What is micro-costing?
Micro-costing is a method to determine and document the costs of providing a procedure, service, or an episode of care. Micro-costing is a method that measures cost in terms of direct costs, indirect costs, variable costs, benefits, and overhead costs. Using it accurately allows you to figure out the real costs of the procedures you are providing which is helpful because only by knowing all of the costs that go into each procedure can you truly understand the cost of your operations. For our purposes, I’ll focus on applying this methodology for respiratory care procedures as a means of identifying, comparing, and trending costs of our services.
What are the components of micro-costing?
Direct expenses are those that are utilized during the provision of the procedure. These are posted to your RT budget and are those that you have the most control over. Direct expenses include human resources, supplies, medical gases, and depreciation of capital equipment. Let’s explore each of these direct costs with regard to identifying each one, understanding the various elements or options of each, and identifying what the RT leader can do to optimize performance of their department.
Referred to in the accounting world as ‘labor’, we use the term ‘human resources’ to reinforce that the RTs in our department are the most valuable resource in our departments to achieving high quality, patient-centric, and cost-effective care. Human resources are typically divided into employed staff, agency staff, and various types of premium pay.
What both RT leaders, executives, and consultants will want to see is how effective and efficient the RT leader is when creating a base staffing model and how cost-effective the model is at flexing upwards and downwards to match patient demand for services. Here is how to create a good model:
Rather than count the number of employees as a ‘head count’, it is more useful to account for them in terms of full time equivalents (FTEs) or in terms of worked clinical hours. While some use FTEs for productivity and costing, I’ll show you how this can be both confusing and erroneous because of the different ways in which we count FTEs. . For RTs working 8 hours/shift, 5 shifts per week, this 40 hour work week for 52 weeks of the year would equate to 2080 hours worked annually. Thus, with this schedule in which the RT works 2080 hours in a calendar year, then she would equate to 1.0 FTE. If the RT works in a part-time role and works 1040 hours in a year, she would be considered 0.5 FTE. For those departments utilizing 3 12-hour shifts/week, the annual worked hours would be 1872 hours. What can be confusing when comparing FTEs is not knowing whether the RT is working 2080 or 1872 hours. Thus, it’s critically important for internal productivity purposes, cost analyses, and even more so when comparing or benchmarking against other RT departments to understand how each department’s defines an FTE.
I suggest totally avoiding the use of FTEs and instead count clinical worked RT hours for productivity and costing. To obtain the labor cost for worked RT clinical time, it’s important that the RT leader document and track the following in terms of labor cost: regular time, premium time (e.g. overtime, weekend option), contract labor, and bonus.
In addition to the hourly wage, you’ll need to count shift differential, weekend option (if paid at a higher rate), holiday rate, overtime rate, and any bonus program. In addition to understanding the direct labor cost, the RT leader will have a valuable tool to track the utilization of these additional pay categories and can utilize this information to either validate their use or restructure the clinical staffing schedule to achieve lower labor cost.
Let’s define each of these:
- Regular hours: These are those hours budgeted as well as any additional regular hours worked by the RT that are within the regular pay category. For example, if the RT is budgeted to work 36 hours next week, but they work an additional 4 hours to help cover a call-in, their total worked regular pay hours would be 40 (i.e. 36 budgeted + 4 additional).
- Premium hours: These higher pay categories include holiday pay, overtime and weekend option (i.e. if different pay rate).
- Bonus: Given the need to flex clinical staffing to patient demand, we’re seeing increased use of bonus pay. Bonus pay can be provided based upon clinical hours worked, shifts, pay period, schedule hours or other means.
- Agency staff: Most leaders attempt to avoid the use of agency staff because of the significantly higher cost. However, contract labor can be useful for those departments that have dramatically different patient demand (e.g. winter season, vacation season, “snow-birds”). Another indication for contract labor is to fill gaps in staffing secondary to both abrupt and sustained loss of clinical staff and inability to fill slots in a timely manner (e.g. maternity leave, short term medical leave). In some organizations, contract labor is paid out of a different HR system, so the RT leader must ensure that this information is captured and added to the clinical labor costs in their department system.
- On-call: As a means of addressing acute changes in patient demand, optimizing staffing, having specialists available for select procedures, and other unanticipated situations, RT leaders utilize on-call systems. In order to be cost-effective, each instance of accessing the on-call person, should be documented and analyzed by the RT leader to understand the clinical need, cost of on-call, and paid clinical time after called in. By doing so, some RT leaders have justified adding an RT to a shift because it is more cost-effective. Conversely, by examining the use of on-call with respect to having an extra RT on the shift, some RT leaders have justified on-call because it is less expensive.
Employee benefit costs are those of providing employees with benefits, such as health insurance, paid time off, retirement plans, and others. There is great variation in the cost of employee benefits between organization, and ranges between 25-40% of salary costs. In simple terms, for every dollar of salary paid directly to employees, your organizations pays an additional $0.25 to $0.40 in benefits costs. While the RT leader doesn’t set the benefit levels and costs, it is important that she understands the various components of benefit plans so that she can integrate this into the staffing model. For example, if an RT vacancy occurs for a full time FTE, there are several options with regard to cost and flexibility. In many organizations, part time employees receive fewer benefits. Thus, it may be more cost effective to hire two RTs to share the full-time position rather than one full time RT. Additionally, two part-time RTs provide greater flexibility in staffing to patient demand. It’s important for the RT leader to understand that employee benefits are an important cost of delivering care, but also that these are not part of the formula to determine productivity.
