CG 0.1 Scope
CG 0.1.1 This Costing guideline provides guidance on feeder extraction, intermediate product development and the matching of these to patient level activity.
CG 0.1.2 This Costing guideline also provides a guidance on the process of assigning expenses from cost centres to final cost centres, to intermediate products, the use of relative value units and the cost allocation process to obtain an intermediate product cost and, following the matching process, a patient level cost.
CG 0.2 Objective
CG 0.2.1 The objective of this Costing guideline is to present the steps required to patient level cost.
CG 0.3 Costing guideline
CG 0.3.1 This Costing guideline presents nine steps that may be followed to undertake patient level costing. These are:
- Step 1: Stakeholder identification, and service scale and scope
- Step 2: Align expense to the service department and define overhead and direct expenses, including overhead allocation methods
- Step 3: Identify patient level activity and feeder data and perform quality assurance checks
- Step 4: Creating and mapping service costing products or intermediate products
- Step 5: Apply Relative Value Units (RVUs) by service
- Step 6: Create intermediate product costs in final cost centres
- Step 7: Match intermediate products and their costs to patient activity
- Step 8: Report costs
- Step 9: Cost data review by service’s stakeholders
Step 1: Stakeholder identification and service scale and scope
CG 0.3.2 Costing practitioners should obtain their jurisdictional policy with regards to the products that require allocation of costs and must identify how the organisation operates, the associated expense and the activities performed in relation to that product.
Purpose of cost information
CG 0.3.3 Costing practitioners need to be clear on the purpose of producing product level cost information to ensure that results are relevant for stakeholder use. To do this, it must be clear on:
- what services or outputs are being costed. These may be defined in a hospital or jurisdictional policy;
- who will use the cost information, such as the primary user and stakeholder; and
- how this information is made useful for stakeholder decision making requirements.
Stakeholder identification and reporting requirements
CG 0.3.4 Costing practitioners should consult their jurisdictions to understand reporting requirements and ensure these are reflected in the hospital costing process.
CG 0.3.5 Consultation with hospital stakeholders should also be done to understand and identify:
- where services are delivered within the hospital;
- the individual service area’s reporting needs; and
- reliable data collection systems that are suitable to use as a basis to allocate expenses to patient activity or other products.
CG 0.3.6 Costing practitioners should undertake the following steps to assign expenses from production cost centres to intermediate products and matching them to patient level activity.
Step 2: Align expense to the service department and define overhead and direct expenses, including overhead allocation methods
CG 0.3.7 Consultation with service areas will allow an understanding of the nature of services provided. The nature of these services and their associated expenses are defined as either overheads to production or directly related to production (production centres).
CG 0.3.8 Costing practitioners should align expenses from production cost centres within the general ledger to final cost centres based on informed decision making including service activity or information from external sources such as timesheets or payroll information.
CG 0.3.9 Based on these data costing practitioners should (within the patient costing system). use stakeholder insights to ensure alignment of costs with activity either by appropriate product mapping or moving expenses to the relevant cost centres.
CG 0.3.10 Costing practitioners will also need to apply an objective and systematic way to allocate overhead expenses to final centres. Some examples of these methods can include:
- using total expenses of the Chief Executive Officer as a means to allocate these expenses to each final cost centre/Department.
- weighted floor space for cleaning
CG 0.3.11 Where overheads are traceable, say through a feeder, and can be directly allocated to activity, costing practitioners should prioritise this allocation approach.
Step 3: Identify patient level activity and feeder data, and perform quality assurance checks
CG 0.3.12 Costing practitioners should meet with their service’s stakeholders to identify what activity occurs within their service area and whether these activities are recorded in information systems.
