Part 4: Reimbursement of Costs…ALL Costs!
When nurses begin to learn about the difference between cost for an item and the total cost for everything involved in supplying the item they are often upset to learn that there indeed may be a charge of
$12 for a simple aspirin. Most see it as health care facilities having "marked up prices" when there are, in fact, the only way we can cover other costs associated with providing care for which we cannot be reimbursed.
What we do when we develop charges is try to determine all the costs associated with the service or item, and there are many. We then develop a charge consistent with the total amount. Thus, these are not inflated charges, but rather a reasonably accurate determination of all associated costs.
We are often reimbursed an amount less than what we charge and there are Generally Accepted Accounting Principles (GAAP) that determine how we handle the difference. Typically this is done through including a contractual allowance that is a deduction from the gross revenue we "book" or enter into the ledger. If we enter only the amount we receive, we will not capture the actual charges and not accurately reflect the discount we gave to the payer.
The only way we collect money in our facilities is to charge insurers for the actual care we provide to the patients who are their members. This includes tests, treatments, etc. But far more is included in the costs of running the facility than just those elements that are part of the direct care of patients.
For example, how do you think we are paid for the laundry we use in patient care and other activities? How do we get paid for the security guard who ensures staff and visitor safety? What about the people in payroll who process our paychecks? And the medical records people who maintain patient records even after they are discharged? Do you think we bill the insurer for these services? Do you think they would pay? Do we just absorb all these costs?
When considering accruals for all costs, we must also add to the cost of supplies a portion of the salary for the person who orders them, the individual who unloads them from the truck and places them in storage, and the person who delivers them to the unit. Then there is the cost of maintaining the inventory so the hospital never runs out of them and the cost of the people who review the bills for them, process the account payable, input the payment information into the general ledger, and someone to actually cut the check and put it into an envelope and mail it! Oh yes, and the postage...
While we add up the costs of doing business, we also have significant economies of scale that allow these costs to be spread over many items and payers so that, if we run our operations efficiently, the average of what we are paid covers our actual costs...and a little more. For example, if we are paid $25 for a bag of IV fluid, that may actually include $5 for the cost of the nurse who hangs it. But she is also hanging several other IV bags for several other patients whose payers are also paying $5 for it. In the end, we make enough from the volume of payers to cover the cost of both the IV fluid as well as the nurse. If you add to that the payers who pay, say $55, there is additional revenue to cover the cost of the nurse.
Ultimately, payers must reimburse us for the cost of all supplies and operational costs. This can be done as when we charge for each item as it is used, when we bundle charges and include it in the cost of a procedure, or it may be included in a per diem charge for a day's care (or another unit of service). Inevitably, everything we use for patient care must somehow be reimbursed to us or we are giving it away and, even for an item as inexpensive as a needle lock syringe, it would undermine our success as a business.
We are often using supplies that, individually, cost very little. But multiply cost by volume and a $1 item becomes $1000 a month, conservatively. We are constantly looking for ways to maximize our reimbursement while cutting costs. It is clear we do not even get reimbursed for all the actual costs of the care we provide, let alone achieve the surplus of funds that might be called a profit. What happens is that those patients with better insurance, for whom we get better reimbursement, carry the burden of the patients for whom we are paid less than the cost of their care.