HLTH 8430 Week 4 Time-Driven Cost Analysis Paper Example

Does the Case Rate Cover Cost? Time-Driven Activity-Based Costing of a Diagnostic Cardiac Catheterization

Student Name

Walden University

HLTH 8430: Healthcare Financial Management

Instructor Name

Month Day, Year

Does the Case Rate Cover Cost? Time-Driven Activity-Based Costing of a Diagnostic Cardiac Catheterization

Introduction

A commercial payer has offered Harmon Valley Health, a composite system with two hospitals and one catheterization lab, a case rate of $1,100 for the hospital component of a diagnostic cardiac catheterization. The finance committee must decide whether to accept. Whether $1,100 covers cost depends on which cost is meant: the full cost of a case, including equipment and space the lab would pay for anyway, or the cost that changes when one more case is done. This analysis builds the cost of one diagnostic catheterization using time-driven activity-based costing, then sorts every resource into fixed, step-fixed and variable before setting the rate against each layer. All figures are illustrative. Physician professional fees are billed separately by the cardiology group and are excluded.

Why Time-Driven Costing

Traditional hospital cost accounting allocates departmental costs to procedures using charges or relative value units, which can misstate the cost of any one procedure. Time-driven activity-based costing instead estimates how many minutes each resource spends on a patient and multiplies those minutes by what each minute of the resource costs to supply. Keel and colleagues' systematic review concluded that the approach works in health care settings and can cost clinical processes efficiently, though its value for bundled payment design has not yet been shown in published work (Keel et al., 2017). Its two inputs, minutes and capacity, must both be stated, because a cost rate without a stated practical capacity cannot be checked. This analysis states both for every resource.

Process Map

The process for one diagnostic catheterization runs in three steps. In preparation, a registered nurse spends about 45 minutes on assessment, consent and line placement while the patient occupies a prep bay for about 60 minutes. In the procedure, the patient occupies the catheterization room for about 60 minutes including turnover, with one nurse and two cardiovascular technologists present throughout. In recovery, the patient occupies a recovery bay for about 180 minutes while a nurse cares for two patients at a time, so about 45 nurse minutes are attributable to each patient. Minutes were estimated from the lab's scheduling records and from observation of several cases, as applications of the method in hospitals have done (Kaplan et al., 2014).

Capacity Cost Rates

A capacity cost rate is the annual cost of supplying a resource divided by the minutes it can practically deliver. Practical capacity is set below theoretical capacity to allow for breaks, training, maintenance and scheduling gaps.

Table 1

Capacity Cost Rates (Illustrative)

Cost per Case

Multiplying each resource's minutes by its rate gives the resource cost of one case. Supplies, including catheters, sheaths, guidewires, contrast and drapes, are added at purchase cost.

Table 2

Cost of One Diagnostic Catheterization by Behavior (Illustrative)

Sorting Costs by Behavior

The room, equipment and bays are fixed over the range the committee is considering: the lab pays for them whether it performs 1,500 or 2,000 cases a year. Together they come to $696 per case at current volume. Nursing and technologist time is step-fixed: one staffed room can absorb more cases up to its practical capacity, but opening a second staffed room, or extending hours, adds a whole team at once. These come to $301 per case. Supplies are variable, rising case by case, at $420.

The distinction matters because the $1,417 total is an average that blends costs that behave differently. A rate below $1,417 does not mean each additional case loses money, and a rate above the variable cost does not mean the contract is sound.

Setting the Rate Against Each Layer

Against variable cost, the $1,100 rate leaves $680 per case. Every case accepted under the rate covers its own supplies with room to spare.

Against variable plus step-fixed cost, $721, the rate leaves $379 per case. If the payer's volume, about 300 cases a year on the payer's estimate, fits within the lab's existing staffed capacity, each case covers its supplies and its staff time and contributes $379 toward fixed costs the lab pays anyway, about $114,000 a year.

Against full cost, $1,417, the rate falls $317 short. If this rate became the system's typical price for the procedure, the lab could not cover its equipment and space over time. And if the payer's volume would push the lab past its staffed capacity, requiring a second staffed room or longer hours, the step-fixed layer jumps, and the contribution could disappear.

What the Committee Can and Cannot Conclude

The committee can conclude that the rate is acceptable as incremental volume, provided three conditions hold: the volume fits within existing staffed capacity, the contract does not let the payer's rate become the reference for other payers, and the contract term is short enough to revisit if volume rises. It cannot conclude that the rate covers the cost of the service, because it does not. Nor can it conclude that the analysis is exact: the minutes are estimates, practical capacity assumptions drive the rates, and a review of the method's use found that most hospital applications still rely on estimated rather than measured times (Keel et al., 2017). Healthcare finance texts make the same distinction between pricing for incremental volume and pricing for full cost recovery (Gapenski & Reiter, 2016). The committee's decision should be recorded as a decision about incremental volume, not as a finding that the procedure is profitable at this price.

References

Gapenski, L. C., & Reiter, K. L. (2016). Healthcare finance: An introduction to accounting and financial management (6th ed.). Health Administration Press.

Kaplan, R. S., Witkowski, M., Abbott, M., Guzman, A. B., Higgins, L. D., Meara, J. G., Padden, E., Shah, A. S., Waters, P., Weidemeier, M., Wertheimer, S., & Feeley, T. W. (2014). Using time-driven activity-based costing to identify value improvement opportunities in healthcare. Journal of Healthcare Management, 59(6), 399-412. https://doi.org/10.1097/00115514-201411000-00005

Keel, G., Savage, C., Rafiq, M., & Mazzocato, P. (2017). Time-driven activity-based costing in health care: A systematic review of the literature. Health Policy, 121(7), 755-763. https://doi.org/10.1016/j.healthpol.2017.04.013