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MHA612CH17_PP.ppt.pdf

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Chapter 17

Cost Variance Analysis

• 16–3

Learning Objectives •  Describe what is meant by cost control. •  Describe the two major theories used for the

detection of out of control costs.

•  Define variance analysis and how it is used by management.

•  Calculate the various types of cost variances. •  Explain and calculate price, efficiency and

volume variances. 2

Figure 17-1: Phases of Cost Control

Efficiency Cost

•  Total cost that results from an out of control situation

•  Efficiency Cost Equals – T x R x P – T = Total time from problem occurrence to

correction – R = Loss or cost per time unit – P = Probability that problem can be corrected

• 16–5

Alternatives for Minimizing Efficiency Cost

•  Preventive Approach – Minimize P (Probability of a problem

occurring) – Emphasis on right people with right motivation

•  Detection-Correction Approach – Minimize T (Total time problem is present) – Emphasis on reporting and variance analysis

• 16–6

• 16–7

Variance Analysis

Requirements for variance analysis •  Standards (budgets) •  Related cost accounting system •  Fixed/variable split of costs

Phases in cost control

•  Recognition of problem • Determination of cause •  Correction

o Budgetary o Operational

Alternative Methods to Determine when to Investigate a Variance

• 16–8

• Control Chart

- Biggest problem is failure to recognize costs of investigation or benefits of problem correction

x = 0 x + 2σ

x - 2σ

Alternative Methods (cont.) •  Decision Theory (Payoff Table)

–  I = Cost of Investigation – L = Loss if system out of control

• 16–9

Alternative Methods (cont) •  Variances should be investigated if the

probability that the system is in control is less than:

•  Example –

–  I = $1,000 – L = $4,000 –  Investigate when probability of system being in

control is less than 75%

• 16–10

1.0 - Cost of Investigation (I)

Loss if out of control (L)

Variance Analysis Areas

•  Facility Level – High level explanation of why costs have

changed •  Departments/Responsibility Centers

– Prior period cost analysis – Budgetary cost comparisons

•  Health Plan/Managed Care

• 16–11

• 16–12

Variance Analysis—Facility Level

Cost per discharge changes result from •  Resource price changes •  Productivity changes •  Intensity changes

Cost Equation •  CPD = •  Ci = Cost (charge) of service i •  Qi = Units of service i required per case

Ci * Qi

Variance Analysis – Facility Level

•  Two Indices split the variance into causes: – HCI – change in cost due to price and

productivity – HII – change in cost due to changes in service

intensity

• 16–13

Variance Analysis – Facility Level •  Change in cost per discharge

– CPD / CPD – HCI x HII

•  (HCI) is defined as the following: •  (HII) is defined as the following:

• 16–14

HCI = C Q

C Q

HII = C Q

C Q

t 0

0 0

Variance Analysis – Facility Level •  Compute HCI

(C Q / C Q )

Variance Analysis – Facility Level •  Compute HCI

(C Q / C Q )

• 16–18

Variance Analysis – Summary

Total Cost / Discharge Example

2009 Cost / Discharge = $3,275.00 2011 Cost / Discharge = 4,310.34 % Increase 31.6%

HCI % 24.2% HII % 5.5% Joint % 1.9% Total 31.6%

• 16–19

One Department (Lab)

HCI = = 1.143

HII = = 1.207

Variance Analysis (2009 to 2011)

Cost Increase % = 14.3 Intensity Increase % = 20.7

Joint Effect Increase % = 2.9 Total 37.9%

$85.71 x 5.0 $75.00 x 5.0

$75.00 x 6.0345 $75.00 x 5.0

Variance Analysis—Facility Level

Departmental Variance Analysis •  Causes of Variances

– Price (wages or prices of supplies differed from budget)

– Efficiency (resource quantities used differed from budget)

– Volume (actual volume of services differed from budget)

– Utilization (output provided differed from what was required)

• 16–20

• 16–21

Categories of Variances Price

Efficiency

Volume

Variance = [Actual Price - Standard Price] x Actual Quantity

Variance = [Std. Volume - Actual Volume] x Avg. Fixed Cost/Unit

Variance = [Actual Quantity - Std. Quantity] x Standard Price

Variance Analysis

Utilization Variance = [Actual Volume – Expected Volume] x Standard Cost per Unit

Table 17-8

Tabel 17-10

Department Variance Example •  Efficiency Variances

a)  Head nurse = (180 – 189) x $30.00 = $270.00 (Favorable)

b)  RN = (1,800 – 1,830) x $24.00 = $720.00 (Favorable)

c)  LPN = (1,200-1,200) x $16.00 = 0 d)  Aides = (2,400-2,430) x $10.00 = $300.00

(Favorable) e)  Supplies = (1,300 – 1,200) x $4.40 = $440.00

(Unfavorable)