The category of supply expenses include supplies that are consumed within the delivery of a procedure or service. The supply item can be single use (e.g. ABG kit to obtain an arterial blood sample) or multiple use (e.g. small volume nebulizer utilized for the entire length of stay in the acute care hospital). While acquisition cost (i.e. the purchase price of the supply item) is important, the RT leader must examine the clinical value and life-cycle of the supply item and integrate this into the purchase decision.
Here’s an example: Small volume nebulizer (SVN) A costs $2, which is significantly less than SVN B, which costs $4. However, SVN A must be replaced daily and delivers half of the medication as SVN B, which does not require replacement during the hospitalization. Thus, the cost of SVN A for a 5-day hospitalization is $20, versus the $4 for SVN B.
The majority of respiratory medications delivered by RTs include inhalers and aerosolized solutions, but we should note that some RTs are involved in delivering other agents. For our purposes, I’ll focus on costing out respiratory procedures for inhalers and SVN-delivered aerosolized solutions to spontaneously breathing patients. In terms of cost of delivering these medications, one needs to include the medication, diluent, medical gas, delivery device, and procedure time. For inhalers (i.e. metered dose inhalers, dry powder inhalers, and soft mist inhalers), the RT leader must include the cost of the inhaler(s), the valved holding chamber (VHC) if appropriate, the RT clinician time required to deliver the breathing treatment, and documentation time. For SVNs, the costs would include the SVN cost (see note above for SVN life-cycle), the medication, diluent, documentation time, and the RT clinician time required to deliver the breathing treatment, noting that SVNs can vary significantly in the time required to deliver the desired dose. Whether the respiratory medications are charged to the RT department or charged to the pharmacy department, the medication costs must be accounted for to ensure that all costs are included.
Depreciated capital equipment
For those services that include capital equipment (e.g. Mechanical ventilator, ABG machine etc.), the traditional approach to deriving the cost for a procedure is to take the life-cycle time of the capital device and divide it into the purchase price and associated maintenance and preventive maintenance to ensure proper equipment operation.
Let’s take a simple example:
A mechanical ventilator is purchased for $40,000 and is projected to provide clinical usage for 5 years. For this simple example, we’ll assume that the ventilator is in continuous operation every day during this 5 year period. Thus, the cost per patient/day would be as follows below. Please note that preventive maintenance, repairs, electronic updates, circuits, humidification system, sterile water etc. would be costed out as supply items, pharmacy, engineering/biomedical, etc.
- Acquisition price: $40,000
- Usage = 1 ventilated patient/day X 365 days/year X 5 years
- Cost/patient/ventilated day = $21.92
Indirect expenses are the costs incurred in the daily operation of a business. Indirect expenses are allocated by the finance professionals to each department based upon various formulas (e.g. square footage, FTEs etc.). Because of this, the RT leader has little control over managing these costs. These include the costs of other essential departments and operations that are not clinical services but are essential to support clinical service delivery (e.g. human resources, maintenance, engineering, business office, etc.). While this cost allocation is outside of the control of the RT leader, it is still important to know this information so that it is not utilized in any way to determine clinical staff productivity. Additionally, since there is wide variation in cost allocation between hospitals, the RT leader should understand the allocation methodology within their organization so that any discussions around comparing total costs of operations between two RT departments is explainable and not included in any productivity analyses.
For the RT leader, it is critical to understand how cost accounting in done in your hospital and how it compares to other hospitals. Additionally, in comparing the cost of two delivery methods, such as SVN versus inhalers, it’s essential to include all components of the cost, particularly RT clinician time and life-cycle cost in order to accurately determine the procedure cost. As RT leaders, we need to communicate what services we provide, the clinical validation of each service, and the documented need to have RTs deliver the service and do so in a cost-effective manner. Finally, it’s important to differentiate clinical efficacy, cost/procedure, and productivity so that cost analysis is part of the equation but not the only driving factor in delivering high quality, patient-centric, and cost-effective care.
Meet The Expert
Garry W. Kauffman, RRT, FAARC, MPA, FACHE
Garry W. Kauffman, RRT, FAARC, MPA, FACHE is a registered respiratory therapist with over 40 years of experience. Garry was selected for the AARC Fellow (FAARC) based upon his contributions to the profession at the national level.
Garry received his MPA from The Pennsylvania State University, and achieved the distinction of board certification in health care (FACHE) from the American College of Healthcare Executives.
Beginning his career as a bedside clinician, Garry has served in clinical, educational, and administrative roles in a variety of healthcare organizations and venues from short-term acute carehospitals, physician practice, ambulatory services, and long-term acute care hospitals. He formedKauffman Consulting, LLC and is the manager of this health care consulting company.
Garry is recognized for numerous journal publications, author/co-author of respiratory care textbook chapters, and as a frequent speaker at the state and national level. Garry has served his profession at the district, state, and national level where he has served in the AARC House of Delegates, AARC Board of Directors, and AARC President. Garry has served his profession in various volunteer roles as the AARC Chartered Affiliate Consultant; AARC Benchmarking Committee; AARC Advanced Practice RT Task Force; AARC Strategic Planning Committee, Respiratory Care author/reviewer; AARCTimes author/reviewer, AARC Uniform Reporting Manual, and ARCF Education Recognition Award Judge, among others.
Garry’s focus continues to be on communicating the value of respiratory care services delivered by Respiratory Therapists by connecting the science of respiratory care, documenting outcomes secondary to our services, and communicating our value to key stakeholders in the health care system.
Garry Kaufmann is a paid consultant of Vapotherm.