David Jones, the new administrator for a surgical clinic, was trying to determine how to allocate his indirect expenses.

David Jones, the new administrator for a surgical clinic, was trying to determine how to allocate his indirect expenses.

David Jones, the new administrator for a surgical clinic, was trying to determine how to allocate his indirect expenses. His staff was complaining that the current method of taking a percentage of revenues was unfair. He decided to try to allocate utilities based on square footage of each department, administration based on direct costs, and laboratory based on tests. Use the information in the chart below to answer problems 1, 2, and 3.

Square Footage Direct
Expenses Lab Tests
Utilities $200,000
Administration 2,000 500,000
Laboratory 2,000 625,000
Day-op Suite 3,000 1,400,000 4,000
Cystoscopy 1,500 300,000 500
Endoscopy 1,500 600,000 500
Total 10,000 $ 3,375,000 5,000

1. What are the Day Op Suite’s total expenses?

2. What are the Cystoscopy Department’s total expenses?

3. What are the Endoscopy Department’s total expenses?

Use the following information for questions 4, 5, and 6.

Your hospital has been approached by a major HMO to perform all their MS-DRG 470 cases (major joint procedures). They have offered a flat price of $10,000 per case. You have reviewed your charges for MS-DRG 470 during the last year and found the following profile:

Average Charge $15,000
Average LOS 5 Days
Cost/Charge Variable Cost %
Routine Charge $3,600 0.80 60

Operating Room 2,657 0.80 80
Anesthesiology 293 0.80 80
Lab 1,035 0.70 30
Radiology 345 0.75 50
Medical Supplies 4,524 0.50 90
Pharmacy 1,230 0.50 90
Other Ancillary 1,316 0.80 60
Total Ancillary $11,400 0.75 50

4. In the above data set, assume that the hospital’s cost to charge ratio is 0.80 for routine services and 0.75 for all other ancillary services. Using this information, what would the average cost of MS-DRG 470 be?

5. Estimate the variable cost per MS-DRG 470 using the departmental cost/charge ratios and variable cost percentages.

6. The HMO in the above example has indicated that their doctors use less expensive joint implants. If this less expensive implant is used, your medical supply charges would be reduced by $2,000. What is the estimated reduction in variable cost?

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