Discussion post on the concepts of cost and revenue , assess the benefits and limitations of the major form of reimbursement on the delivery of health care services.

Costs for reporting versus costs for management control Managers need to have cost information to manage their responsibility centers within large organizations or the entire operation of smaller organizations. Many decisions that managers must make require information about the costs their units incur. The correctness of the decisions depends to a great extent on the accuracy of the cost information available. Therefore cost data collection for use by managers should have a high priority. At the same time, HCOs are required to comply with a number of external reporting requirements. The financial statements for external reporting are discussed in Chapters 6 and 7. In addition to producing financial statements, most HCOs are also required to complete other reports that focus on the organization’s costs. These external reports are most commonly prepared for Medicare, Medicaid, and other governmental agencies and for some insurers, including Accountable Care Organizations (ACOs). It is important to keep in mind that historically, many payments to HCOs have been based on costs incurred. As a result, payers often needed to know the organization’s costs. Most HCOs spend a great deal of energy generating reports that contain mandated cost information. Unfortunately, in some cases, the information contained in the external reports is used for internal management and decision making without careful thought as to how the needs of internal users differ from those of external users. What types of information are used inappropriately for internal management purposes? Many types. Some of the problems that result from this practice are relatively easy to deal with; others are much more complex and are built into the underlying cost-accounting calculations used throughout the organization. Consider an example of an easily solvable problem. Suppose you are a hospital or long-term care unit manager, and nurses are “floated,” or sent from their home unit to work on another unit, based on staffing need (i.e., the home unit has too many nurses, whereas the other has too few). In some organizations, the nurse’s time is charged to the home unit even though the nurse spends his or her time working on another unit. This practice results in overcharges to the home unit for more resources than it consumed and undercharges to the unit where the nurse was floated. For external reporting purposes, it may be adequate to simply show the total cost for the nursing staff. However, the organization needs its managers to control their costs. When it is time to contrast budgeted costs with actual costs, the actual costs should reflect the resources actually consumed on the unit. The scenario just described puts managers of both units at a disadvantage. The manager of the float nurse’s home unit might be held accountable for the costs expended by all unit nurses who are floated, which, depending on the extent of floating, could put the home unit over budget. On the other hand, the manager of the unit to which the nurse floated is unable to document resources actually consumed and therefore may find it difficult or impossible to adequately justify and defend the additional staffing resources needed. How can this problem be solved? A system needs to be put into place that tracks the “home” units where nurses are assigned to work each day and charges float costs to units where nurses actually work on any given day. Such systems are widely, although not universally, used. A much more difficult problem concerns the use of cost reports for determining the costs of treating different types of patients. Cost reports are complex and difficult to complete. A number of problems exist with the information they contain. However, these problems become buried in the calculations, and many managers treat the cost report information as if it were more accurate than it really is. The next section explains the cost-finding process used to develop cost reports. The problems with the process that make its resulting information less than optimal for management use are discussed. Later sections of the chapter discuss alternatives that provide managers with more accurate information. ❃ Traditional cost-finding methods Health care organizations consume a variety of resources in providing their services. Labor, supplies, and equipment are needed to provide care to each patient. The challenge faced by accountants in HCOs is both to accumulate cost information for all resources used and to find an efficient, economical way to accurately associate with each patient the costs incurred to treat that patient. Practically speaking, assignment of perfectly accurate costs to each patient is an unreasonable expectation. To keep track perfectly would require constant observation of each patient to see how many towels are used, exactly how many minutes of nurse time and technician time are expended, and so on. Simply put, gathering cost information costs money. All HCOs therefore use accounting shortcuts to save money. However, there is a clear trade-off between how much is spent on gathering cost information and how accurate it is. It often costs more money to collect more accurate information. Each organization must decide when the level of information is “good enough.” Expanded use of bar coding and computers makes it possible to collect more detailed and accurate information without substantially increasing the cost of data collection. The simplest cost-finding approach is to divide the total dollars spent over a period of time by the number of patients treated over that period. The result is the average cost per patient. That average will be the same for all patients. Clearly, however, such an approach is not good enough. It would be impossible for managers to begin to determine which patients are profitable and which generate losses if such a method were used. If managers worked hard to treat a certain type of patient more efficiently, they would not have any sense of whether that goal was accomplished if the same cost was assigned to all patients regardless of resources consumed. The approach must be more sophisticated. The medicare step-down approach The approach most HCOs use for cost finding is the one mandated for Medicare cost reports. With that approach, all resource consumption is first associated with a responsibility center. As noted in Chapter 1, a responsibility center is an organizational entity to which costs are assigned and tracked. Housekeeping, finance, medical records, pharmacy, an intensive care unit (ICU), the operating room (OR), and a coronary care unit (CCU) are examples of responsibility centers. Each responsibility center accumulates direct costs, such as labor and supplies used in the center. The next step is to allocate all the costs of the cost centers to the profit centers. Recall from Chapter 1 that profit centers are the organizational units that charge specifically for their services. For example, patients are generally charged a specific amount for a surgical procedure but not for security. Profit center managers are responsible not only for the costs incurred in their unit or department but also for the revenues. Although this creates the burden of additional responsibility, it also adds benefits. If a unit or department is a profit center, it can point to an explicit measure of the financial contribution that it earns for the organization. The revenue it generates can be used as an argument for giving additional resources to the center. If given the choice, most managers would want their departments to be classified as profit centers. How do HCOs distinguish between cost centers and profit centers? The key requirement for a profit center is that it must be possible to measure different consumption of that center’s services by different patients. For example, each patient benefits equally each day from the presence of a security guard at the front door of the organization. Therefore there can be one catchall charge per patient per day, called the per diem, which includes costs such as the security guard. However, if patients consume different amounts of a resource, specific charges are needed to reflect those differences. For example, if one patient has surgery and one does not, we need to be able to charge only the one who had surgery. And we need to be able to charge a greater amount to someone who had a more expensive operation than to someone who had a less expensive operation. Therefore security is not a profit center, but the OR is. Examples of profit centers in hospitals include pharmacy, radiology, OR, respiratory therapy, central supply, and the laboratory. Examples of cost centers include dietary, administration, housekeeping, and medical records. Why must the cost center costs be allocated to the profit centers? HCOs—or any type of service organization—get their revenues by charging for the services provided. When the prices or rates are set, the organization must consider all of its costs. Laundry is not a profit center; it does not charge patients a fee for its services. ORs consume large amounts of scrubs and sheets, which must be laundered. If a hospital were to set its OR prices high enough to recover the cost of its OR nurses but did not consider the cost of the laundry, its prices might not be set high enough to recover all costs incurred by the organization. Therefore to ensure that the organization sets prices high enough to recover all of its costs, the costs of the profit centers must also include all of the costs of the cost centers. After all of the cost center costs have been assigned to the profit centers, each profit center can in turn assign its total direct and indirect costs to the units of service that have been provided to the patients it has treated. The costs assigned to a specific patient by each of the profit centers can be aggregated to determine the total cost of treating that patient. Even though Medicare pays hospitals on the basis of DRGs (or the Medicare Severity DRG, or MS-DRG) rather than on the hospital’s cost, the Medicare cost report is still completed by hospitals. The cost information from the report is used by the federal government in its process of setting national payment rates for each DRG. A detailed look at the cost-finding approach Accumulate direct costs for each responsibility center The first step in the cost-finding process is to accumulate the direct costs of the responsibility center. For example, consider an OR, which is a profit center. Direct costs in the OR include salaries and wages for regular staff. This includes all supervisory and staff personnel who work in the OR and are included in the OR budget. The OR manager, the scrub and circulating nurses, technicians, orderlies, clerks, and secretaries are all included. Employee benefits are also included in direct costs. Other direct costs include the costs for supplies, seminars, agency per diem nurses, and all other items under the direct control of the OR that are normally considered its direct costs. Determine bases for allocation The laundry department is an example of a cost center. After its direct costs have been accumulated, they must be assigned to profit centers. Each center that uses laundry should be charged for a portion of the costs of the laundry. To do this, the manager must first decide on the basis for the allocation. The cost of the laundry could be charged in equal shares to each department that uses it. However, that would be unfair to departments that use relatively little laundry. Such an allocation would not be good enough. Other approaches to allocating the cost of laundry would be on the basis of pounds of laundry or pieces of laundry. In fact, most HCOs that have a laundry department assign laundry costs on the basis of the number of pounds of laundry. All dirty laundry is placed in a laundry cart, which is weighed. Then total laundry costs can be allocated based on the share of total pounds of laundry consumed by each department.1 Is that an appropriate basis for the allocation? Clearly, it is not. A laboratory jacket may be more complicated to sort and fold than a sheet. Although four laboratory jackets together may weigh the same amount as one sheet, they no doubt require more labor than one sheet. Labor is one of the greatest expenses of the laundry department. Therefore cost accuracy would improve if costing were done on the basis of the number of each type of laundry item. However, it costs much more to keep track of pieces than pounds. Most HCOs have decided that pounds are a good enough measure for laundry. This system effectively assigns all of the costs of the laundry to the profit centers, and it uses an allocation basis that takes some, if not perfect, account of relative use by different responsibility centers. In any event, the only perfectly accurate measurement would require one staff member to