Improved cost allocation in case-mix accounting

Traditionally, many hospital costs have been allocated to patients using indirect measures that do not always reflect the value of the resources used to provide care. When, for example, costs are allocated by multiplying the patient's charges by the hospital's ratio of costs to charges, the allocated cost does not reflect actual cost because the hospital does not uniformly charge for services in proportion to their cost. The choice of method for cost allocation will be as important for the newly developed case-mix cost-accounting systems as it has been for traditional cost-accounting systems. To illustrate how the use of an indirect cost-allocation method might affect the output of a case-mix cost-accounting system, operating room, radiology and clinical laboratory costs were assigned to 106 hospitalized inguinal hernia patients in two diagnosis-related groups (DRGs) using both the hospital's existing cost-allocation method and a method that measures costs directly. Total costs and the costs in each department were significantly lower in each DRG using the direct method. It was concluded that patients in these two DRGs were being assigned more than the actual cost of their care with the existing cost-allocation method and, therefore, that the existing method prevented the case-mix accounting system from providing accurate management information.