An
> Equivalent
visits forthe
outpatient
areas:
rics). If a hospital
has
a large maternity
alternative
is dividing
a cost-per-adjusted
Case Example
Step 3. Comparing
Two Metrics
By using relative weights (RWs), we can As is often stated, “the proof of the pudarea, its Medicare
CMIhospital’s
would likely
discharge
metric by the
CMI).be
Hospital A
Hospital B
overstated when compared to its alldetermine that a hospital with 500 out- ding is the eating.” So we will demonCost
per
equivalent
patient
unit
$8,800
$9,366
payer this
CMI.may
Asbe
discussed
howevWhile
fine for earlier,
the inpatient
patient visits and an average RW of
strate the use of equivalent patient
units
$11,953
$5,232
Cost per adjusted discharge, CMI adjusted
3.0 has 1,500 equivalent visits
with a real-world example constructed
er, the application
any
CMI metric to
component,
there isofan
implicit
adjusted discharges poses benchmarking
Ratio: Cost per equivalent patient unit to cost per
adjusted discharge, CMI adjusted
71.0%
179.0%
challenges. We now turn our attention to
Acute
Care
Hospital
RCCs,
1996
to
2008
equivalent patient units to see if the
Cost per equivalent patient unit to U.S. median
109%
117%
metric can truly overcome the pitfalls of
Ratio of Cost to Charge
1996
1998
2000discharge2002
2004
2006 199% 2008
% Change
Cost per adjusted
CMI to U.S. median
87%
adjusted discharges.
Inpatient nursing departments
74.5%
Hospital Cost64.7%
Index®
69.9%
59.2%
Hospital Cost Index® to U.S. median
54.9%
53.9% 104.0 52.8%
112.5
29.1%
Calculating cost per equivalent patient unit.
103%
111%
As
our
formula
illustrates,
there
are
Facilitywide
50.6%
45.6%
37.3%
31.4%
29.8%
41.1%
Source: Cleverley & 41.7%
Associates, Inc. Reprinted
with permission. 33.4%
three requirements to calculating equivConstructed with publicly available data, this example shows that the use of two different cost
Source: Cleverley
& Associates,
Reprinted with permission.
alent
patient
units:Inc.
equivalent
dismetrics—cost per adjusted discharge (CMI adjusted) and cost per equivalent patient unit—results
charges,
equivalent
andatthe
Facilitywide
RCCs arevisits,
decreasing
a faster rate than inpatient nursing RCCs—implying charge increases are being shifted to outpatient
in sizably different benchmark information about costs at two not-for-profit hospitals in the same
payment
ratio.
All of these elements are
and ancillary
areas.
geographic area.
8 Fall 2010 Strategic Financial Planning
II
www.hfma.org/sfp Fall 2010
7
assumption that outpatient complexity is However, how can we add the two metusing
increase
publicly
of 10
available
percent,data
butfor
thetwo
entire
notCase
Example:
Comparing
Metrics discharges and equivarics—equivalent
equivalent.
This would
mean that Two
a hos-Volume
for-profit
price increase
hospitals
is allocated
in the same
to outpatient
geolent
visits—to
get equivalent patient
pital1.with
an inpatient
CMIAdjusted
of 2.0 would
graphic
procedures.
area (see
Thethe
result:
exhibit
A 10
at percent
right). To
Step
Calculating
Cost per
Discharge,
Case
Mix Adjusted
units? The answer may be found in
have an outpatient case mix complexity
illustrate
increasedifferences,
in adjustedwe
discharges
will compute
(from
Hospital A
Hospital B
Medicare payment rates. For example,
factor also about double the average
two
20overall,
to 22). facilitywide cost metrics:
Values required to compute the metric
let’s assume that Medicare pays a hospivalue. From our annual State of the
> Cost per adjusted discharge, case mix
Gross inpatient revenue
$909,743,000
$20,735,870
tal $5,000
for an inpatient
discharge
Hospital
Industry,
we
know
that
larger
adjusted
Historical RCC data for acute care hospiGross outpatient revenue
$601,621,000
$74,977,216
with
a CMI of 1.0, and $50
hospitals
often
have higher inpatient
> Cost
per equivalent
unit (which
tals (see
the exhibit patient
below) implies
that
for an outpaGross patient
revenue
$1,511,364,000
$95,713,086
CMI
valuesexpense
relative to smaller hospitals; tient
reflects
inpatientare
andbeing
outpatient
charge increases
shiftedcase
from
visit with a RW of 1.0.