constantly observe each patient to see exactly what laundry that patient used. The cost of that approach would obviously be prohibitive. The problem of the specific basis to choose for allocating costs is not limited to the laundry. Other responsibility centers also make choices. For example, any HCO that has a building must allocate its annual depreciation to the various profit centers. That is usually done on the basis of square feet. A responsibility center that physically occupies many square feet would be charged more than one that has fewer square feet. However, it actually costs more to build certain parts of a facility than other parts. For example, an OR costs much more per square foot than a patient room. By allocating an equal amount of depreciation per square foot, too little is assigned to the OR and too much to medical and surgical rooms. Ultimately, this means that medical patients are overcharged relative to their resource consumption, and surgical patients are undercharged. However, hospitals have generally decided that an equal depreciation charge per square foot is adequate. Allocate from cost centers to profit centers All costs of the cost centers are allocated to the profit centers using the allocating bases previously discussed. Fig. 9.1 provides a simplified example of what this type of allocation attempts. In the figure, housekeeping and laundry are cost centers. The CCU and pharmacy are profit centers. Each cost center must ultimately allocate all its costs to the profit centers. FIG. 9.1Allocating costs. Table 9.1 provides a highly simplified numerical example.2 The numbers in this example are designed to show the impact of alternative allocation approaches and are not meant to be realistic dollar amounts or percentages. As in Fig. 9.1, housekeeping and laundry are cost centers, and the CCU and pharmacy are profit centers. The first line in the table shows the direct cost incurred in each of the four centers; the next two lines show the allocation base and how much of the base is related to each department. ❃ TABLE 9.1 Cost-Base Information for Allocation Cost Centers Profit Centers Total Cost Housekeeping Laundry Coronary Care Unit Pharmacy Direct cost $40,000 $60,000 $500,000 $500,000 $1,100,000 Allocation statistics: Housekeeping (square feet) — 70% 25% 5% 100% Laundry (pounds) 20% — 10% 70% 100% Housekeeping costs will be allocated on the basis of square feet and laundry on the basis of pounds. The table shows the percentage of all square feet that each responsibility center has and the percentage of all pounds of laundry used by each center. The square feet in the housekeeping department and the pounds of laundry done by the laundry for the laundry are excluded because no responsibility center allocates its own costs to itself. Thus in this hypothetical example, housekeeping services are used 70% by laundry, 25% by the CCU, and 5% by the pharmacy. Laundry services are used 20% by housekeeping, 10% by the CCU, and 70% by the pharmacy. Table 9.2 shows an allocation of the direct costs to the profit centers. The allocation in this table is called a direct distribution. In the direct distribution method, cost center costs are allocated only to profit centers. In making the allocation, a problem arises. Although 25% of the square feet are in the CCU and 5% are in the pharmacy (see Table 9.1), if those percentages are used for the allocation, the full $40,000 of housekeeping cost would not be allocated. This is because 70% of the square feet is in the laundry, and no cost is being allocated to the laundry. This problem is resolved by allocating to the profit centers based on the remaining square feet after eliminating the cost centers. Thirty percent of the square feet is in all the profit centers combined, and 25% is in the CCU. Thus 25% divided by 30% gives the proportion of the housekeeping cost allocated to the CCU. Similarly, 5% divided by 30% gives the housekeeping cost allocated to the pharmacy; 10% divided by 80% gives the laundry cost allocated to the CCU; and 70% divided by 80% gives the portion of the laundry cost allocated to the pharmacy. For example, 25% divided by 30% multiplied by the $40,000 housekeeping cost results in the $33,333 of cost allocated to the CCU. ❃ TABLE 9.2 Direct Distribution Cost Centers Profit Centers Total Cost Housekeeping Laundry Coronary Care Unit Pharmacy Direct cost $40,000 $60,000 $500,000 $500,000 $1,100,000 Allocation statistics: Housekeeping (square feet) (40,000) — 33,333 6,667 — Laundry (pounds) — (60,000) 7,500 52,500 — Totals $ 0 $ 0 $540,833 $559,167 $1,100,000 An additional complexity is that direct distribution fails to take into account the fact that some cost centers provide service to other cost centers. Housekeeping cleans the laundry. If all housekeeping costs went directly to profit centers, none would be allocated to the laundry, and costs would be distorted. The possible distortion is so great that a direct allocation to profit centers only is not considered good enough. Instead, an allocation approach is used called the step-down method, shown in Fig. 9.2 and Table 9.3. The step-down method requires the organization to allocate all of the cost of a cost center to all other centers (both cost and profit). First one cost center’s costs are allocated to every center. Then another cost center is allocated. As each center is allocated, its cost balance becomes zero, and it no longer is part of the process. In other words, no costs can be allocated to a responsibility center after it has allocated its costs. Note in Fig. 9.2 that housekeeping now would allocate costs to the CCU, pharmacy, and laundry. The laundry, however, would allocate costs only to the CCU and pharmacy. Therefore some distortion still remains in the allocation process. FIG. 9.2Allocating costs by the step-down method. Other more elaborate allocation approaches eliminate most or all of the remaining distortion. These are called the double distribution and the algebraic or matrix distribution approaches. The algebraic or matrix distribution approaches are based on solving a set of simultaneous equations. Although the allocation that results from the use of such methods is more accurate, these approaches are also more complicated to understand and implement. The hospital industry generally considers step-down allocation good enough. The use of step-down allocation creates another problem: Should housekeeping be allocated before or after laundry? The order of the allocation may affect the ultimate outcome. Table 9.4 changes the order of allocation. Laundry is now allocated using the step-down method before housekeeping is allocated. Look at what happened to the ultimate cost in each profit center. The total CCU cost has risen by $28,333, from $521,000 in Table 9.3 to $549,333 in Table 9.4. The pharmacy cost has fallen by $28,333, from $579,000 to $550,667. This is an extreme example, but it demonstrates the distortion possible by changing the order of allocation. In a perfect allocation system, the ultimate cost in each profit center would remain the same regardless of the order in which the cost center costs are allocated. ❃ TABLE 9.3 Step-Down Distribution Cost Centers Profit Centers Total Cost Housekeeping Laundry Coronary Care Unit Pharmacy Direct cost $40,000 $60,000 $500,000 $500,000 $1,100,000 Allocation: Housekeeping (square feet) (40,000) 28,000 10,000 2,000 0 Subtotal $ 0 $88,000 $510,000 $502,000 $1,100,000 Laundry (pounds) (88,000) 11,000 77,000 0 Totals $ 0 $521,000 $579,000 $1,100,000 ❃ TABLE 9.4 Step-Down Distribution with Altered Order of Step-Down Allocation Cost Centers Profit Centers Total Cost Housekeeping Laundry Coronary Care Unit Pharmacy Direct cost $60,000 $40,000 $500,000 $500,000 $1,100,000 Allocation: Laundry (pounds) (60,000) 12,000 6,000 42,000 0 Subtotal $ 0 $52,000 $506,000 $542,000 $1,100,000 Housekeeping (square feet) (52,000) 43,333 8,667 0 Totals $ 0 $549,333 $550,667 $1,100,000 Are the actual resources consumed by the organization any different because the order of allocation of cost centers changed? No. The same total amount of money was spent. The same resources were used. However, the cost of the CCU and the pharmacy can vary because of the accounting method used. With the more sophisticated algebraic approach, such variation in costs does not occur. However, the step-down method, as noted, has been considered good enough. It is possible that the step-down method has allowed HCOs to manipulate their cost reporting in an attempt to shift costs between profit centers and in turn increase reimbursement. For example, many hospitals have both inpatients and outpatients. Medicare inpatients are paid on a fixed DRG payment scale. Outpatient payments for Medicare patients are not currently based on fixed DRG-type rates but on a prospective payment system called Ambulatory Payment Classifications (APCs), which pays hospitals for services provided that are similar clinically and in terms of resource use. If the order of the step-down allocation causes more costs to be allocated to the outpatient areas and fewer costs to departments that treat predominantly inpatients, total reimbursement will rise.3 Allocate costs to units of service Up to this point, the discussion has centered on allocating all costs of the organization into the profit centers. The next part of the cost-finding process focuses on assigning each profit center’s costs to the units of service that it provides. For example, a laboratory assigns its costs to the various laboratory tests it performs, and an OR assigns its costs to the surgical procedures that take place. There are four approaches to allocating a profit center’s costs to units of service: the per diem or per visit, surcharge, hourly rate, and weighted procedure methods. The per diem method is used if none of the other three methods reasonably applies. The per diem method divides the total costs of the center by the number of patient days, generating a uniform cost per patient day. Although some nursing responsibility centers do qualify for treatment using the other methods, this tends to be the exception rather than the rule. Most nursing costs are assigned ultimately to per diem categories. There are often different per diems for routine care as opposed to ICU or CCU. The major problem with such an approach is that it assumes that each patient consumes exactly the same amount of nursing (or other) resources per patient day. It takes no account of patient severity of illness or nursing requirements. However, the cost-finding process has treated this approach as being good enough. The surcharge method is commonly used in the pharmacy and medical supplies responsibility centers. The profit center compares its costs excluding inventory with the inventory cost and determines a surcharge. For example, if a pharmacy spends $10,000 on all costs except pharmaceuticals and $100,000 on pharmaceuticals, the surcharge would be 10% (i.e., $10,000 ÷ $100,000). As each prescription is filled, the cost would be calculated as the cost of the drug itself plus 10%. The problem with this approach is that in reality, just because a drug costs 10 times as much to buy as another drug does not mean that it requires 10 times as much pharmacist time to process. Some organizations overcome this problem partly by using a minimum charge applied to all drugs dispensed. The proverbial $10 aspirin in the hospital is partly the result of charging a standard minimum amount for processing the aspirin order, storing the aspirin, and dispensing it. The hourly rate approach measures the amount of service a profit center provides by time. This method is used by respiratory therapy, physical therapy, ORs, and recovery rooms. For example, an OR would divide its total cost (after the step-down allocation) by the total number of hours of procedures to determine a cost per hour. Sometimes the calculations are done in minutes, yielding a cost per surgical minute. The logic of this method is that longer operations consume more resources. This method is accurate for a service such as physical therapy in which generally only one therapist works with the patient. A problem with this approach in the OR is that an operation may require just one nurse, two nurses, or two nurses and a technician. Also, the supplies and equipment used may not bear a direct relationship to time. It is possible that a 2-hour operation might consume far more resources than a 3-hour operation. In the past, this method, although not very good, has traditionally been considered good enough. In recent years, however, ORs are trying alternative approaches. For example, many ORs keep track of person hours rather than just surgical hours to account for the number of staff members in the surgical suite. The weighted procedure method (sometimes called the relative value unit method) is based on a special study of the center’s costs that establishes a relative costliness of each type of service the center performs. This method is commonly used in departments such as