Your hospital has been approached by a major HMO to perform all their MS-DRG 470 cases (major joint procedures). They have offered a flat price of $10,000 per case. You have reviewed your charges for MS-DRG 470 during the last year and found the following profile:

Average Charge: $15,000
Average LOS: 5 Days

Cost/Charge Variable Cost %
Routine Charge $3,600 0.80 60

Operating Room 2,657 0.80 80
Anesthesiology 293 0.80 80
Lab 1,035 0.70 30
Radiology 345 0.75 50
Medical Supplies 4,524 0.50 90
Pharmacy 1,230 0.50 90
Other Ancillary 1,316 0.80 60

Total Ancillary $11,400 0.75 50

1. In the above data set, assume that the hospital’s cost to charge ratio is 0.80 for routine services and 0.75 for all other ancillary services. Using this information, what would the average cost of MS-DRG 470 be?


2. Estimate the variable cost per MS-DRG 470 using the departmental cost/charge ratios and variable cost percentages.

The variable cost per procedure is $8,000, based on the following formula:

Variable Cost percent (VC%) = Variable Cost (VC) / Sales Revenue (SR)
80% = VC / 10,000
.80 x 10,000 = VC
8,000 = VC

3. The HMO in the above example has indicated that their doctors use less expensive joint implants. If this less expensive implant is used, your medical supply charges would be reduced by $2,000. What is the estimated reduction in variable cost?

4. Management has studied work patterns in the housekeeping department and estimates the number of hours to be worked as follows. Hours worked = (1,500 hours per month) + (0.50 × RVUs). For the coming month, management expects RVUs to be 5,800. What should budgeted labor for the month be?