With this
Operating
$768,986,760
$58,409,570
Total
inpatient
discharges
20,873
1,919
intensity
inpatientadjustment)
to outpatient and ancillary areas. however, the relative degree of outpainformation, we can take the relative
Medicare
CMI
1.8553
1.2604
Many hospitals are raising outpatient pro- tient complexity is not of the same mag- payment ratio of outpatient to inpatient
Calculating
cedure prices
cost per
at rates
adjusted
greater
discharge,
payment of 0.01 ($50/$5000) and create
nitude. As a result, larger hospitals
than inpaAdjusted discharges
34,676
8,858
case
mixprocedures
adjusted. Six
an equivalent
patient unit.
would
appear
to
have
more
adjusted
distient
because
therequired
greater
valuesofare
Adjusted discharges CMI*
64,334
11,164
charges
(and lessdischarge
cost-per-adjusted
disof discount-from-billed
to incidence
compute this
metric (see Step 1 incharge
the
$11,953
$5,232
Cost
per adjusted
(CMI adjusted)
compared
to smaller
Equivalent Patient Units Equivalent
payments
the outpatient arena.
Given
exhibit).
Theincase-mix-adjusted
dis*charge)
Adjusted Discharges
CMI Adjusted
Discharges hospitals
Medicare CMI
when inpatient case mix adjustments
Discharges (Payment Ratio no other
changes,
this shift
creates
an
charge
measure
is based
on the
multipliwere
included.
Equivalent Visits)
increase
in the number
of adjusted
cation
of adjusted
discharges
by the disStep 2. Calculating Cost per Equivalent Patient Unit
charges,CMI.
whichFor
would
overstate
the actual
Medicare
example,
at Hospital
HospitalifAa hospital has
Hospital
B
facility
volume.
A,increase
the costin
per
adjusted
discharge, CMI
For example,
15 equivaA Possible Solution: Equivalent
Equivalent
inpatient discharges*
65,375and 1,500 equivalent
2,055 visadjusted, would be:
lent discharges
Patient Units
Gross inpatient revenue
$909,743,000
$20,735,870
its, we can create the equivalent patient
Further complicating the application of
Creating a hospitalwide output measure
Inpatient Medicare charge per discharge,
adjusted Expenses
discharges:
Every hospital
has
Operating
($768,986,760)
units as$13,915.72
follows: 15 (0.01
1,500) = 30
requires
a method for adding inpatient
CMI adjusted
$10,092.40
†
experienced
different
rates of
Adjusted
Discharges
(34,676)
change for Equivalent
volumes tooutpatient
outpatientvisits
volumes.
There are
2,841,919
367,735
Gross accepted
outpatient revenue
$74,977,216
inpatient
Medicare
CMI
$11,953
widely
case-mix-adjusted volThe $601,621,000
concept appears to make
sense.
and(1.8553)
outpatient
RCCs, which
Medicare
outpatient
charge
perboth
visit,inpaRW adjusted Assuming$211.70
$203.89
ume
measures
available
for
that Medicare is trying
to relate
makes benchmarking among hospitals
‡
87,386
6,236
Equivalent
patient
units
The
advantage of using a Medicare CMI
tient and outpatient areas:
payment to underlying reasonable cost,
unreliable.
0.7745%
1.1371%
Outpatient payment to inpatient payment ratio
> Equivalent discharges for inpatient
which is a stated objective, the use of relais based solely on its availability. The
areas:
using Medicare-severity
diag- tive Medicare
payment rates may
be valid.
Medicare
can beMany
used hospitals
for virtually
Case mixCMI
complexity.
will
Cost
per By
equivalent
patient unit‡
$8,800
$9,366
nosis
related
group
(MS-DRG)
case
It
is
not
perfect,
but
it
should
represent
a
every
U.S.the
acute
care hospital.
drawmodify
adjusted
dischargeThe
metric
to
*Equivalent Inpatient Discharges Gross Inpatient Revenue Inpatient Medicare Charge per Discharge, CMI Adjusted
† Equivalent Outpatient Visits Gross Outpatient Revenue Medicare Outpatient Charge per Visit
weights, we can determine that a hospi- major improvement from the adjusted
back
to Medicare
CMI
is that it by
does
not
recognize
case mix
complexity
multiply‡Equivalent Patient Units Equivalent Inpatient Discharges (Payment Ratio X Equivalent Visits); Cost per Equivalent Patient Unit Operating
Equivalent
Patient Units
tal with
10 discharges
and an average
discharge measure of hospital output.
adequately
reflectdischarge
patients in
nontradiing the adjusted
value
by the hos- Expenses
CMI of 2.0 has 20 equivalent discharges
tional
Medicare
(primarily,
obstetpital’s
inpatientareas
case mix
index (CMI).