laboratory or radiology, where a specific and limited number of services are provided, and they are provided in a similar fashion each time. A base value is assigned to one type of procedure, and all other procedures are assigned a relative value. Thus, if blood gas analysis is twice as costly as a complete blood count (CBC), the CBC might be assigned a value of 1.0 unit of work and the blood gas a value of 2.0 units of work. In any given month, the values assigned to all of the services provided can be summed and divided into the total cost of the profit center. This yields a cost per unit of work. For example, suppose that the total costs of the laboratory profit center after the step-down allocation of cost center costs is $5000. If the laboratory performs 300 blood gas analyses and 400 CBCs, it performs a total of 1000 units of work (300 blood gases × 2 units of work + 400 CBCs × 1 unit of work). The cost of $5000 divided by 1000 units of work is $5 per unit of work. Therefore the $5000 total laboratory costs would be assigned at a rate of $10 per blood gas analysis (2 units of work × $5 per unit) and $5 per CBC (1 unit of work × $5 per unit). A problem with this approach is that it relies heavily on the assumption that a blood gas analysis is always twice as costly to perform as a CBC. This problem is exacerbated by the fact that many HCOs use standard relationships based on a survey of institutions rather than on measurements of the relative costs in their own facility. Because the personnel pay rates and the equipment used vary from one organization to another, the relative relationships are not likely to be exactly the same at all institutions. However, compared to having an accountant observe the resources used each time a laboratory test is performed, the system is considered good enough. Is good-enough cost finding good enough? For the first two decades under Medicare and Medicaid, the good-enough approximations that resulted from the cost-finding system just described were considered acceptable. Most large third-party payers, such as Medicare, Medicaid, Blue Cross, and private for-profit insurers, had a large mix of patients, so that if they were overcharged for one patient, they were likely to be undercharged for another. As long as the total costs were not overstated, overcharges and undercharges were likely to average out for large groups of patients. It was not sensible for third-party payers to require HCOs to spend substantially more money on improved cost accounting. HCOs then would have had to bear the cost of the improved cost accounting in addition to the costs of patient care. With the introduction of DRGs, however, incentives changed. DRGs place hospitals, in particular, at risk for the costs they incur. If patients cost more to care for than the DRG payment rate, the hospital suffers a loss. The growth of prospective payment and value-based care has made it even more important for health care providers to measure patient costs accurately. This means that to the extent possible, while still being mindful of the cost of collecting more accurate information, managers of HCOs would like to improve on the good-enough approximations. They would like to eliminate the inaccuracies of using pounds of laundry instead of pieces or using square feet instead of construction cost for depreciation. They would like to eliminate the distortions created by the order of allocation in the step-down process. They would like to remove the inaccuracies generated by weighted procedure and hourly, surcharge, and per diem assignments of cost. Can this be done? There probably will never be a 100% accurate costing system. As automated systems have become more commonplace in HCOs, the potential exists to make great strides in more accurately assigning patient resource consumption. In the interim, many HCOs are taking at least intermediate steps to improve their costing. Some of the approaches used are discussed in the remaining sections of this chapter. ❃ Costing out nursing services The essence of the costing problem is that nursing costs are often charged to patients as part of a general per diem charge rather than a separate charge on the patient’s bill. As a result, all patients are assumed to receive the same level of care, consume the same “amount” of nursing care, and therefore receive the same charge for the nursing care they receive. Readers of this book are keenly aware that this is not the case. The reality is that patients receive very different levels of nursing care and are cared for on very different types of patient care units: Some receive care on an ICU, others receive care on a specialty unit, and yet others receive care on a general medical or surgical unit. Even patients on the same unit generally require different levels of care because their diagnoses differ, along with their prescribed treatments and nursing interventions. In terms of providing management with an understanding of the cost implications for different patients, the per diem approach provides extremely poor information about the amount of nursing care and the resources different types of patients require or consume. This approach incorrectly assumes that all patients consume exactly the same amount of nursing care, even though different patients have different nursing care requirements. Hospitals interested in costing out nursing services have been faced with two extreme alternatives. One choice is to divide the total annual costs of nursing care by the number of patients treated for the year to determine the average cost per patient. At the other extreme, the hospital could hire a data collector to follow each nurse and determine exactly how much of the nurse’s time was used by each patient. This detailed approach is generally referred to as microcosting. Fig. 9.3 reflects this extreme choice: Whereas alternative A is simple and inexpensive, alternative Z is extremely detailed and expensive. FIG. 9.3The A versus Z extremes. What hospital could afford to assign a data collector to each nurse to observe and gather detailed information on how much time was devoted to each patient and on which components of care were delivered? The value of information should always justify its cost. Alternative Z in Fig. 9.3 is labor-intensive and generally too costly for most hospitals to undertake. Fig. 9.4 adds a compromise. In most cases, a patient with a 3-day stay would consume less nursing care than a patient with a 15-day stay. If total nursing care costs are divided by total patient days, patients who are in the hospital for more days can be assigned more nursing cost than patients in the hospital for fewer days. This is alternative B. It is still not nearly so precise and accurate an approach as alternative Z; however, it is not much more expensive than alternative A and gives a much better approximation of the nursing care cost for different patients. FIG. 9.4Introduction of Alternative B. Under alternative B, the approach most hospitals use, the nursing cost is assumed to be the same for all patient days. More days imply more cost, but for the same number of patient days, all patients are assumed to use the same amount of nursing care. Thus even though this is a much better option than alternative A, it is still a very poor measure of nursing cost. Solutions to the costing problem How can the cost of each individual patient be better measured without an accountant following every nurse? One solution that most hospitals use is information systems. Health information technology is so important that CMS provides incentives for the use of electronic health records (EHRs), and the U.S. Department of Health and Human Services has an office devoted to the coordination of health information technology initiatives.4 By taking advantage of available technologies such as computers in nursing stations and point of care technologies (i.e., computers at each patient bedside or individual nurses equipped with tablets or other mobile devices), nursing care can be delivered more efficiently5 and its costs tracked more accurately.6 Fig. 9.5 illustrates how computers have been added to the continuum from low-accuracy, low-cost information to high-accuracy, high-cost information. This is alternative Y. Using information systems, nurses electronically record when they are with each patient and what they are doing for that patient. The system then multiplies the nurse time spent by the salary of the particular nurse providing the care to determine the specific cost of nursing care for a particular patient. When nurses are doing some indirect activities, such as documenting in a patient’s record, the computer can also assign that cost to the appropriate patient. FIG. 9.5Introduction of Alternative Y. Substantial progress has been made in a variety of areas to ease the input of data into the computer. Uniform price codes (bar coding) are becoming more widely used on a variety of supplies consumed by hospitals. Bar coding is also being used in HCOs to track how nurses spend their time. For example, bar coding allows nurses to indicate when they enter and leave a patient’s room, and thus a determination can be made of how much time they spend with each patient. Although this technology does not document what nurses actually do when they are with patients, it complements the documentation feature in most information systems. Note that alternative Y is close to alternative Z in several respects. The data to be gained are potentially quite accurate and clearly can be made patient-specific. These data would enable the hospital to assign costs (and ultimately charges) to patients based on their differing consumption of nursing resources. Another approach to estimating the cost of nursing care is the use of a patient classification system. Patient classification systems require rating patients based on the likely nursing resource requirements resulting from the acuity of their illness. Sicker patients requiring more nursing care are assigned higher acuity or higher classification levels. Many hospitals have developed their own systems, and several commercial systems are widely used in hospitals throughout the United States. Patients are rated by nurses on scales such as 1 to 5; the higher the number, the greater the nursing resources consumed and, in turn, the greater the cost of caring for patients with this rating. In other words, this system weights the costs of caring for patients based on a system of rating patients. Patient classification generally is not a perfectly accurate measure of the resources needed for each patient. Some patients classified as level 2 will require more care than level 2 calls for, and some level 2 patients will require less care than would be expected based on that classification. If the system is functioning reasonably well, however, average patient resource consumption will match what is expected based on the classification system. And certainly it would generally be expected that a level 2 patient will consume resources closer to the level 2 average than to the level 1 or the level 3 average. A mechanism to determine patients’ costs based on their classification still will not provide the precise accuracy of alternative Z. It will not even provide the alternative Y accuracy that a computer system can generate. However, it can create a new alternative, X, as shown in Fig. 9.6. Alternative X is inaccurate in that all patients are assigned the same nursing cost for a day at the same classification level. If two patients are both level 2 on a given day, their cost is assumed to be the same even though it is known that they probably will not consume exactly the same nursing resources. However, alternative X is much more accurate than alternatives A and B. Alternative B assumes that the cost is the same per patient day for all patients regardless of acuity. FIG. 9.6Introduction of Alternative X. Alternative X is an improvement because the cost is considered the same per patient day only for patients at the same acuity level. Different costs are assigned to patient days at different acuity levels. Users of alternative X must recognize that the information has some degree of inaccuracy. However, the system may be accurate enough, given the current high costs of using either alternative Y or Z. Therefore patient classification systems can be the basis for a process that allows more accurate estimates of the cost a hospital incurs for nursing care for different types of patients. Somewhere between X and Y on the scale from A to Z, one could place workload measurement tools. These are variants of patient classification. Workload measurement tools attempt to determine the nursing care time required for each patient each day. The approach is to identify the time required for each of the types of nursing interventions that take up most of the nurses’ time. Each patient is evaluated each day to determine which interventions will be needed. Such tools can track required care hours specific to each patient. This is contrasted