Boston Childern Hospital

Introduction
Boston Childrens Hospital (BCH) is a specialized hospital in the area of child care and it is the leading
hospital in United states for child care. It treated more than 500,000 patients in 228 clinical programmes
and performed 26,000 surgeries in 2011. It also has the largest hospital based pediatric research centre
with an annual funding of more than $255 million and 1100 scientists. For the year 2011 the hospital
reported an income of more than 1.3 billion dollar and a profit of 66 million.
BCH was a free standing hospital and due to its specialized operations reported higher costs compared
to any other hospital. Some of the hospitals such as Tufts use to charge 50% lower fees for similar kind
of service. The higher cost of service was making the BCH being excluded from various payors. In 2012
the tiered/networked market consisted of 15% and BCH was losing in this market. This forced the BCH to
study their cost and take cost reduction initiative so that it can price its service appropriately.
Cost measurement Departments
Various cost management initiatives were launched by the Hospital at different departments such as
Department of Plastic an Oral Surgery and Department of Orthopadic surgery
Various Costing methods for costing the Hospital
1. Ratio of Cost to charges
2. Ratio of Cost to value
3. Time Driven Activity Based Costing
Ratio of Cost to charges
Currently both the department of plastic and oral surgery and Department of Orthopedic surgery used
the RCC approach. It is a absorption method where the cost is assumed to be proportional to the
charges. In this approach all the revenue producing charges of each department are collected then all
the traceable expenditure of the department are directly allocated and indirect expenses are
apportioned, the ratio of the total of sum of the departmental overheads and the charges gave the RCC
rate which was used to find out the cost attributable to individual service.
The above method is one of the simplest method that can be used to appropriate the cost to individual
services. It might not give the clear picture of the cost as indirect cost are appropriated on an arbitrary
basis to derive the RCC rate. Another reason why the RCC rate might over or under estimate the cost is
all the services of the department are assumed to have the same RCC rate and hence a simple medical
procedure might absorb higher cost compared to a complicated procedures. This will result in under
charging of the complicated procedures and over charging of the simple procedures. Since the simple
procedures are more common compared to the complicated the consumers will perceive the service as
costly compared to the other hospitals.
Ratio of Cost to Value
The Charges for the particular service is derived from the medical fee schedule. TheCMS has developed
this schedule based on the Resource based Relative Value scale(RBRVS). The Relative value unit (RVU)
calculation by CMS was primarily based on 3 factors
1. Physician Work RVU
2. Physician Expenses RVU
3. Malpractice Insurance RVU
Based on the above three medical RVU was derived.

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GPCI = Geographical Practice Cost Index
The medical expenses were calculated by multiplying the RVU with the medical conversion factor which
was decided by the CMS and in order to reduce the cost CMS was reducing this regularly and currently it
was at $25.
BCH used these total medical RVU but multiplied this with an internal rate to cover its full cost. This was
used as a list price for various services. The payment made by the various insurance companies were
also based on this factor.
The above method specified is just a variant of the RCC and the basic methodology is same and specifies
the weights based on the complexity of the procedure and hence it is superior to the RCC method, But in
this method all the indirect costs or the costs which cannot be traceable to a particular department are
assumed as fixed. This might not be appropriate as some of the indirect costs vary with the level of the
activity. Another problem with this method is RVU for the whole department will remain same and
hence might result in the overcharging of simple procedures and under charging of the complicated
procedures. As pointed in the case the cost of cleft palate patients whose treatment goes for more than
18 months, 40% of the costs will incurred in the first few days but the RVU approach spreads the costs
evenly throughout and results in under absorption.
Time Driven Activity Based Costing
Time driven ABC is a variant of activity based costing. This method is more suitable for a hospital
environment as it gives emphasis on time and it is very easy to implement and since in hospital most of
the profit centres perform similar kind of activity the method can be copied to the other department
easily. Implementation of the TDABC is much simpler compared to the implementation of traditional
ABC and the procedure followed is similar.
BCH decided to try this in two of its departments and started to map the clinical and administrative
activities. It also collected data from each and department on a per minute basis and also collected data
on patients entire life cycle and also foundout the over head absorption rate. To better implement the
TDABC the process map of all the process involved in the process are also prepared.



Comparison of RVU and TDABC for the Cast room
Orthopedic surgeon Plaster/ Cast
Technician
Ambulatory Service
Cost/Minute $7.00 $1.00 0.75

Long Lg Cast
Padding
Gore tex Petrie cast Club Foot
Cast
Personal
Cost
1.75+60=61.75 1.75+60+2.75
=64.50
1.75+103.5=105.25 182+47=229
Cost of
Materials
44.70 156.10 94.10 10.40*3 =
31.2
Indirect
Cost
57.48 84.294 107.64 140.50
Total Cost 163.93 304.59 307 364.7
Margin 202.17 377.91 -180.30 818.3
Current
Price
366 682.50 126.70 1183


Cost and Margin under RVU (Exhibit 12)
Long Lg Cast
Padding
Gore tex Petrie cast Club Foot
Cast
Total Cost 135.67 141.77 112.98 618.67
Margin 230.04 267.03 13.72 564.33
Current
Price
366 682.50 126.70 1183

The above analysis shows that petrie cast is underpriced compared to other treatment but this is not
revealed from the regular RVU analysis. Considering the simplicity of the TDABC and the ease of use it is
advised for the BCG to implement the TDABC as it will result in better cost allocation.