DDBA 8561 Week 8 Length of Stay Cost Trace Example

Where a Saved Bed-Day Goes: A Cost Trace From a Medical Unit Separating Cash Released From Capacity Freed, Applying the Fixed and Variable Split and Following the Days That Reappear at Post-Acute Providers

Student Name

Walden University

DDBA 8561: Seminar in Managing Healthcare Delivery Systems

Instructor Name

Month Day, Year

Where a Saved Bed-Day Goes: A Cost Trace From a Medical Unit Separating Cash Released From Capacity Freed, Applying the Fixed and Variable Split and Following the Days That Reappear at Post-Acute Providers

The Claim Under Test

A composite 380-bed hospital in Ohio reduced average length of stay on its general medical unit from 5.1 to 4.6 days over a year, avoiding about 2,300 bed-days. Its finance report credits the change with $5.1 million in savings, multiplying avoided days by the hospital's average daily cost of about $2,200. This trace follows one avoided bed-day along three paths and argues that most of that figure never becomes cash released.

Path One: The Hospital's Own Budget

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Roberts et al. (1999) analyzed costs at a large public teaching hospital and found that about 84 percent of total costs were fixed in the short run and about 16 percent variable, meaning that avoiding a patient-day saves only the variable share unless staffing or capacity is reduced. Taheri et al. (2000) found that the final days of a hospital stay cost far less than average, because most resources, surgery, imaging and intensive care, are used early. The last day of a medical stay, when the patient is recovering and awaiting discharge, consumes mostly bed, nursing time and meals.

Applying the variable share to the last day rather than the average day, an avoided day releases perhaps $250 to $350 in cash, not $2,200. Across 2,300 days, that is roughly $575,000 to $800,000, not $5.1 million, unless the hospital closes beds or reduces staff.

Table 1

Average Daily Cost Split Into Fixed and Variable Shares

Path Two: The Next Patient

The hospital did not close beds. Most avoided days were filled by the next patient, often an emergency department admission that would otherwise have boarded. That capacity has value: under per-case payment, each added admission brings revenue, and the hospital's margin on a typical medical admission is about $1,400. If 400 more admissions were treated because beds were free, the gain would be about $560,000 in margin. But this is revenue from capacity freed, not cost saved, and it depends on demand being there to fill the beds.

Path Three: Post-Acute Providers

About 30 percent of the unit's patients go to skilled nursing facilities or home health agencies. When they leave the hospital half a day sooner, some of the recovery that would have happened in the hospital happens there instead. Mechanic (2014) noted that post-acute care has become a major and variable component of Medicare spending, which makes days shifted into it a cost to the broader system even if not to the hospital. Two receiving facilities reported longer initial stays for patients from this hospital over the same year, by about half a day, a shift the hospital's report does not see.

What the Trace Shows

The reported $5.1 million combines three different things: a modest cash saving from variable costs, revenue from capacity used by additional patients and costs moved to other providers. Only the first is a saving to the hospital, and only part of the third is a saving to anyone.

Why the Distinction Matters for Decisions

The distinction is not accounting pedantry. If the hospital believes it saved $5.1 million, it may expect budget relief that will not appear, and it may treat further reductions in length of stay as free when they move costs to partners. If it understands that the main gain is capacity, it can decide whether to use that capacity for more admissions, to close beds and release cash, or to reduce boarding. Each choice has a different financial result, and the reported figure obscures all three. A manager presenting the change to the board should report the variable saving, the margin from added admissions and the shift in post-acute days as separate lines.

A Fairer Report

A fairer finance report would show $575,000 to $800,000 in variable savings, about $560,000 in margin from added admissions if demand filled the beds, and an unpriced shift of post-acute days to partners.

Limits

The fixed and variable shares come from published analyses and the hospital's cost accounting categories, which may differ from Roberts's hospital. Facility reports of longer stays come from two facilities and are not adjusted for case mix.

References

Mechanic, R. (2014). Post-acute care: The next frontier for controlling Medicare spending. New England Journal of Medicine, 370(8), 692-694. https://doi.org/10.1056/NEJMp1315607

Roberts, R. R., Frutos, P. W., Ciavarella, G. G., Gussow, L. M., Mensah, E. K., Kampe, L. M., Straus, H. E., Joseph, G., & Rydman, R. J. (1999). Distribution of variable vs fixed costs of hospital care. JAMA, 281(7), 644-649. https://doi.org/10.1001/jama.281.7.644

Taheri, P. A., Butz, D. A., & Greenfield, L. J. (2000). Length of stay has minimal impact on the cost of hospital admission. Journal of the American College of Surgeons, 191(2), 123-130. https://doi.org/10.1016/S1072-7515(00)00352-5