• 16–25

Department Variance Example •  Price Variances

a)  Head nurse = ($31.00-$30.00) x 180 = $180.00 (Unfavorable)

b)  RN = ($25.00-$24.00) x 1,800 = $1,800.00 (Unfavorable) c)  LPN = ($16.20-$16.00) x 1,200 = $240.00 (Unfavorable) d)  Aides = ($9.60-$10.00) x 2,400 = $960.00 (Favorable) e)  Supplies = ($4.80-$4.40) x 1,300 = $520.00 (Unfavorable)

•  Volume Variance

–  Volume variance = (630 – 600) x $43.00 = $1,290.00 (Unfavorable)

• 16–26

Department Variance Example •  Utilization Variance

– Based on assumption that too much can be included in an encounter of care, e.g. excessive length of stay

– Assume in our example 80 cases with an expected LOS of 7 days. We have excess days of 40 (600-560)

– Utilization variance – (Act. Volume – Exp. Volume) x Std. Cost per Unit [600-560] x $161.80 = $6,472

• 16–27

Department Variance Analysis

•  Summary – Price Variance 1,780 (U) – Efficiency Variance 850 (F) – Volume Variance 1,290 (U) – Utilization Variance 6,472 (U) – Total 8,692 (U)

• 16–28

• 16–29

Variance Analysis Managed Care Contracts

•  Cost = Inpatient (IP) + Outpatient (OP) •  IP = Admissions x Cost per Admission = [Enrollees (E) x Admission per Member (APM)] x [Cost per Admission (CPA) x Admission Case Mix Index (ACMI)] •  OP = Visits x Cost Per Visit = [Enrollees (E) x Visits per Member (VPM)] x [Cost per Visit (CPV) x Visit Case Mix Index (VCMI)]

•  Cost Drivers 1.  Enrollment (E) 2.  Utilization (APM or VPM) 3.  Efficiency (CPA or CPV) 4.  Patient Mix (ACMI or VCMI)

•  Sample Data

• 16–30

Variance Analysis Managed Care Contracts

Budget Actual

IP Costs $12,568,500 $16,531,200

OP Costs 5,433,120 5,372,640

Total 18,001,620 21,903,840

Members (E) 42,000 41,000

Admission Rate (APM) .070 .080

Admissions 2,940 3,280

Visit Rate (VPM) .400 .390

Visits 16,800 15,990

IP Case Mix (ACMI) .90 1.05

OP Case Mix (VCMI) 1.10 1.20

Cost per Admission (CPA) $4,750 $4,800

Cost per Visit (CPV) (VCMI = 1.0) $294 $280

• 16–31

•  Enrollment Variance = Change in Members x Budgeted Use Rates x Budgeted Cost per Unit 1. Inpatient

= (Ea - Eb) x APMb x CPAb x ACMIb

= -1000 x .07 x $4,750 x .90

= -$299,250 (Favorable)

2. Outpatient

= (Ea - Eb) x VPMb x CPVb x VCMIb

= -1000 x .400 x $294 x 1.10

= -$129,360 (Favorable)

Variance Analysis Managed Care Contracts

• 16–32

•  Utilization Variances = Change in Use Rates x Actual Members x Budgeted Cost per Unit 1. Inpatient

= (APMa - APMb) x Ea x CPAb x ACMIb

= (.080 - .070) x 41,000 x $4,750 x .90

= $1,752,750 (Unfavorable) 2. Outpatient

= (VPMa - VPMb) x Ea x CPVb x VCMIb

= (.390 - .400) x 41,000 x $294 x 1.10

= -$132,594 (Favorable) 32

Variance Analysis Managed Care Contracts

• 16–33

•  Efficiency = Change in Cost per Unit x Actual Units 1. Inpatient

= (CPAa - CPAb) x ACMIa x Ea x APMa

= ($4,800 - $4,750) x 1.05 x 41,000 x .08

= $172,200 (Unfavorable) 2. Outpatient

= (CPVa - CPVb) x VCMIa x Ea x VPMa

= ($280 - $294) x 1.20 x 41,000 x .390

= -$268,632 (Favorable) 33

Variance Analysis Managed Care Contracts

• 16–34

•  Patient Mix = Change in Case Mix x Budget Cost per Unit x Actual Volume 1. Inpatient

= (ACMIa - ACMIb) x CPAb x Ea x APMa

= (1.05 - .90) x $4,750 x 41,000 x .08

= $2,337,000 (Unfavorable) 2. Outpatient

= (VCMIa - VCMIb) x CPVb x Ea x VPMa

= (1.20 - 1.10) x $294 x 41,000 x .390

= $470,106 (Unfavorable) 34

Variance Analysis Managed Care Contracts

• 16–35

•  Summary Variance Analysis (Negative Values are Favorable) Enrollment Utilization Efficiency Patient Mix Total

($299,250)

1,752,750

172,200

2,337,000

$3,962,700

($129,360)

(132,594)

(268,632)

470,106

($60,480)

($428,610)

1,620,156

(96,432)

2,807,106

$3,902,220

Inpatient Outpatient Total

Variance Analysis Managed Care Contracts

Variance Analysis – Managed Care

•  Conclusions – A large increase in both IP and OP case mix

increased costs –  IP usage was also up increasing costs

• 16–36