with patient classification systems that use an average hour figure for all patients within a broad category or level of care. Such an approach is not as sophisticated as alternative Y, in which the actual care hours are entered into the computer as the patient receives the care. It is likely that some interventions will take longer than is typical for some patients and less time than is typical for others. Therefore the cost ultimately assigned to the patient will be based on average time, not actual time. However, the workload measurement approach is more sophisticated than alternative X, which uses average nursing care hours for all patients in a given patient classification category. Although patient classification and workload measurement systems can be used to determine the cost of nursing, these systems were initially developed to predict staffing needs, not to determine costs. Nurse managers should be aware that although patients require a designated amount of care, this does not mean that they receive it. They should also be aware that secure electronic systems and wireless technologies are being used in HCOs to help nurses gain greater efficiency in their work. For example, many organizations give nurses pagers and secure cell phones so they can easily stay in touch with others on the health care team. This saves a great deal of nurses’ time spent navigating the system. Other hospitals are using tablets and other mobile devices so that nurses can record how they spend their time. This will help make nurses’ work more transparent and allow nurse managers to determine the amount of time nurses spend in direct and indirect care activities.7 As systems evolve to better link nurses, the care they provide, the patients they care for, and the outcomes of their care, it will be possible to move closer to alternative Z than we can imagine today. Why change the costing approach? The mere fact that the ability to improve costing now exists does not in itself explain why a nurse manager would want to more accurately identify costs. What is to be gained from having a more accurate measure of the different costs for nursing care for different types of patients? A critical benefit from improved costing of nursing services is that the organization can generate information for better management decisions. Is a particular service too costly? What price can be bid for a health maintenance organization or preferred provider organization contract? Hospital costing has long been based on averages and cross-subsidizations. In the current environment, errors in calculations of costs become more serious as negotiations for discounted prices become more intense. Managers are being pushed along the increasing accuracy of the costing line in Fig. 9.6, yet this also requires moving in the direction of increased cost of data. In addition, as costing becomes more specific and more accurate, managers not only can deal better with pricing problems but also can be more efficient in the management of costs. Control of budgets improves as another measure of expected cost becomes available. Flexible budget systems can provide better analysis and control of costs, and productivity can be monitored better if more is known about costs. Not only is it possible to assess how costs should change based on changing numbers of patient days, but information about the cost per patient in a given DRG can also be used to assess costs as the number of patients in each DRG changes. Should costing be linked to diagnosis related groups? If HCOs are going to move in the direction of more accurate costing of nursing services, one of the critical questions is how to categorize the cost. Should there be one nursing cost for medical patients and another for surgical patients? Should the cost be determined for men as opposed to women, or for young people as opposed to old people? Should there be one nursing cost for each type of patient based on International Classification of Diseases (ICD) code? Should the cost be found by DRG? The problem managers face is the definition of the product of nursing care. What do nurses “produce”? If a nurse changes a dressing or gives a patient a medication, are those the products of nursing care? Most people would probably consider those activities to represent only intermediate products or tasks. The ultimate product is the health and outcomes of the patient, not the tasks completed. However, HCOs treat many different kinds of patients. They do not have only one final product. They have many final products as represented by the different patients to whom nurses provide care. Yet currently, all patient costs are assessed for nursing care as if they were the same. That needs to change. Final products need to be defined so that nurse managers can assess the cost of each. Patients could be divided into categories called nursing resource groupings (NRGs), perhaps based on nursing diagnoses or some other categorization.8 Ideally, patients should be divided into homogeneous NRGs based on nursing care consumed. Any patient in one NRG would consume a set of nursing resources similar to that for any other patient in that grouping. What should be the basis for costing nursing services in the interim until an NRG type system is in use? One approach is to fall back on alternative X. A patient classification system can be used to determine how many days a given patient is rated at each classification level.9 If the cost of each day at each classification level (discussed later in this chapter) can be determined, the manager can add up the costs to determine the patient’s total nursing care cost. However, this requires determination of the patient classification for every patient for every day. Some hospitals will find the advantages of being at alternative X on the costing accuracy scale sufficient to warrant this investment in data collection. Doing this will not only improve costing but also will collect information that can be used for calculating acuity variances. However, many hospitals will not want to spend the resources needed to classify every patient every day. The alternative is to take a sample of patients from each DRG and determine the average nursing cost for patients in each DRG based on a sampling approach. Not all patients within a specific DRG will consume the same nursing resources for each day at a specific patient classification level. Nor will all patients in one DRG have the same number of patient days at each classification level or even the same total number of patient days. This approach is based on average length of stay, the average number of days at each patient classification level, and the average nursing resource consumption within each patient classification level. However, the average amount of nursing resources for each type of DRG can be found. For example, if a hospital uses a nursing patient classification system with a scale from 1 to 5, a group of patients from each DRG can be sampled to find out, on average, how many days of the patients’ stays were at level 1, how many at level 2, and so on. Averaging all patients in a given DRG at a given hospital will not give a measurement alternative accurate enough to be labeled W on the scale from A to Z. Such an estimate of cost would probably be considered R on such a scale. It would not be nearly as accurate as X, but it would be substantially more accurate than A and B. This new alternative, R (Fig. 9.7), would be substantially less expensive than alternatives X, Y, or Z. FIG. 9.7Introduction of Alternative R. Diagnosis Related Groups, although perhaps not ideal for the purpose of costing nursing care, are an adequate categorization for the assignment of average differential nursing costs. Many hospital decisions are based on particular DRGs or clusters of DRGs, so the DRG-based cost information generated will be of considerable management value. ❃ Specific approach to costing nursing services Nursing care costs consist of the following: • Direct costs of patient care (staff) • Indirect costs of patient care (e.g., staff, supervisors, secretaries) • Patient care–related costs (e.g., patient and unit supplies) • Overhead costs (allocated from other departments) Note that the cost of nursing care is more than just the hourly salary and benefits for the nurse giving care at the bedside. Nursing management, assessment, planning, evaluating, teaching, and discharge planning are also critical elements of nursing care. In addition, supplies, secretaries, and overhead are elements of overall nursing care cost. A manager could try to determine the costs of each of these elements separately for each category of patient or do the costing in some more aggregate fashion. Start with the assumption that all nursing department costs are aggregated. The key element that allows for improved costing of nursing services is the fact that nursing patient classification systems are in place in almost every hospital. Without such systems, different patients may consume different amounts of resources, but the manager has no way to measure the differential consumption. With a classification system, once a patient has been classified, the manager has some idea of the nursing resources that the patient will consume. For example, suppose that a nursing unit has the following hypothetical patient classification resource guidelines: Acuity Level Hours of Care 1 3.0 2 4.0 3 4.8 4 6.6 5 9.0 In developing the patient classification system, various clinical indicators are used to determine whether a patient should be classified as 1, 2, 3, 4, or 5. After the patient has been classified, the classification system tells how many hours of nursing care should be required to treat that patient. In this example, a patient classified as a 4 would typically require an average of 6.6 hours of care per day. Note that the scale is not proportional. A patient classified as a 2 does not require exactly twice as many hours as a patient classified as a 1. Whereas a level 1 needs 3 hours of care, a level 2 needs 4 hours. Rather than double, this is only 33% more care. A level 3 patient needs 4.8 hours (i.e., 20% more than a level 2). A level 4 patient requires 38% more care than a level 3. As one moves from level to level, the amount of additional care does not change in proportion. It changes based on the specific classification system and the anticipated clinical needs of a patient at each level in that system. This complicates the cost calculation. If the scale were strictly linear (i.e., a ratio scale with zero the lowest score and a score of 2 requiring twice as much care as a score of 1), one could add up all the patient days at each level and divide that sum into total nursing cost to get a cost per unit of patient classification. However, because the scale is not linear, it is necessary to create a relative value unit (RVU) scale. This scale helps determine how much care each level requires relative to the care needed for a typical level 1 patient. A patient classified as a 1 will be given a value of 1 on the relative value scale. Each other classification level would then be calculated in relative proportion. This can be accomplished by dividing the required hours of care for each level by the number of hours required for level 1. For example: Therefore the relative value assigned to classification level 2 is 1.33. This value of 1.33 represents the fact that a level 2 patient consumes 0.33 more nursing care hours than a level 1 patient. Continuing for all classification (acuity) levels: Acuity Level Hours of Care RVU 1 3.0 1.00 2 4.0 1.33 3 4.8 1.60 4 6.6 2.20 5 9.0 3.00 Assuming the following information, one can see how the RVU system can be used to develop cost information10: Total nursing costs: $250,000 Acuity Level Number of Patient Days 1 100 2 220 3 350 4 110 5  40 The first step is to determine the total amount of work performed by the nursing department. This is done by multiplying the RVUs for each acuity classification level by the number of days at that level. With the number of patient days and the RVUs calculated above, the total RVUs would be as follows: Acuity Level Patient Days × RVUs = Total RVUs 1 100 × 1.00 = 100.00 2 220 × 1.33 = 292.60 3 350 × 1.60 = 560.00 4 110 × 2.20 = 242.00 5 40 × 3.00 = 120.00 820 1,314.60 There were 1314.60 units of nursing work performed. We can divide this into the total nursing cost to find the cost for each RVU of nursing work. Here one can see that the nursing cost for a patient for 1 day with classification 1 would be $190.17. The cost for a patient with classification 4 would be $190.17 multiplied by 2.20 (the RVU for classification level 4). How would a manager calculate the nursing cost for a patient from admission to discharge? Suppose that the average DRG 128 patient had a length of stay of 7 days, with 2 days classed as a 1, 4 days classed as a 2, and 1 day classed as a 4. The nursing cost for DRG 128 then would be as follows: Acuity Level Patient Days × RVUs × Cost per RVU = Total Cost 1 2 × 1.00 × $190.17 = $ 380.34 2 4 × 1.33 × 190.17 = 1,011.70 3 0 × 1.60 × 190.17 = 0.00 4 1 × 2.20 × 190.17 = 418.37 5 0 × 3.00 × 190.17 = 0.00 7 $1,810.41 Would all patients in a given DRG be expected to consume the same resources? Not really, but the manager can still be confident that an approach such as this on average for any given DRG will give a much more accurate assignment of cost than one that simply assigns to every patient in a nursing unit the same daily cost for nursing care. ❃ Limitations of the relative value unit approach Patient classification versus other workload measurement The purpose of the RVU patient classification approach is to make a workable costing approach accessible to the majority of HCOs in the country. However, it does not generate perfectly accurate measures of cost and is subject to a variety of limitations. The idea of an alternative to patient classification was discussed earlier. If a workload measurement tool is in place in a hospital and is being used on an ongoing basis to categorize resource needs of each patient each day, it can be used to provide potentially more accurate cost information. Rather than being limited to perhaps five patient classification levels for a given medical or surgical unit, such an approach collects indicators of hours of resource consumption for each patient. It is more patient-specific than the RVU approach. Putting such an approach in place and following through with it on a continuous basis may be a considerable undertaking. However, if it is used, the costing of nursing services is made much easier. Under such an approach, the required interventions for each patient are translated into required hours of care. Total nursing care costs for direct and indirect expenses must be calculated as with the RVU system. Dividing total nursing costs by total hours of care generates a cost per hour of care. This cost per hour can be multiplied by the required hours of care for each patient for each day as determined by the system. This will give the cost per patient for each day in the hospital. If aggregate information is desired by DRG, it can be obtained by averaging the costs of each patient in that DRG. However, the majority of hospitals do not have patient-specific workload measurement systems in place. Indirect nursing costs A problem with both the RVU and more detailed workload measurement systems is the implicit assumption that all nursing costs vary in proportion to the hours of nursing care. Does that make sense for indirect costs? For example, will a sicker patient who requires more direct nursing care also require more indirect nursing care? More documentation time? More supplies? More overhead? The answer to these questions depends on the specific situation of the institution. Is it true that clerical costs will be greater for more acutely ill patients? It may well be that a simple per diem allocation is a more appropriate way to allocate such costs. Costing could be improved therefore by dividing total nursing costs among those costs that vary with nursing care hours (e.g., RN staff, LPN staff, other patient care staff, and perhaps clinical supplies) and those costs that do not vary with nursing care hours (e.g., office supplies, nurse manager time, and clerical time). Costs that vary with nursing care hours would be allocated by the RVU or workload measurement approaches described previously. The other costs could be divided by total patient days and assigned to patients based on their number of patient days. Staffing mix A significant problem is the fact that most hospital nursing classification systems provide required hours of care but do not specify the mix of care. If 30% of all nursing care hours are provided by LPNs, it is simply assumed that 30% of the care for each patient is provided by LPNs. It is possible that one patient at level 2 might require 4 hours of RN care, but another might require 3 hours of LPN care and only 1 hour of RN care. Obviously, both of these patients do not consume the same amount of nursing care resources, even if they consume the same number of hours of care. Therefore there will be some distortion of costs unless the hospital uses a system that indicates not only how many hours of care are needed but also how many hours of care are needed by staff type. This problem is not unique to costing, however. It represents a weakness of patient classification systems. If the hospital does not know the required mix of care providers, the classification system is not going to be useful for staffing decisions. Part of this problem stems from the fact that different hospitals have different views on which functions can be done by different types of staff. As patient classification systems improve, this mix problem should become less serious. In the meantime, managers could attempt to separate the cost of RNs from that of LPNs and aides and assign those costs separately to patients. Special studies could be undertaken for each DRG to determine whether care was biased toward more than an average amount of RN care or toward more than an average amount of LPN care. Then the cost of nursing care for that DRG could be adjusted accordingly. It should be noted that cost may not be the sole reason for using one type of nurse over the other. Research has begun to document the relationship between staff type and staff mix on patient outcomes. In some hospitals, LPNs may be less prevalent because of decisions to employ a higher skill mix. However, in other types of health care settings such as long-term care and home care facilities, LPNs may be factored in staffing more prominently. How complex are managers willing to make the costing system? Each HCO must decide how much it is willing to invest in refining its costing system, realizing that generally, the more accurate the costing system, the more expensive it is. Some managers believe that the historical average nursing cost per patient day is so inaccurate that an RVU-based system is a tremendous improvement even with the problems cited here. We have used a hospital as an example. The same principles apply whether the cost determination is for nursing care delivered in a hospital, nursing home, outpatient setting, or patient’s home. However, the costing is greatly simplified in home health care because patient records explicitly indicate the level of staff that provided the care. ❃ Product line costing One result of the work done on costing nursing services is that grouping all patients of one type and finding an average cost for that type of patient is possible. In other words, product line costing is feasible with this method. A product line is a group of patients with some commonality that allows them to be grouped together, such as a common diagnosis. HCOs use product line management as a way to achieve the best outcomes for a group of patients in the most cost-effective manner. Many organizations focus on providing care to patients with one disease, so-called disease management.11 Often an organization cannot eliminate one product in a product line without eliminating the entire product line. For example, if a hospital sells its bypass pump because it is losing money on cardiac bypass surgery, it will no longer be able to do heart valve surgery. They are both part of the cardiac surgery product line. Many people believe that managers should be given organization-wide responsibility for both the revenues and expenses related to specific patient product lines. For example, a manager might be responsible for the revenues related to the obstetrics product line. The manager is accountable for both the variance in the number of discharges and the revenue per discharge. Of course, the manager would be responsible for the budgeted and actual costs of the product line as well. Before one takes the step of costing or budgeting by product line, it is necessary to question how the information will be used. In terms of running a hospital nursing unit, will knowledge of the cost for all patients in a given DRG be useful? The answer depends a great deal on the types of decisions a manager or organization faces. Cost information by DRG can be used as a way to promote efficiency. For example, the treatment patterns of two physicians who care for diabetic patients could be examined to determine whether one approach is more effective or efficient than the other. If one approach achieves better outcomes at a lower cost, the approaches for managing patients with diabetes could be discussed and integrated to provide better care. Alternately, suppose that a hospital is trying to decide whether to accept a group of patients with diabetes from a certain insurer at a discounted price. Knowing the costs for that type of patient would certainly be advantageous in the negotiating process. Often product line calculations include nursing costs simply as part of the overall per diem cost. The organization can have much better information about different types of patients if it relies on nurse costing approaches, discussed earlier in this chapter. Direct care hours Product line information can be used not only for negotiations but also for budgeting. The direct care hours approach to product line budgeting consists of dividing the patients for a given nursing unit into product lines, determining the number of hours of care required for each product line, and aggregating that information to find the total hours of care needed in the budget. This is a straightforward approach to using product line information to improve budgeting capability. It represents an alternative to using acuity-adjusted patient days for determining nurse staff requirements (as will be discussed in Chapter 12). In this approach, the first step is to separate all patients for a unit into specific groups. These groups, or product lines, could—but do not have to—conform to DRGs. The next step is to determine how many patients are expected in the coming period in each group. That information can be generated using the forecasting techniques discussed in Chapter 20. Using historical information, forecasting can also predict the average length of stay of the patients in each group. After the manager has predictions of the number of patient days in each group and the average length of stay, these two numbers can be multiplied to determine the total number of patient days expected in each product line. The number of patient days can be multiplied by the expected average direct care hours per patient day (HPPD) for patients in the product line to generate the total hours of direct care needed for each specific product line. The total direct care hours for each product line can then be aggregated to determine the total direct care hours needed for the unit for the coming year. Based on that information, the unit’s budget for staff can be prepared. Table 9.5 presents a simplistic example of this process. In this example, sufficient staff must be budgeted to provide 24,300 direct care hours. The benefit of this process is that it has the potential to accurately provide information on the resources needed by the unit. ❃ TABLE 9.5 Product Line Budgeting for Direct Care Hours Forecast Volume of Patients × Forecast Average Length of Stay = Expected Patient Days × Expected Hours per Patient Day = Total Hours of Direct Care Product line 1 200 3 600 5 3,000 Product line 2 50 5 250 6 1,500 Product line 3 100 4 400 3 1,200 Product line 4 300 7 2,100 6 12,600 Product line 5 500 3 1,500 4 6,000 24,300 The major difficulty with this process is the determination of an accurate measure of average direct care HPPD by product line. If that information is inaccurate, the resulting total direct care hours needed will be inaccurate as well. Planning the budget based on a forecast of the number of patients in each product line may help the manager. An alternative approach is to determine the total number of days at each patient classification level for all patients in each product line. Using information from the patient classification system, the nursing staff requirements for that product line can be determined. If this is done for all product lines, the total nursing requirements can be determined. Standard costs Most industrial organizations establish standard costs against which performance can be measured. Standard costs represent expectations of what it should cost to produce a good or service, usually on a per-unit basis. They are targets, often established based on industrial engineering studies of the resources that should be consumed in the production of the good or service. Standard costing breaks down the costs of each product into its parts. These include direct and indirect costs, divided into their fixed and variable cost components. It is important to isolate fixed and variable costs in standard costing so that the information can be used for decision making. By dividing costs in this manner, the manager can determine the likely change in costs resulting from changes in the number of patients treated. Historically, HCOs have not