(An
> Equivalent
visitsthe
for Two
outpatient
rics).
If a hospital
has aalarge
maternity
alternative
is dividing
cost-per-adjusted
Case Example
Step
3. Comparing
Metricsareas:
By using relative weights (RWs), we can As is often stated, “the proof of the pudarea,
its Medicare
CMI
likely
be
discharge
metric by
thewould
hospital’s
CMI).
Hospital A
Hospital B
overstated when compared to its alldetermine that a hospital with 500 out- ding is the eating.” So we will demonCost
per
equivalent
patient
unit
$8,800
$9,366
payer
CMI.
discussed
earlier,
howevWhile
thisAs
may
be fine for
the inpatient
patient visits and an average RW of
strate the use of equivalent patient
units
Cost per adjusted discharge, CMI adjusted
$11,953
$5,232
3.0 has 1,500 equivalent visits
with a real-world example constructed
er,component,
the application
ofis
any
metric to
there
anCMI
implicit
adjusted discharges poses benchmarking
Ratio: Cost per equivalent patient unit to cost per
adjusted discharge, CMI adjusted
71.0%
179.0%
challenges. We now turn our attention to
Acute
Care
Hospital
RCCs,
1996
to
2008
equivalent patient units to see if the
Cost per equivalent patient unit to U.S. median
109%
117%
metric can truly overcome the pitfalls of
Ratio of Cost to Charge
1996
1998
2000
2002
2004
2006199%
2008
% 87%
Change
Cost
per adjusted
discharge CMI
to U.S. median
adjusted discharges.
Inpatient nursing departments
74.5%
®
Hospital
69.9% Cost Index
64.7%
59.2%
Hospital Cost Index® to U.S. median
54.9%
104.0
53.9%
52.8%
112.5
29.1%
Calculating cost per equivalent patient unit.
103%
111%
As our
formula
illustrates,
there
are
Facilitywide
50.6%
45.6%
41.7%
33.4%
31.4%
29.8%
41.1%
Source:
Cleverley & Associates,
Inc. Reprinted 37.3%
with permission.
three requirements to calculating equivConstructed with publicly available data, this example shows that the use of two different cost
Source:
Cleverleyunits:
& Associates,
Inc. Reprinted with
permission.
alent
patient
equivalent
dismetrics—cost per adjusted discharge (CMI adjusted) and cost per equivalent patient unit—results
charges,
equivalent
visits,
and theat a faster rate than inpatient nursing RCCs—implying charge increases are being shifted to outpatient
Facilitywide
RCCs are
decreasing
in sizably different benchmark information about costs at two not-for-profit hospitals in the same
payment
ratio.areas.
All of these elements are
and ancillary
geographic area.
8 Fall 2010 Strategic Financial Planning
www.hfma.org/sfp Fall 2010
I7II
available
using publicly
through
available
publicly
data
available
for twodata;
nothowever,
for-profitthey
hospitals
must all
inbe
thecalculated.
same geographic area (see the exhibit at right). To
illustrate
differences,
we will compute
First,
we calculate
the number
of equivatwo discharges
overall, facilitywide
cost
metrics:
lent
by dividing
total
gross
> Cost percharges
adjusted
caseavermix
inpatient
bydischarge,
the hospital’s
ageadjusted
Medicare inpatient charge per dis> Cost per
equivalent
unitin
(which
charge
(CMI
adjusted).patient
As shown
Step
reflects
inpatient
and 8,
outpatient
case
2 in
the exhibit
on page
this calculaintensity
adjustment)
tion
yields 65,375
equivalent inpatient
discharges for Hospital A.
Calculating cost per adjusted discharge,
case mixwe
adjusted.
