Question

Elaborate on the concept of Cost to Care Ratio (CCR), and although CCR is relatively simple to implement. Why do complex health care organizations use the step-down, or the activity base costing approach instead of CCR?

Answer 1

A ratio of the cost divided by the charges. Generally used with acute inpatient or outpatient hospital services.

The following CCRs can be calculated from the Hospital cost reports

˗Total Hospital (all payers, all patients)

• Hospital level
• Cost center specific

˗Medicare specific

• Hospital level
• Cost center specific

The hospital’s goal is to deliver high quality care at low cost; and that’s where Activity Based Costing helps in getting the visibility into the costs. This article is based on a simplistic approach to show how Activity Based Costing (ABC) can be used to arrive at the cost to serve a patient. The same concept can be extrapolated for cost of a service line such as Emergency Department, Geriatric outpatients and Neurology acute. This is similar to line of business P&L in other service organizations such as Banks. When the organization matures with ABM, the next step is to get into activity based budgeting/forecasting.

In an hospital, you would have Revenue centers and Support centers. Profit/Revenue center brings in revenue for the hospital where as support center enables the profit center to bring in the revenue. For instance, Human resources department, a support center does not serve the patient directly; however without that department you will not be able to recruit and sustain the workforce required for the patient care. Hence, you need to distribute the cost of having an HR department to profit centers and cost centers, such that the accurate cost of the center is reflected.

Cost Center Profit Center

(Service Provider) (Service User)

Billing	Operating Room
Information Technology	Blood Bank
House Keeping	Laboratory
Social Services	Pharmacy