done much standard costing because providers have considered each patient to be unique, requiring a somewhat customized treatment. A number of benefits could be realized from the use of standard costs, however. They present a basis for comparing actual results with a predetermined standard. They can be used when making decisions about contracts with insurers, expanding or contracting services, and revising the way services are offered in other areas. Even though patients are unique, standard approaches are taken for most patients with specific problems. Those approaches can form the basis for developing standard costs. A classic article on product line standard costing describes overcoming much of the obstacle to standard costing by focusing on the idea that hospitals treat patients by providing them with a large number of intermediate products.12 By carefully examining each department, one can make a list of the various intermediate products produced by that department. For example, a laboratory produces different types of tests. Based on this approach, the set of intermediate products consumed by the average patient in a specific product line can be used to determine the standard costs of that product line. The set of intermediate products consumed by a patient in each product line is referred to as the standard treatment protocol (STP) for that product line. In this system, each intermediate product line is called a service unit (SU). A chest x-ray would be one type of SU produced by the radiology department. A patient who has three chest x-rays receives three of that SU. A standard cost profile (SCP) must be established for each SU that indicates the cost of producing that SU. The profile would include direct and indirect costs and would identify fixed and variable costs. Conceptually, this seems straightforward. The patient care provided by each department is broken down into intermediate products called SUs. The cost of each SU is determined. The average number of each SU from each department is found for each product line. Then the SUs consumed for a product line are multiplied by their cost to determine the total costs for patients in that product line. A difficulty with this approach is determining SUs for nursing units. One could try to break down nursing care into the various specific activities and relate those to SUs. Administering a medication could be an SU. Taking a patient’s vital signs could be an SU. Charting information about a patient could be an SU. With the use of computer information systems, it is possible to disaggregate nursing care and assign it to patients in this manner. An example of work in this area is the use of critical paths for a patient’s hospital stay. With this approach, the standard care required for patients (usually by DRGs) is determined. During the course of the patient’s stay, variances from this standard are noted. Some variances are acceptable; for example, a patient’s health status changes, which is beyond the control of nursing. Other variances are not acceptable; for example, a patient is not ambulating because nurses did not provide care as outlined in the standard plan. With these data, it is possible to determine the ratio of outputs to inputs required (as determined by the standard) versus actual (as determined by the actual care provided). Because of the amount of data required to assess productivity in this way, successfully determining productivity for an episode of care usually requires the use of a computer. For organizations with information systems in place, it is possible to determine the average number of vital signs taken for a patient in a specific product line. For most hospitals, such a detailed level of information is not currently cost-effective to collect. However, nursing SUs could be based on patient classification. Thus a patient day at level 3 could be one SU, and a day at level 4 would be a different SU. Establishing the STP would include giving consideration to which nursing SUs are typically consumed and how many of each. The costs for those SUs could be determined by using the RVU method. The RVU method is an ambitious approach to product costing, but it is used in more HCOs each year. It provides very detailed information about each product line from all parts of the organization, including nursing. The management implications of such information are significant. By examining all the SUs consumed in each department, a team of clinicians could find ways to more efficiently provide care. SUs with a lower SCP might be substituted for more expensive ones. It might be possible to find ways to reduce the number of SUs in various departments. If one considers product line costing broadly as a tool in the management of care for an organization’s product lines, the potential benefits of product line standard costing are significant. ❃ Nursing intensity weights Another approach to costing for nursing is nursing intensity weights (NIWs). This approach, developed in New York State, was established as a way of accounting for patients’ needs in the costing of nursing care. This approach allocates nursing costs to patients based on NIW scores. NIWs were developed by a panel of nurses using the Delphi technique (see Chapter 20) to score the amount of nursing care needed by patients in each DRG for each day of their hospital stay. The NIWs take into account five scoring dimensions: assessment, teaching, emotional support, medical, and physical assistance. NIWs are used in New York to determine the nursing care costs of different patients, separating out those costs from the per diem charges. A problem with NIWs, however, is that NIWs are not necessarily the same at all hospitals. Using NIWs to find costs at a given hospital would require the laborious process of having nursing staff establish weighted scores along the five dimensions for each day of a “typical” patient’s hospital stay in each DRG. This is a very time-consuming process. Another problem with NIWs is that, as originally developed, they do not take into account indirect nursing costs. That is, they account for the time nurses spend with patients. They do not, however, specifically take into account the time the nurse spends with family and physicians, the time preparing for patient discharge, record keeping time, and so on. That does not mean those costs are not included in the NIW costs. They are. However, they are included by being averaged in, in direct proportion to how direct time is spent. That might not be very accurate. It is possible that a patient might have fewer direct care needs but would still use as much indirect nursing time as a more acute patient who has greater direct care needs. NIWs could be established with separate computations of the direct and indirect nursing care needs. However, that would make the approach even more time-consuming. And when all is said and done, the results are based on the opinion (expert opinion, but still opinion) of a panel of nurses rather than on a more rigorous collection of actual cost data. As one study noted, “The future of NIWs is in doubt,”13 and alternative approaches both for determining patients’ needs for nursing care and, in turn, for costing nursing services are needed. ❃ Activity-based costing Activity-based costing (ABC) is a relatively new approach to determining costs. The approach is based on the observation that costs are incurred because of specific activities. In most costing methods, costs are assigned to cost centers and patients based on some measure of volume, such as patient days or visits or hours. For example, OR costs are assigned to patients based on minutes in the OR. From an ABC perspective, it is not necessarily the amount of time but the specific activities that generate costs. Based on this notion, managers need to focus on the actions that drive costs higher. The activities of an organization that cause it to incur costs are referred to as cost drivers. The use of cost drivers to assign costs has the effect of improving accuracy by focusing cost measurement more on a cause-and-effect basis. For example, suppose an HCO purchasing department orders many items on a routine basis and some items on a special order basis. The activity is placing orders. However, it is quite possible that a special order will be more costly than a routine order. Purchasing departments are cost centers. Their costs must be allocated to patients for the organization to recover its full costs. One common approach to such allocation is based on the number of purchase orders. Departments that generate a lot of purchase orders are assigned a greater share of the cost of the purchasing department. In turn, those costs are allocated to patients who use the department. This seems quite reasonable. However, if a rush order is an activity that causes purchasing to spend extra money (e.g., time of the personnel in the department, express freight costs), then from an ABC perspective, one would argue that the departments that generate a large number of rush orders should be charged more than departments that do not, other things being equal. In other words, costs should not be assigned simply based on the number of purchase orders generated by each department. For the purchasing department, the activity of placing a rush order is more costly than the activity of placing a regular order. Rush orders drive costs higher. The ABC approach requires the manager to analyze the activities of each responsibility center or department in an organization. The various activities that are cost drivers must be identified. Then costs can be assigned to departments and ultimately to patients based on the amount of the cost-driving activities they require. For example, suppose that an OR traditionally has assigned its costs based on minutes of surgery. A patient with a 2-hour surgery is charged twice as much as a patient with a 1-hour surgery. However, one of the costs of surgery is cleaning and preparing the room after every surgery. Suppose that those costs are the same for each surgery regardless of the length of the surgery. The activity of cleaning and preparing the room should then be charged equally to each surgical patient. This probably means that more allocation bases will be needed. The depreciation cost of the surgical suite may be charged to patients based on the length of the procedure. The cost of cleaning the room may be charged equally per patient. The cost of supplies consumed during the surgery should include the extra cost of any rush orders that were required for the procedure. This will complicate the costing process but will produce substantially more accurate information. ABC proponents argue that most industries really do not have a good sense of which of their products or services are profitable and which lose money. Furthermore, employees may be more cost conscious if they use ABC information. Consider the purchasing department and OR examples just described. Surgical patients who require special order items are subsidized under the old costing system because costs of the rush orders are spread out over all departments that order supplies. This could cause a particular type of surgery to appear more profitable than it is because the true costs of the rush orders are not assigned to the departments and patients that caused the special orders. However, that will change after the ABC system is in place. The OR will be charged directly for each special order. It can then assign the cost of the rush order to specific patients who required the rush-ordered items. This in turn will provide more accurate information about the cost of care for each type of patient. Furthermore, seeing the higher costs resulting from rush orders, the manager of the OR may plan more carefully, avoiding the need for many of the rush orders. This will reduce the total costs for the patient, department, and organization. In terms of routine medical or surgical nursing, using ABC requires an examination of what nurses do and why they do it. ABC works well with the concept of value-added costs. By examining everything we do to try to determine the cost drivers, we can also assess whether each activity adds value to the patient. If it does not, perhaps it can be eliminated. If it does add value, the cost of the activity should be assigned to the patient who directly benefits from it. One problem with ABC is deciding how minutely to define activities. Is taking a pulse or blood pressure an activity? Certainly. However, should we determine the cost of that activity and track how many times it is done for each patient? This is not an easy question. From a clinical perspective, we already track such activities in the patient chart. However, until costing and clinical systems are fully linked, tracking the activity for costing purposes will require additional data input. And what about activities that are necessary but that are never entered in the clinical chart? With ABC, as with any approach to costing, we must always balance the value of more