Ideally,
would use
all-payer
averSix the
values
are required
age
charge and
however,
these
valto compute
thisCMI;
metric
(see Step
1 in
the
ues
are notThe
publicly
available. Still,disthe
exhibit).
case-mix-adjusted
Medicare
values do
not pose
charge measure
is based
on significant
the multipliissues.
likely that
the average
charge
cation It
ofisadjusted
discharges
by the
for
a Medicare
nonMedicare
patient
Medicare
CMI.and
Fora example,
at Hospital
will
notcost
be the
(the Medicare
A, the
persame
adjusted
discharge, CMI
patient
willwould
likelybe:
be a higher charge for
adjusted,
the same MS-DRG). However, this relationship
would
exist uniformly
across all
Operating
Expenses
($768,986,760)
hospitals.
In addition,(34,676)
Adjusted Discharges
while theMedicare
Medicare
CMI
(1.8553) $11,953
data
does not
adequately
reflect
nontraditional Medicare areas (obstetrics, as
The advantage
of using a Medicare
discussed),
the price-to-weight
relationCMI
ship
is thesolely
sole focus
the equivalent
is based
on itsin
availability.
The
discharge
To be
we
Medicaremethodology.
CMI can be used
forclear,
virtually
are
simply
with an average
every
U.S. concerned
acute care hospital.
The drawcharge
case mixCMI
of 1.0—a
thatnot
back toper
Medicare
is thatvalue
it does
should
be similar
is nontradibased on a
adequately
reflectwhether
patientsitin
large
small volume
obstetric cases
tionalorMedicare
areasof(primarily,
obstet(provided
the markhas
rics). If a hospital
a largeinpatient
maternity
up across
area,isitssimilar).
Medicare CMI would likely be
areas
overstated when compared to its allpayer CMI.
As discussed
earlier,
howevSecond,
we calculate
equivalent
outpatient
visits
by dividing
total
gross
outpaer, the
application
of any
CMI
metric
to
tient
charges
by the hospital’s
Medicare
adjusted
discharges
poses benchmarking
outpatient
perturn
visitour
(relative
challenges.charge
We now
attention to
weight
adjusted).
Hospital
we
equivalent
patientFor
units
to seeA,
if the
divided
$601,621,000
by $211.70
to yield
metric can
truly overcome
the pitfalls
of
2,841,919
equivalent outpatient visits.
adjusted discharges.
Again, one of the primary advantages of
the
equivalent
unit methodology
Calculating
costpatient
per equivalent
patient unit.
isAsthe
ourapplication
formula illustrates,
there are
of an outpatient-spethreecase
requirements
to weight)
calculating
equivcific
mix (relative
to outpaalent patient units:
equivalent dis-the
tient-specific
volume—something
charges,discharge
equivalentformula
adjusted
would
visits, and
thenot
permit.
payment ratio. All of these elements are
8 Fall 2010 Strategic Financial Planning
IV
The final step to create equivalent patient methodology. For example, is there a
Case
Example:
Comparing
Two Volume
Metrics
units:
Convert
equivalent
visits to equivahigh degree
of correlation between costlent
patient
units.
To
do
this,
we
first
per-adjusted
Step 1. Calculating Cost per Adjusted Discharge, Case Mixdischarge
Adjusted and cost-perneed to determine the relative payment
equivalent patient unit? Does one
Hospital A
Hospital B
ratio, which is accomplished by taking
measure suggest that a hospital is high
Values required to compute the metric
the ratio of Medicare outpatient payment cost relative to an industry average, while
Gross inpatient revenue
$909,743,000
$20,735,870
per Gross
relative
the second
measure suggests$74,977,216
that it is
weight of 1.0 to Medicare
outpatient revenue
$601,621,000
low cost?
inpatient
payment
per case weight of 1.0
Gross patient
revenue
$1,511,364,000
$95,713,086
for each
hospital
(obviously, this number
Operating
expense
$768,986,760
$58,409,570
Totalby
inpatient
discharges
1,919
If we noticed20,873
similar relative values,
it
can vary
facility).
For Hospital A, the
Medicare
CMI
1.8553
1.2604
would make little sense to implement a
average Medicare payment for an inpatient case with a case mix weight of 1.0
new measurement methodology.
