Persistent increases in healthcare costs make now an opportune time to consider how an emergency department charges for its visits.
The charges (and underlying costs) for visits to a hospital’s emergency department (ED) have been a subject of much debate regarding the merits of different cost-accounting approaches. Given the national concern with growing healthcare costs, it is now more important than ever to find a more appropriate way for an ED to structure its charges.
Currently, most EDs charge a per visit fee that varies depending on the patient’s diagnosis. A 2013 study found that the median charge for 10 selected outpatient conditions was $1,233, with a range of $740 (for an upper respiratory infection) to $3,347 (for a kidney stone). This method of calculation is appropriate in that it considers an ED’s variable costs such as supplies and medications. It is flawed, however, because it charges some patients for costs that have nothing to do with their diagnoses (i.e., the fixed costs associated with the ED’s readiness to serve an unknown number of patients).
Computing a visit’s cost (and thus arriving at a charge) is a complicated matter because an ED incurs three distinct kinds of costs:
- The fixed costs of being “ready to serve,” such as the depreciation on the ED’s space and equipment
- The step-function costs that are associated with the ED’s readiness to serve, mainly a portion of the salaries for physicians and nurses
- The variable costs for the visit itself, including the remaining portion of provider salaries and the costs of such consumables as blood products, pharmaceuticals, and medical supplies
If we consider only the last category, the cost for an ED visit would be modest, regardless of diagnosis. Most of the costs incurred by an ED are for its standby capacity (i.e., having space, technology, resources, and staff ready to serve an unknown number of patients arriving at an unknown time of the day or week).
From a financial perspective, these standby costs are “period costs;” that is, they are costs the ED incurs for a period of time independent of the number of patients treated. This issue becomes complicated when different levels of “readiness” are required for different days and times of the week.
By contrast, the variable costs and the portion of the step-function costs needed to treat a patient are “product costs,” which depend mainly on the patient’s condition. Some patients (such as those with a kidney stone) will require a complex (and costly) mix of consumables, nursing care, and physician time, while others (such as those with an upper respiratory infection) will require a less costly mix.
Although there are many ways to deal with these issues, the approaches used to handle similar situations elsewhere can be instructive. There are three approaches in particular that can be adapted for use in setting an ED’s charges.
Many public utility companies charge their customers a flat amount per month for access to their infrastructure, such as the water and sewer system or the electricity grid. The remainder of the customer’s bill is based on consumption, such as the gallons of water or kilowatts of electricity used.
A hospital could easily adapt this approach to ED billing, combining a flat fee for the ED’s standby capacity with an additional charge based on the provider time and consumables needed to treat the patient.
A somewhat tricky aspect of this approach is dividing personnel costs between the standby and treatment components. The standby amount would contain the ED’s estimate of the portion of each individual’s salary that reflected his or her availability to provide care. By contrast, the treatment portion would account for the time spent actually providing care. Dividing these costs would be a challenge, but an experienced ED manager could make a reasonable approximation.
The Impact of Using a Separate Standby Cost
The exhibit above provides a simplified example of the impact of using a separate standby cost rather than incorporating standby costs into a per visit rate. As it shows, when standby costs are a fixed amount per patient, the cost per patient increases by 27 percent for a minor diagnosis and falls by 10 percent for a more serious one.
Thus, when a reasonable basis of allocation is used for the standby costs, a visit for a minor ailment will have a lower total cost than when the ED uses a fixed amount of standby costs per visit. In effect, when the standby costs vary by patient or visit, they must be absorbed into the total per visit rate. As a result, patients who have high variable costs pay a higher share of the ED’s standby costs than do patients with low variable costs. Yet both categories of patients have equal access to the ED’s standby capacity.
A Standby Charge That Varies Based on Anticipated Demand
Companies such as Uber have different charges based on the day of the week and time of day that their services are requested. Airlines, hotels, and cruise companies also charge more during peak demand periods. An ED could take a similar approach with its standby charge. Under this scenario, the standby charge would vary by day of the week, and perhaps by time of the day, depending, in large measure, on the associated staffing requirements.
Hypothetical Example of Use of Standby Costs and Variable Costs in Computing an ED’s Charges
The exhibit above provides a hypothetical example of how such an approach might work. There are four aspects of the exhibit that are worth emphasizing. First, many standby costs are independent of the day of the week. For example, the amount of plantwide depreciation allocated to a hospital’s ED is the same per day regardless of the day. The same is true for depreciation on the ED’s furnishings and equipment and for its administrative costs.
Second, the standby costs for nurses and physicians are higher for Saturdays than for other days because of the need for greater staffing on Saturdays. The analysis could be made more sophisticated by assessing the standby costs required for each day of the week separately, and even for different times of the day.
Third, the amount of standby costs per patient depends on a combination of the anticipated volume for which the ED is staffed versus the actual number of patients who arrive. Using the hypothetical numbers in this exhibit, even though the total standby costs are higher on a Saturday, the standby costs per patient are lower, due to the greater number of patients seen on a Saturday. Clearly, these differences would change based on variations in standby costs and patient volumes, but the possibility nevertheless exists that the cost of a visit could be lower on a busy day than on one that is less busy.
Fourth, as was the case in the previous example, the variable costs per diagnosis are independent of the standby costs and do not vary based on when a patient is treated. They represent the consumables as well as the nursing and physician salaries associated with treating the patient. If we assume that the treatment of a patient with a particular diagnosis is about the same regardless of the day of week that he or she uses the ED, then there should be no differences in these costs from one day to the next.
The Use of Standardized Protocols for Variable Costs
The idea of protocols for inpatient care has been around since 1982. These protocols (sometimes called “clinical pathways” or “clinical guidelines”) are now used in many hospitals. An ED could use a similar approach. For example, the standard variable cost for an upper respiratory infection could be determined by having physicians and nurses determine the provider time and consumables needed to treat the average patient.
As with inpatient protocols, an ED’s clinical protocols would not need to be followed under all scenarios. A physician would have the authority to override the protocol if he or she determined that doing so was clinically appropriate.
When a protocol approach is followed, insurers and patients are charged the standard amount, rather than an amount based on the actual time spent or tests provided. An important point is that the protocol would be used only for the variable cost of consumables and the treatment portion of provider salaries.
With this approach, the ED team would establish protocols for the most common diagnoses. The result would be a standardized cost per diagnosis for the variable costs of providing care. As the exhibit below shows, the standby cost would be added to this amount to determine the full cost of the visit. This amount would then be increased by a percentage (here, 100 percent) to arrive at the charge.
Protocol Approach: Hypothetical Example of Use of Standby Costs and Variable Costs in Computing an ED’s Charges
A complicating factor with this approach is that not all patients who receive care in an ED will have only one diagnosis. For these patients, a time-and-materials approach is more appropriate. Nevertheless, the physician and nursing time, as well as the consumables used, would be for the variable costs only. The standby costs still would be separate.
Overall, an approach that charges separately for an ED’s standby costs and uses standardized protocols for its treatment costs would lead to a more precise way of charging patients and insurers for use of the ED. This approach would recognize (and account for) the fact that an ED’s standby costs are independent of a patient’s presenting condition and eventual diagnosis. Currently, because standby costs are embedded in a per visit rate, patients with relatively serious conditions subsidize those with less serious ones. A two-part charge coupled with standardized protocols for variable costs would move an ED toward a fairer approach to charging patients.
David W. Young, DBA is professor emeritus of the Health Sector Program at Boston University’s School of Management and president and CEO of The Crimson Group, Inc., Cambridge, Mass.