accurate information against the extra cost of collecting that information. ❃ Setting prices Nurse managers and executives today are becoming more directly involved in the revenue process of HCOs. It is no longer sufficient to simply control costs. For HCOs to prosper, their managers must have an understanding of the processes by which they receive their revenues. Rate setting is the element of financial management that focuses on setting the prices the organization charges for the services it provides. Historically, rate setting has been outside the control of HCOs. The federal government sets hospital DRG rates for Medicare patients. In addition, many other rates charged by HCOs are mandated by governmental bodies, such as state-controlled Medicaid rates. With the proliferation of prospective payment and value-based purchasing, this process is changing. As Medicare and Medicaid recipients enroll in ACOs and other insurance plans, hospital, home health care, and ambulatory care rates are being determined more and more on the basis of negotiation. Nevertheless, the process of developing a charge master—that is, a list of the organization’s prices for each of its services—remains a critical element of the management process. Some patients still pay the prices set by the provider. And many negotiated rates are set as a percent of the organization’s prices as listed in its charge master. Total financial requirements Health care organizations strive to obtain the financial resources needed to meet their total financial requirements (TFRs). These requirements are the financial resources needed to meet the health care needs of the population served by the organization. Clearly, the financial requirements of any organization include sufficient money to cover the current costs of operations. On a broader perspective, however, the financial needs of the organization encompass the ability to replace facilities as they become obsolete and to adopt new technologies as they become available. The total financial requirements of HCOs have been defined to include five categories14: 1. Costs of doing business 2. Costs of staying in business 3. Costs of changing business 4. Returns to capital sources 5. Costs of uncertainty The costs of doing business are the routine operating costs of the organization, including salaries and expenses. If the organization provides education or research, it must recover enough to pay for those services in addition to patient care. If some payers pay less than the full costs generated on their behalf, other payers must be charged more if the organization is to recover the full costs of doing business. The costs of staying in business are the financial resources all organizations need to operate, to replace assets, and to acquire new technologies. Most patients do not pay for their care until after they are discharged. However, the organization must acquire supplies before the patient arrives and must pay salaries concurrent with the patient stay. To stay in business, the organization must therefore have a reserve of cash available to tide itself over until revenues are received. The costs of changing business are those expenditures that are required when organizations make modifications to existing services or add new services. Health care services do not remain stagnant over time. As the practice of nursing and medicine changes, HCOs must be flexible enough to delete outmoded services and to add new ones. Returns to capital sources are the resources needed to repay those who provide the organization with the basic resources to be in business. This includes the money needed to establish the organization, as well as additional monies to allow the organization to acquire buildings and equipment over time. Some of this money is borrowed. In that case, return on capital refers to interest on the loan as well as to repaying the principal of the loan. For-profit entities have owners who have invested money. A return to those owners is generally in the form of dividends. In some cases, the organization is either community owned or voluntary, and its original resources came from tax dollars, philanthropic sources, or both. In such cases, the return on capital may come in the form of subsidized health care services for indigent patients. The costs of uncertainty refer to the unexpected and unplanned expenses that organizations may incur simply as a result of being in business. These include the impact of adverse legal decisions, political decisions, regulatory changes, and similar occurrences. A stable entity must set rates in such a manner that all these financial requirements are considered. Some payers (e.g., Medicare) can dictate their prices to the organization. The rates the organization charges the remaining payers must be adequate so that in total the organization has the financial resources it needs. This means that if the organization loses money on Medicare patients, it must attempt to charge a higher price to non-Medicare patients to offset the loss. This is sometimes referred to as a “plug-figure” approach. The organization decides the amount of revenue it needs, determines how much revenue it will receive from sources that pay set prices, and then plugs in the charges for the remaining patients to achieve the desired revenue. Unfortunately, this may require the organization to charge a high price for its services. Charging a high price is likely to result in increased bad debts as prices become higher than patients can afford. Increased bad debts mean that charges to the remaining payers must be even higher to offset that loss. This can create a vicious circle, with the organization unable to collect enough to remain financially viable. Rate-setting approaches Three approaches typically are used for rate setting in health care: cost-based prices, negotiated prices, and market prices.15 Cost-based prices Cost-based reimbursement generally relies on the traditional cost-finding analysis, discussed earlier in this chapter. Often cost-based payers, such as Medicaid, dictate that they will pay the lower of cost or charges. If for some reason the organization were to set its charges less than its costs, payers would reimburse the lower amount. The cost-based approach requires knowledge of the cost of treating each patient. If one is to reimburse the organization for the cost of treating the patient, one must know that cost. However, rather than actually trying to capture the cost of treating any one patient, cost-based payers generally use what is known as the ratio of charges to charges applied to costs, often referred to as the ratio of cost to charges (RCC). In this approach, it is assumed that a given payer’s costs and charges in any profit center will be approximately the same. Thus, if 30% of all surgical charges are for Medicaid patients, Medicaid is responsible for 30% of all OR costs. That 30% can be applied to the total OR profit center costs to determine the amount Medicaid must pay. Looking at this calculation another way, suppose that the OR had total charges of $1 million and that 30% of those charges, or $300,000, were to Medicaid patients. Because Medicaid pays costs rather than charges, the costs of treating those patients must be determined. Suppose that the total costs of the OR were $800,000. Costs are 20% lower than charges (i.e., $800,000 is only 80% of $1 million). Therefore Medicaid costs must be only 80% of the $300,000 of charges, or $240,000. Negotiated prices Negotiated prices or rates are common in the health care industry. Insurers and even large employers actively negotiate directly with hospitals and other health care providers. Generally, guaranteed patient volume is offered in exchange for discounted prices. Based on the discussions of Chapter 8, to be acceptable to an HCO, negotiated prices should at least provide a positive contribution margin to the organization. Market prices The market approach is based on the concepts of supply and demand introduced in Chapter 4. This is commonly how practitioners in private practice set prices. For example, suppose a nurse practitioner (NP) sets up a private practice. The NP might charge less than other practitioners in the area and initially not make a profit. However, if volume increases, the nurse practitioner will likely begin to make a profit. With this approach, the organization can set any price it wishes. However, a price set too high would encourage competitors to enter the market and underbid the organization. If the price is set too low, the organization will lose money and eventually go out of business. HCOs therefore must walk a tightrope in setting prices. There are also times when competition may cause the organization to lower some prices and raise others so as not to be perceived as an expensive provider. For example, suppose that two hospitals in the same area offer open heart surgery; one hospital performs 500 per year, but the other performs 50 per year. The charge at the hospital with the higher volume might be significantly less than at the one with lower volume because of economies of scale. The low-volume hospital has fewer patients to share the fixed costs of doing open heart surgery (e.g., the expensive equipment required). It is not unreasonable to expect that the low-volume hospital will lower its charges to match the competition even if this means that it is charging less than cost. How will the low-volume hospital survive in that case? It would probably raise charges on a low-cost, high-volume item for all patients. For example, it might add a charge of $1 per test for all laboratory tests done for all patients to offset the reduced charge to open heart surgery patients for their surgery. In this way, the hospital would avoid the possibility of being labeled as very expensive for a high-visibility program such as open heart surgery. If a policymaker questioned the wisdom of allowing a low-volume open heart surgery program to exist, the hospital could counter that it is so efficient that its charges are no higher than those of the high-volume program. Major payers are aware of such influences on hospital rate setting. That is why cost-based payers often mandate that they pay only the lesser of cost or charges. This allows them to take advantage of competitive situations that result in prices below cost. Rate setting is a critical area of health care management. Managers must take into account their total financial requirements, the patient mix by type of patient, and the patient mix by type of payer. Balancing these factors is often essential to organizational viability. It is particularly important for nurses in private practice. ❃ Financial reimbursement for nursing services Despite the limitations of costing systems, great progress has been made in costing out nursing services. It is now possible to recognize different nursing costs for different patients. That means that it is feasible for nursing to become a profit center that charges directly for its services. The ability to recognize different consumption of resources by different patients and to charge accordingly is the essential ingredient for a profit center. Establishment of nursing as a profit center is feasible as long as different patient classification levels can be assigned different costs. Clearly, nurses who work in home health are in a profit center. Nurses in private practice, whether alone or in a group with physician providers, are revenue generators. If an organization’s patients are all fixed-fee patients, profit centers make little sense. For example, a fixed DRG payment to a hospital will not vary if nursing, laboratory, or radiology varies its charges. If all patients were paid on a DRG basis, eventually there would be no profit centers. However, at present most HCOs still have some patients who pay charges. Therefore potential benefits exist for treating nursing as a profit center. First, it charges patients more fairly using a closer approximation of their actual consumption of resources. Second, for hospitals it clearly segregates nursing from room and board (the proverbial “black hole” of the per diem charge!). Third, it can help alleviate the “nursing as a burden” misconception. The reality is that nursing is part of the solution because nurses understand process improvements that are key in streamlining overall care delivery. As HCOs find an ever-increasing need to manage themselves in a businesslike manner, a clearer understanding of both revenues and expenses will be required. The movement toward recasting the nursing function as a profit center in hospitals can help in that evolution. Separate costing for different types of patients allows for variable billing—that is, the amount billed to each patient per patient day or per visit varies. Instead of all patients simply being charged the same amount per day or per visit for nursing care, different patients are charged different amounts based on their differing resource consumption. After the different costs of caring for different