CG 12 Contracted care

CG 12.1 Scope

CG 12.1.1 This Costing guideline outlines an approach to identify the scope and source of expenses which relate to contracted care.

CG 12.1.2 This Costing guideline also provides practical steps and examples to guide staff on the patient costing process for this activity.

Scope of Contracted care

CG 12.1.3 Many hospitals have outsourced or purchased contracted care services from another hospital or external entity for their day to day delivery of hospital services. The hospital may also at the same time provide contracted care services to external organisations.

CG 12.1.4 Examples of services contracted out or provided to external entities include:

  • Treatment/care of all or part of the admitted episode provided to/by another hospital,
  • diagnostic and clinical services provided to/by external providers, such as pathology services and
  • support services such as catering, security provided to/by external providers.

CG 12.1.5 These contracted services should be attached to patient activity with costs assigned as they are part of the production process.

CG 12.2 Objective

CG 12.2.1 The objective of this Costing guideline is to ensure that all contracted care expenses which contribute to an organisations day to day production of final products are included in patient costing and in determining the full cost of production.

CG 12.2.2 This Costing guideline also aims to provide a resource for staff to assist them undertake the patient level costing exercise by providing practical examples of contracted care services and attaching these services to activity.

CG 12.3 Costing guideline

Step 1: Stakeholder identification

CG 12.3.1 Costing practitioners should consult contract management and finance stakeholders to get an overview of all contracted care arrangements within their hospital. All expenses for these contracted care activities which relate to the day to day production of final outputs should be identified and accounted for accordingly.

Step 2: Align expense to the Contracted care services department and define overhead and direct expenses, including overhead allocation methods

CG 12.3.2 Costing practitioners should engage finance stakeholders to ascertain how the various contracted care expenses are recorded within the general ledger.

CG 12.3.3 Costing practitioners will be able to establish relevant final cost centres following an understanding of expenses and contracted care activities.

CG 12.3.4 The following should be noted for the contracting hospital/purchaser:

  • The contracting hospital (purchaser) will normally receive invoices (generally in an aggregated amount) from the provider. This invoiced amount will be charged to the general ledger to a specific cost centre or assigned through an account code. Where possible costing practitioners, for feeder or activity purposes should seek to have this invoice disaggregated by activity to enable more informed costing.
  • Where services are provided on-site by the external provider, overhead or direct expenses may be allocated to these contracted care activities.
  • Depending on the contract arrangement, these expenses may be recoverable from the external providers. Costing practitioners must ensure all the expenses in the general ledger reflect the contractual arrangements.
  • Where the aggregated amount is posted to one account code, the costing practitioner should review if this is the correct posting and reflects where the contracted care is provided.
  • Where changes are required, costing practitioners may need to split and map the invoiced amount to separate account codes to reflect service provision. This will also allow the expenses to be mapped to appropriate line items.
  • Any other direct or overhead expenses that are incurred for these activities should be moved or allocated to these final cost centres. Costing practitioners should note that some overheads are not normally allocated to off-site external providers (such as fuel light and power), however should also discuss which overheads may be relevant (such as contract management functions).

CG 12.3.5 The following should be noted for the contracted hospital/provider of service:

  • Costing practitioners should ensure that expenses specifically incurred for the contracted care activities are allocated to these activities only.
  • Costing practitioners must ensure that no revenue of the contracted care services is offset against the expenses. However, if the service is operated as a commercial entity and the costing practitioner is unable to partition cost to be allocated to patient product and cost incurred on the contracted care activities, the cost practitioner may use the revenue derived from the contract care services as cost recovery against patient product costs.
  • Contracted activities to non-patient products or external private parties may be classified, costed and reported as commercial activities – as per BR 6 – Matching Production and Cost – Commercial Business Entities

CG 12.3.6 Costing practitioners should utilise the costing system or another medium to record:

  • the contracted care services expense and relevant mapping to final cost centres;
  • the stakeholders met with;
  • the date of the meeting; and
  • a date for future review of contracted care services alignment.

Step 3: Identify patient level activity and Contracted care feeder data and perform quality assurance checks

CG 12.3.7 Costing practitioners may obtain (depending upon the service and availability of data) both the purchased and contracted out activities from their own feeder systems.

CG 12.3.8 Costing practitioners should perform quality assurance checks on the contracted care 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 Contracted care service costing products or intermediate products

CG 12.3.9 If contracted care services are treated as an overhead, costing practitioners should assign the most appropriate overhead statistic to distribute these expenses.

CG 12.3.10  If contracted care services are treated as direct cost, intermediate products may be created and mapped to respective final cost centres.

CG 12.3.11 Where a hospital provides services to its own patients and the same services are also provided to external entities as part of a contracted care arrangement, the intermediate product codes created should be the same.

Step 5: Apply Relative Value Units

CG 12.3.12 The cost allocation process for contracted care services might be further enhanced through the use of Relative Value Units (RVUs).

CG 12.3.13 Where traceable contracted care expenses can be identified, these expenses should be used to allocate expenses directly to the patients. However, if the total traceable cost differs from the amount recorded in the general ledger, the traceable cost should be used as a RVU weighting.

CG 12.3.14 The relative values should be determined and agreed in consultation with the relevant stakeholders.

Step 6: Create intermediate product costs in final cost centres

CG 12.3.15 Where contracted care is deemed as final care areas, the products are matched to the appropriate patient activity using the appropriate matching criteria.

CG 12.3.16 Contracted care services may itself be treated as a final cost product. Consumption of resources from other hospital areas should be matched appropriately to the final costed product. For example, contracted hospital providing endoscopy services to patients of another hospital may be required to admit and report these patients, if that data is available.

CG 12.3.17 The costing practitioner of the contracting hospital/purchaser should consider the following to inform the costing process for its contracted services:

  • Where patient level contracted care feeder data is available, it should be used to allocate expenses directly to the patients.
  • Where activity data is missing for feeder purposes, utilisation data or RVU may also be created from demographic or coding information.
  • Where feeder data cannot be found, the costing practitioner should consider allocating these expenses as an overhead.
  • Where contracted care activities take place during a patient the costing practitioner should use caution when using episode length of stay to create intermediate products. For example, when calculating the number of meals, contract leaves need to be taken into account for cost distribution purposes.

Step 7: Match intermediate products and their costs to patient activity

CG 12.3.18 The cost allocation process is performed where overhead and direct costs expenses allocated to intermediate products.

CG 12.3.19 Each intermediate product is provided with a share of defined overhead expenses and direct expenses. This allocation and the combination and share of expense is the cost per intermediate product and represents the cost of production.

Step 8: Report costs

CG 12.3.20 Costing practitioners should perform the required steps to consolidate and report costs at patient or encounter level

Step 9: Cost data review with Contracted care services stakeholders

CG 12.3.21 Costing practitioners should meet with their relevant stakeholders to report and review the costs calculated for Contracted care activities.

CG 12.3.22 Costing practitioners should note that patients may be admitted in both the contracting and contracted hospital, and as such, care must be taken to avoid double-counting of hospital activities and duplicate reporting of costs.

CG 12.3.23 Costing practitioners may refer to the contract role and contract type field in the Admitted Patient Care National Minimum Data Set (NMDS) to identify an inter-hospital contracted care episode for reporting purposes.