Question

Dr. Eger is a physician who operates on two different types of patients. He has been pressing the HOS for more operating-room time. HOS is busy and would have to turn away other surgeons if it complies. Eger claims that he has become so efficient lately that HOS cannot afford to refuse him. As evidence of his improved efficiency, he points out that in August he operated on 18 patients. The total cost of treating the patients was $129,100. In September he operated on 18 patients. The total cost of treating the patients was only $127,000. According to Dr. Eger, he has generated a total savings of $2,100. Your investigation determines that in August he treated seven Type X patients with an average cost of $4,300 and 11 type Y patients with an average cost of $9,000. In September, he treated eight Type X patients and ten Type Y patients. Costs in September for his patients were $5,000 for Type X and $8,700 for Type Y. Although the August cost for Type X patients had risen, Eger points out that costs for the higher-volume, higher-cost type Y patients had fallen. Develop a case-mix variance and a cost variance so we can better understand the impact on HOS of the changes in Dr. Eger’s practice from August to September. What other information would be of interest in this particular case?

Answer 1

Answer:

The case-mix variance is the current volume times the current cost, less the prior volume times the current cost, as follows:

		Current volume		Current cost
	Type X	8		$5,000		$40,000
	Type Y	10		$8,700		87,000
						$127,000

		Prior volume		Current cost
	Type X	7		$5,000		$35,000
	Type Y	11		$8,700		95,700
						$130,700
	Case-mix variance		favorable		$  3,700

The shift by Dr. Eger from high-cost Type Y patients toward lower cost Type X patients resulted in a $3,700 decrease in the cost of treating his patients. Thus, we are observing a strong case-mix change.

The cost variance is the prior volume times the current cost, less the prior volume, times the prior cost, as follows:

		Prior volume		Current cost
	Type X	7		$5,000		$35,000
	Type Y	11		$8,700		95,700
						$130,700

		Prior volume		Prior cost
	Type X	7		$4,300		$30,100
	Type Y	11		$9,000		99,000
						$129,100
	Cost variance		unfavorable		$     1,600

As we can see from the cost variance, once we have adjusted for the change in case mix, Dr. Eger’s cost of treating patients has actually risen, not fallen!

                       

In addition to these variances, it would also be quite helpful to have the reimbursement rate for Type X and Type Y.  The relative rate increases for different patient types can inpact the appropriate decision.