patients are known, they can be charged accordingly. For example, in ambulatory care it is common to charge more for a new patient visit than for a follow-up visit. Variable billing may be a way to better justify hospital bills and in some cases may increase overall revenues to the hospital. Variable billing may be beneficial to nursing because it dramatically shows the specific contribution that nursing makes to the overall revenue structure of the hospital. Home health agencies generally charge on a per-visit basis, although nurse managers recognize that different patients require different amounts of care. For example, the diabetic patient who requires a glucose check and an insulin injection requires much less care (and time) than an immunocompromised patient with opportunistic infections. Most managers assume that the variations will balance out. For each visit requiring a substantial amount of time, there will be an “in-and-out” visit to offset it. This approach was adequate in the past when most nurses were paid on a salaried basis. As more and more home health agencies are paying nurses on a per-visit basis, this approach may no longer prove workable. Billing may move to a variable basis depending on nursing resources consumed. Pay for performance (P4P) Value-based purchasing, introduced earlier in this book, has particular relevance to nursing cost and reimbursement issues. A method used in value-based purchasing known as pay for performance (P4P) allows payers to reimburse providers for services delivered based on the provider’s performance on certain quality of care outcome measures. P4P has the ability to transform the way in which care is delivered, the incentives inherent in our system of financing health care providers, and the way in which care is paid for. In the future, it very well may be that provider payments are differentiated based solely on performance. Several quality initiatives have been conducted by the Centers for Medicare and Medicaid Services (CMS) to improve the care of Medicare patients, including the Nursing Home Quality Initiative (implemented in 2002), Home Health Quality Initiative (implemented in 2003), Hospital Quality Initiative (implemented in 2003), Physician Focused Quality Initiative (implemented in 2004), End Stage Renal Disease Quality Initiative (implemented in 2004), and Physician Voluntary Reporting Program (initiated in 2006). In all cases, data on evidence-based quality measures were gathered for reporting purposes and in some cases for payment purposes. These measures generally reflected the outcomes that resulted from the “process” aspects of quality (i.e., whether certain standard and recommended processes or treatments were carried out, whether they were done appropriately, and whether they were done in a timely fashion). Hospital Compare16 provides information to consumers about hospital performance on 64 quality improvement measures, allowing consumers to compare the outcomes that are a function of processes carried out at different hospitals. These quality initiatives have made HCOs rethink and in some cases redesign internal care processes. Because P4P measures are tied to payment, there is increasing pressure on hospitals to be efficient and effective in care delivery, to maximize revenues, and to reconsider how money is allocated internally. As hospitals and other HCOs have simultaneously faced declining reimbursements and increasing performance pressures, nursing has come under increasing pressure to improve performance, increase productivity, and even “do more with less.” Under such financial pressures, it would not be unlike hospitals to consider cutting, or to actually cut, nursing staff to reduce costs; historically, this has happened because nurses are the largest professional group and represent the largest labor cost in most hospitals and are thus perceived as costly. However, cutting nurse staffing today comes at a price. For example, evidence indicates that nurse staffing cuts that occurred in the past adversely affected patient outcomes.17 The question this raises is, given this evidence, how will hospitals choose to align their processes? Will they focus on costs exclusively, or will they strive to balance quality and costs? Needleman and colleagues18 declared an “unequivocal” business case for increasing nurse staffing. The business case indicates that under certain staffing scenarios, hospitals could reduce net costs by increasing RN staffing. Although not included in their analysis, increased nurse staffing could also bring about cost savings that result from increased nurses’ job satisfaction, decreased nursing turnover, and decreased turnover costs. The social case for increasing nurse staffing includes the benefits that accrue to society resulting from improvements in quality—that is, decreased lengths of stay, adverse events, in-hospital deaths, and hospital readmissions. Benefits may also accrue to HCOs if increased nurse staffing makes them more profitable. The recognition of nurses’ role in preventing health care–acquired conditions, the impact of nursing care on the financial bottom line of HCOs, and the P4P environment provide an opportunity for nursing to make great strides in this area. Although current P4P initiatives address important process aspects of health care quality, they still do not capture core processes related to nurses’ work.19 Some aspects of nurses’ work that are critical to patient care quality, such as pain management and diabetes care management, are clearly overlooked.20 Because these important aspects of nursing care are omitted from current performance measures, hospitals are not compelled to invest in routinely gathering data on and tracking these outcomes and in turn may not put efforts toward improving the quality of care in these areas. It is ironic that the work of the largest group of health professionals has been overlooked in many of the P4P measures established by the CMS. However, identifying evidence-based measures that reflect nurses’ work is difficult. Even the National Quality Forum’s evidence-based nursing-sensitive performance measures (discussed in Chapter 5 do not reflect the complexity and reality of nurses’ work. Until such evidence-based measures are available, hospitals will be challenged to adequately improve their processes that depend on nurses.21 Just as CMS links hospital payment to its performance, so too can hospitals and HCOs link nurses’ payment to their performance. For organizational employees, incentives to improve performance may be directed toward groups (i.e., the organization or the work units) or to individual nurses and tied to performance evaluation. Similarly, incentives for nurse managers and executives may be linked to unit or departmental performance on measures such as patient satisfaction or staff nurse turnover. Concern has been expressed that these incentives may put financial gains above quality of care. Nurse managers and executives should be aware of the potential legal and ethical conflicts that may be associated with this practice and advocate for the use of financial performance incentives that do not compromise professional integrity and public trust. ❃ Implications for nurse managers and executives Nurses who oversee nursing services have a responsibility not only to the units, departments, and staff they manage but also a broader responsibility to the organization. It is imperative for nurse managers to understand the organization’s perspective on cost finding and rate setting. This issue is also important for nurses in private practice. Nurse managers and executives need to be aware that not all accounting methods and procedures will always be correct or appropriate. By understanding how the organization conducts its cost accounting, nurse managers and executives can identify situations in which the accounting data are inadequate for their needs. Perhaps all supplies are charged to the nursing department when paid for rather than when consumed. Although that would have little impact on the external reporting of costs, it makes monthly evaluation of performance difficult. Are the right amounts of supplies being used for the number of patients actually being cared for? That question cannot be answered without cost information related to monthly consumption of resources. Information about the amount paid in a given month for supplies is insufficient information for the nurse manager. After such problems are identified, the organization’s financial managers must be informed of the inadequacy of the existing information. Nurse managers and executives and financial managers can then work together to generate and use relevant information to improve the organization’s overall management capabilities and results. Nurse managers and executives cannot lose sight of the fact that a great deal of the organization’s revenues depend on following the cost-finding requirements of external payers and providing them with external reports. The reasons for the cost-finding techniques should be understood lest they be condemned for their lack of perfection. At the same time, recognition of their limitations makes clear the need for the nursing profession to step forward and develop better approaches for costing out nursing services. This need is made more critical by the introduction of fixed-payment systems such as DRGs, by capitation payments, and by insurer-negotiated rates for episodes of care or bundled payments. Prospective payment and P4P reimbursement make knowledge about the cost of treating different types of patients essential. Improved costing of nursing services is a vital step toward getting a more accurate cost for each of the organization’s product lines. Whether this will in turn lead to variable billing for nursing services in hospitals on a universal basis is still unclear. Accurate costing information for nursing does, however, remove the roadblocks to variable billing. Improving ways of costing nursing services has become important to nurse managers and executives for several reasons. First, improved cost information can be used to better understand the contribution that nursing makes to the organization as a whole. Second, the information generated by improved costing can be used to help managers and executives make effective decisions and better control the costs of providing nursing services. Third, it can help better understand and highlight the nursing resources needed by patients. Fourth, costing information is useful for examining changes in the way nursing care is provided. For example, the cost impact of various skill mixes on inpatient units or in ambulatory care centers can be examined, as well as the implications of making changes to skill mix. Finally, improved cost information can help nurse managers and executives understand the financial implications of errors and adverse events, including health care–acquired conditions. The most accurate costing system requires continuous observation of all nurses by data collectors to derive detailed cost information. The cost of such highly accurate microcosting is prohibitive. However, one can think of a continuum of costing methods. In general, less expensive methods provide less accurate data; more expensive methods provide more accurate data. Fully integrated information systems are used in many hospitals, and over time, software programs have been developed and perfected to make using these systems more efficient and effective. Many organizations are experimenting with various software programs to integrate clinical and financial systems. As the saying goes, however, “If it wasn’t documented, it wasn’t done.” Electronic health documentation systems are essential if we are to recognize and better understand nursing contributions to patient episodes of care and, in turn, to capture and adequately measure nursing productivity. In the meantime, ABC and patient classification systems can be used to substantially improve the assignment of nursing costs to patients in an economical way. Costing out nursing services is an extremely useful tool for product line costing and budgeting. Information about product line costs can show management where profits are being made and where losses are accruing. Product line information can aid managers substantially in understanding which patients place the greatest burden on the unit and in helping the organization make appropriate decisions regarding changes in its patient mix. The move to P4P system is changing the dynamics of care delivery, reimbursement, and resource allocation within HCOs. Unfortunately, the work of nurses is not adequately captured in current P4P measures. Leadership is needed from nurse managers to bring to light the importance of measuring and capturing the work of nurses and to work with researchers to develop such measures. Until evidence about the work of nurses is established, HCOs may miss important opportunities to improve certain internal processes that rely on the largest group of health professionals.