CG 0.3.13 The level of activity detail captured will influence the costing methodology and final costed output. Ideally, the feeder data from an information system will include some or all of the following fields:
- the patient’s unique identifier;
- the patient unique episode identifier;
- the unit where the service was requested (for example, Ward A, outpatient clinic B, Ward C);
- the date of service;
- the type or category of service provided that will define the intermediate product (for example language interpreted, type of drug, type of pathology test, type of image, ward name)
- the volume driver or unit of measure for each intermediate product that will be used to allocate expenses such as time, the quantity of service, the actual cost or traceable cost.
CG 0.3.14 Costing practitioners should perform quality assurance checks on the feeder activity file prior to the costing process. For example, checks should be made on the date of service (to test reliability to remove error dates and ensure dates are relevant to the period being costed).
Step 4: Creating and mapping service costing products or intermediate products
CG 0.3.15 Intermediate products are generally created for services listed in the feeder. Once the intermediate products are created, costing practitioners will be required to ensure these are mapped in the costing system to the appropriate final cost centre.
Step 5: Apply Relative Value Units (RVUs) by service
CG 0.3.16 The cost allocation process might be further enhanced through the use of RVUs.
CG 0.3.17 Costing practitioners should be aware that RVUs are generally applied in the cost allocation process to demonstrate the relative effort in producing one cost object against another.
CG 0.3.18 The relative values should be determined in consultation with service stakeholders. The process of developing RVUs is similar across a number of service areas (final cost centres) within a hospital, such as wards or nursing, imaging, pathology, pharmacy, and prosthesis. The difference between them generally is the description of effort or value that is used to define the RVU per service area.
CG 0.3.19 The determination of effort or value is generally dependent on the area being costed and the intermediate products being produced from that area. Examples of effort include:
- acuity (or patient classification or dependency) for wards
- work effort (time based and resource classification based) for imaging and pathology
- actual prices (paid by the hospital) for prosthesis and pharmaceuticals
CG 0.3.20 Costing practitioners should consult their jurisdictions for any mandated requirement of specific RVUs to be used in the costing process.
CG 0.3.21 Costing practitioners should note, that where expenses are allocated to an intermediate product using an RVU, the following hierarchy should be considered:
- the use of local RVUs that are derived from an organisation’s own historical information and accurately reflect the organisation’s operational behaviours
- the use of RVUs that are derived from external information, such as an industry standard (such as the Commonwealth Medical Benefits Schedule) or benchmark.
- the use of National Diagnostic Related Group (DRG) Service Weights
CG 0.3.22 Developing local RVUs should always be the highest priority for costing practitioners, as the costs will be more reflective of resource consumption and hospital practice than using external price lists or service weights. However, consideration needs to be given to the materiality of costs.
Step 6: Create intermediate product costs in final cost centres
CG 0.3.23 Two allocation processes are performed:
- When overhead costs are allocated to the Production Cost Centre (using an appropriate allocation statistic)
- When the Production Cost Centre costs (overhead and direct) are allocated to the intermediate products.
Step 7: Match intermediate products and their costs to patient activity
CG 0.3.24 Costing practitioners should establish a series of matching rules within the costing system to match intermediate products defined in each feeder to the appropriate activity and final product.
CG 0.3.25 Intermediate products should be matched to the patient or encounter level for which they have been ordered as this match defines the resources consumed and the associated costs of care.
CG 0.3.26 Costing practitioners will need to develop and apply matching rules that fit with their local service model. Costing practitioners may wish to consider the following matching criteria in this order of preference, for activity and feeder data:
- Admitted Patients: Match intermediate products by date of service within the admission and discharge
- Emergency Encounters: Match intermediate products by date of service within the admission to and discharge from emergency
- Outpatient Encounters: Match intermediate products by date of service 30 days before and 30 days after Outpatient Clinic attendance
Step 8: Report costs
CG 0.3.27 Costing practitioners should perform the required steps to consolidate and report costs at patient or encounter level
Step 9: Cost data review by service’s stakeholders
CG 0.3.28 Costing practitioners should meet with their service stakeholders to report on costs calculated for, amongst other purposes, validation and sign off.