Adjusted discharges
34,676
8,858
was
$8,378,
and
the
average
payment
for
a
However,
the64,334
two cost metrics are11,164
signifAdjusted discharges CMI*
Medicare
visit with(CMI
a relative
in this example.$5,232
The
Cost peroutpatient
adjusted discharge
adjusted) icantly different
$11,953
weight
of
1.0
was
$64.89.
The
payment
cost-per-equivalent
patient
unit
sug* Adjusted Discharges CMI Adjusted Discharges Medicare CMI
ratio for Hospital A would then be calcugests that Hospital B is 6.4 percent more
lated
costly than Hospital A ($9,366 compared
as
follows:
Step 2. Calculating Cost per Equivalent Patient Unit
to $8,800). In contrast, the cost-perHospital
B
adjusted Hospital
dischargeA metric suggests
that
Payment Ratio $64.89 $8,378 Equivalent inpatient discharges*
2,055
Hospital A is65,375
128 percent more costly
.007745
Gross inpatient revenue
$909,743,000
$20,735,870
($11,953 compared to $5,232).
Inpatient Medicare charge per discharge,
The CMI
computation
adjusted of equivalent patient
$13,915.72
$10,092.40
†
In addition,
comparing the cost367,735
units
is
then
determined
as follows:
with rel2,841,919
Equivalent outpatient
visits
Gross outpatient revenue
$601,621,000
$74,977,216
evant U.S.
averages would suggest
that
Medicare
outpatient
charge
per visit, RW adjusted
$203.89
Hospital A is$211.70
very costly using the
adjustEquivalent
Patient
Units
Equivalent
‡
6,236
Equivalent
patient units
ed discharge87,386
method, but only slightly
Inpatient
Discharges
(Payment Ratio
Outpatient payment to inpatient payment ratio
0.7745%
1.1371%
above U.S. averages using the equivalent
Equivalent Visits)
patient unit$8,800
method. These are very
sizCost per equivalent patient unit‡
$9,366
able
differences
and
would
lead
to
difHospital
A
example:
65,375
(0.007745
*Equivalent Inpatient Discharges Gross Inpatient Revenue Inpatient Medicare Charge per Discharge, CMI Adjusted
† Equivalent Outpatient Visits Gross Outpatient Revenue Medicare Outpatient Charge per Visit
ferent conclusions regarding cost-saving
X 2,841,919)
87,386
‡Equivalent Patient Units Equivalent Inpatient Discharges (Payment Ratio X Equivalent Visits); Cost per Equivalent Patient Unit Operating
Expenses Equivalent Patient Units
opportunities.
The cost per equivalent patient unit is
operating
expenses divided
equivalent Finally, Hospital Cost Index® values
Step 3. Comparing
the Twoby
Metrics
(which incorporate specific inpatient
patient units. For Hospital A, the cost
Hospital A
Hospital B
and outpatient case-weight-adjusted
would be $768,986,760 87,386 Cost
per
equivalent
patient
unit
$8,800
$8,800
measures of cost) are much more$9,366
aligned
$11,953
$5,232
Cost per adjusted discharge, CMI adjusted
with the cost-per-equivalent patient unit
Comparing
metrics.patient
Whenunit
reviewRatio: Costthe
pertwo
equivalent
to cost per method and produce similar conclusions
adjusted
71.0%
as comparisons
to U.S. medians.179.0%
ingadjusted
values discharge,
for these CMI
metrics,
remember
that the scale between them is not the
Cost20,000
per equivalent
patient unit to U.S.
median To corroborate109%
117%
same:
case-mix-adjusted
disthese findings, we ran
a
Cost per adjusted discharge CMI to U.S. median
199%
87%
charges is not the same as 20,000 equivasimple correlation of the two metrics on
lent
patient
units.
It
is
their
relationship
3,000 noncritical
access hospitals for
®
Hospital Cost Index
104.0
112.5
®
across
facilities
and over
time
that is of
which data was103%
available in 2008 and
to U.S.
median
111%
Hospital
Cost Index
critical
importance
for
benchmarking.
found
that
the
two
measures
were
posiSource: Cleverley & Associates, Inc. Reprinted with permission.
tively correlated, but with substantial
Constructed with publicly available data, this example shows that the use of two different cost
The relative cost between the two case
variation. The conclusion is obvious; the
metrics—cost per adjusted discharge (CMI adjusted) and cost per equivalent patient unit—results
example hospitals should be similar—if
two measures will produce different conin sizably different benchmark information about costs at two not-for-profit hospitals in the same
clusions on many occasions.
the cost metrics were similar in the
geographic area.
www.hfma.org/sfp Fall 2010
9
A More Accurate Metric
We believe that the methodology used to
construct equivalent patient units is far
more accurate than the adjusted discharge
methodology and will be better equipped
to distinguish cost differences between
hospitals.
