Calculating the Cost of Length of Stay
The Centers for Medicare & Medicaid Services (CMS) has changed the value-based purchasing metrics for inpatient care. In 2015, there was increased emphasis on outcomes and efficiency and a smaller focus on clinical and patient experience outcomes. For 2016 emphasis on clinical outcomes has increased to 40 percent and the efficiency measure now makes up 25 percent of the score. Proposed future changes will keep the efficiency metric at 25 percent and continue an ever-evolving focus on clinical outcomes and patient safety. Successfully managing your patient flow will reduce length of stay (LOS) and can have a big financial impact on your performance with these clinically focused metrics.
Improving LOS directly improves your financial, operational and clinical outcomes by decreasing the costs of care for a patient, not only in facility expenses and supplies, but in staffing and premium pay. It can also improve outcomes by minimizing the risk of hospital-acquired conditions.
To measure improvement achieved through process changes intended to better manage LOS, it is important for your organization to use a consistent and accurate cost accounting approach to determine the components of your daily costs including: bed costs, ancillary testing and services, pharmacy and supplies as well as how those costs are measured.
There are many methods for measuring the cost of inpatient LOS improvements and this measurement should be customized to meet the needs of your individual organization. However, here are three more commonly used methods I have seen, ranging from conservative to more aggressive in their approach.
Options for Calculating Length of Stay Costs
“Room and board” is a conservative method for valuing LOS costs. This is a very basic valuation that is easy to explain and usually there isn’t a lot of disagreement from physicians and clinicians when determining what’s included in the cost. While this method will produce a value for patient LOS and can be used to measure reductions, it misses some major costs, especially those related to procedures.
“Total direct cost” is a more comprehensive valuation method. This method is also moderately easy to calculate and explain to physicians and clinicians. It captures all of the direct cost related to the patient’s stay. The concern with this method is that it captures front-end procedure and surgical costs that will still be incurred even when LOS is reduced.
“End of stay” is at the middle of the spectrum. I consider this option to be a happy medium. It captures the costs incurred towards the end of the stay, which are the costs most likely reduced as LOS drops. In this valuation method, an average direct cost of care incurred towards the end of the stay is used to calculate reductions.
From these primary approaches to valuing LOS reductions, there are many variations in use by organizations across the industry and they highlight the value of having an LOS oversight committee. Understanding the impact of reductions in LOS and improvements to the cost of providing care is an important step in determining where to invest limited resources and facilitating key stakeholders “buy-in”, enabling the process of change to occur. It will take some time to reach a consensus on methodology but it’s an important exercise to work through with the organization’s oversight committee.
Regardless of the method used, the key to success in valuing LOS improvements is determining a method for your organization and using it consistently over time to financially quantify improvements.