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Lab budgeting and cost accounting under DRGs
Medical Laboratory Observer, Feb, 1985 by W. Glenn Cannon
Cost accounting is not a solution to management problems. It is a management tool
designed to provide information that facilitates sound decisions. The two primary
objectives of cost accounting are 1) to match cost with revenue and 2) to match resource
consumption with the units of service provided.
Under the DRG system, matching revenue with cost and evaluating appropriate utilization
levels must be done on a patient-by-patient or case-by-case basis. These are hospital
management functions. Overutilization of services for a patient will drive costs above the
level of the fixed payment rate for a particular diagnosis.
Since the cost of a particular test can no longer be matched against a specific dollar
amount of revenue, laboratory managers now will have the most significant impact by
producing lab services as efficiently as possible in terms of costs. Controlling resource
consumption is the labs prime concern, and the cost/output ratio is the laboratory managers
key performance measurement.
In hospitals, two distinct management components require cost data: individual service
centers providing unique aspects of patient care and independent physicians who
determine the types and quantity of service the different centers provide.
Each of these centers--nursing, emergency room, radiology, and the laboratory, for
example--has a unique set of economic factors affecting its ability to operate efficiently
and maintain viability. The department head for each center has control over labor used,
supplies consumed, and support services consumed (laundry, housekeeping, etc.), and is
expected to absorb some administrative overhead.
Physicians, however, control the centers scheduling function. They do so by ordering tests
and other services.
Which patients receive lab services or how much each patient receives is irrelevant to the
laboratory manager. But if hospital administrators succeed in reducing test utilization by
persuading phsicians to curb unnecessary ordering, the laboratory must react appropriately.
That means scaling down operations in a way that results in significant savings.
A mere decrease in the number of tests performed will not cut costs a great deal. For
example, it may only shave reagent use and a bit off the electricity bill. Personnel and
overhead costs continue at previous levels unless management does something about them.
We will suggest possible methods of reducing laboratory resource consumption, but our
main purpose here is to outline a cost accounting system that gives lab managers the best
cost data available on the operational components of the laboratory that they can do