We conducted some additional analysis
on Hospital A and B in the case example,
digging deeper into cost data for each
hospital. This detailed analysis showed
that the equivalent patient unit method
accurately concluded that Hospital A is
less costly than Hospital B. Specifically,
Hospital A appeared to be less costly
when departmental cost measures were
reviewed. Hospital A also had a lower
percentage of overhead costs than
Hospital B (32 percent compared to 39
percent), and Hospital A incurred lower
losses on Medicare patients, both inpatient and outpatient.
Why was there such a dramatic difference between the two cost measures? For
this example, there is one primary reason: Hospital B priced its outpatient
services 70 percent above inpatient services while Hospital A had a 35 percent
differential. The obvious result of this
pricing strategy would be to inflate
adjusted discharges at Hospital B relative
to Hospital A.
The equivalent patient unit methodology
solves this central issue and can better
represent true relative volume of patient
services provided by the hospital. Some
bias may still be present to the extent
that mark ups differ within inpatient or
outpatient product lines, but the magnitude of the bias is significantly reduced.
measure its volume in equivalent patient
units. The real problem is the availability
of benchmarks on an equivalent patient
unit basis. We believe that the equivalent
patient unit concept will be adopted soon
once it is publicized. Our firm will make
the comparisons available to any hospital
requesting them, and we believe other
benchmarking firms will soon follow.
Even without that data, it is relatively
easy to obtain public use file data for a
set of peers and develop your own internal benchmarks.
William O. Cleverley, PhD, is president, Cleverley &
Associates, Inc., Worthington, Ohio (bcleverley@
cleverleyaassociates.com). James O. Cleverley is a
consultant with Cleverley & Associates. Both are
members of HFMA's Central Ohio Chapter.
Next Steps
With the methodology presented here, it
should be a simple task for a hospital to
Reform Perspectives
By Philip L. Ronning
Becoming Accountable
The true opportunity lies not in building an
accountable care organization (ACO)—but in
becoming accountable for delivering value to the
patient.
Create an accountable culture before you form a
legal structure. Some advisors are encouraging
providers to “move swiftly to consider participating in an ACO.” But it is critical to avoid the
temptation to move before you have determined
what precisely the ACO will do differently to
realize different results.
Creating the ACO—or any formal legal structure
to receive and distribute shared savings—does not
in itself cause accountability. The organization
conducts meetings, massages data, produces
reports, and distributes savings. But all of these
activities do nothing to significantly improve the
health of a population or to reduce spending.
The true challenge, opportunity, and obligation:
become accountable for improving quality and
reducing costs. This is a matter of culture, not
organizational structure.
Make the patient the organization’s purpose. Past
organizational initiatives were designed to serve
the provider rather than the patient. For example,
PHOs, PPOs, and IPAs were created to find
patients, secure contracts, or protect fees. These
strategies were executed to capture or claim—
rather than to improve or change. While not
unreasonable, these aims are not durable. When
these organizations failed to deliver patients and
procedures, providers discarded them.
ACOs are being born of a new and very different
type of movement—a movement with aims that
are patient-oriented, population-based, and
intended to deliver value to the patient.
Improving the value of health care (lower costs higher quality) is a purpose that will not change
and, if built on this foundation, an ACO will be
durable, meaningful, and successful in proportion
to efforts invested.
Philip L. Ronning is president, Ronning Healthcare
Solutions, Newberg, Ore., and a member of HFMA’s
Oregon chapter (Philronning@ronninghcs.com).
Subscribers can access a longer and more
detailed version of this article at
www.hfma.org/sfp in the Summer 2010 issue.
Reprinted from the Fall 2010 issue of Strategic Financial Planning.
Copyright 2010 by Healthcare Financial Management Association, Two Westbrook Corporate Center, Suite 700, Westchester, IL 60154.
10 Fall 2010 Strategic Financial PlanningFor more information, call 1-800-252-HFMA or visit www.hfma.org.