Charging Appropriately for Emergency Department Visits

Mini Review

Austin Emerg Med. 2016; 2(7): 1038.

# Charging Appropriately for Emergency Department Visits

David W. Young *

Professor Emeritus, Health Sector Management Program, Boston University School of Management and President and CEO, the Crimson Group, Inc., USA

*Corresponding author: David W. Young , Professor Emeritus, Health Sector Management Program, Boston University School of Management and President and CEO, The Crimson Group, Inc., USA

Received: July 25, 2016; Accepted: August 22, 2016; Published: August 23, 2016

## Abstract

An ongoing debate in health care concerns the charges (and underlying costs) for visits to a hospital’s emergency department (ED). Given the current concern with growing healthcare costs, it is an opportune time to look at a more appropriate way for an ED to structure its charges.

Computing a visit’s cost (and thus arriving at a charge) is a complicated matter. This is because there are three kinds of costs an ED incurs: (1) the fixed costs of being “ready to serve” such as the depreciation on the ED’s space and equipment, (2) some “step-function” costs that also are associated with the ED’s readiness to serve, mainly a portion of the salaries for physicians and nurses and (3) the variable costs for the visit itself, which include the remaining portion of provider salaries as well as such consumables as blood products, pharmaceuticals, and medical supplies.

It would not be difficult for an ED to develop an approach that is similar to one used in many corporations for inter-company sales, and in most public utilities. With this approach, there would be a two-part charge: a flat charge for the ED’s stand-by capacity, which would be the same for each visit regardless of the patient’s presenting condition or discharge diagnosis; and a variable charge, which would be based on the actual services provided.

Overall, this approach would lead to a fairer and more precise way of charging patients and insurers for use of the ED. In particular, it recognizes (and accounts for) the fact that an ED’s stand-by costs are independent of a patient’s presenting condition and eventual diagnosis. Currently, because stand-by costs are embedded in a per-visit rate, patients with relatively minor conditions are subsidizing those with more complex ones. A two-part charge would change this and move an ED toward a fairer approach to charging patients.

Keywords: Health care costs; Per-visit charge; Fixed costs; Stand-by costs; Two-part charge; Cross-subsidization

## Introduction

An ongoing debate in health care concerns the charges (and underlying costs) for visits to a hospital’s emergency department (ED). The debate takes on increasing importance now that the Affordable Care Act (ACA) has increased access for 20 million more Americans. Previously, some of these individuals used the ED even though they had no insurance, but others did not unless their health was in serious jeopardy. These latter individuals now can be expected to use the ED for conditions that are serious but not life-threatening. Given the current concern with growing healthcare costs, it is an opportune time to look at a more appropriate way for an ED to structure its charges.

Currently, EDs charge a per-visit fee that varies depending on the services provided. In one study, the median charge for ten outpatient conditions was $1,233, with a range of$740 (for an upper respiratory infection) to $3,347 (for a kidney stone) [1]. Computing a visit’s cost (and thus arriving at a charge) is a complicated matter. This is because there are three kinds of costs an ED incurs: (1) the fixed costs of being “ready to serve” such as the depreciation on the ED’s space and equipment, (2) some “stepfunction” costs that also are associated with the ED’s readiness to serve, mainly a portion of the salaries for physicians and nurses, (1) and (3) the variable costs for the visit itself, which include the remaining portion of provider salaries as well as 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 whether it were for an upper respiratory infection or a kidney stone. Most of the costs incurred by an ED are for its stand-by capacity: having space, technology, and staff ready to serve an unpredictable number of patients, needing an unpredictable mix of resources, at an unpredictable day of the week, and at an unpredictable time of the day. From a financial perspective, these stand-by costs are “period costs” that is, they are costs the ED incurs for a period of time independent of the number of patients actually treated [2]. This issue becomes complicated when different levels of “readiness” are required at different times of the week. By contrast, the variable costs and the portion of the stepfunction costs needed to treat a patient are “product costs”, ones that will vary depending 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 URI) will require a less costly mix. While there is no “right” way to deal with these issues, the approaches used to deal with similar problems in other industries can be instructive. In particular there are three complementary approaches that can be adapted for use in an ED. ## Approach 1: Two-Part Charge Many companies, in setting their transfer prices (i.e., the price that one division charges another for intra-company sales), use a twopart charge [3]. One part is a fixed amount, sometimes on a monthly or quarterly basis, that the consuming division pays for access to the selling division’s capacity. The other part is a variable amount based on the variable and step-function costs associated with the specific goods and/or services provided. In effect, the fixed charge represents the stand-by costs. In health care, this idea has been discussed in the context of a large integrated delivery system [4]. In a similar fashion, many public utility companies charge their customers a flat amount per month for access to, say, the water and sewer system or the electricity grid. The remainder of the bill to the customer is based on the actual use of the service, such as the gallons of water or kilowatts of electricity. 1 Step-function costs are costs that increase in lumps (or steps) as volume changes. They are distinct from variable costs (which increase in a linear fashion with increases in volume) and fixed costs (which do not change over a large range of volume). It would not be difficult for an ED to develop a similar approach. In this case, the amount of the flat charge would be for the ED’s standby capacity. The stand-by charge would be the same for each visit regardless of the patient’s presenting condition or discharge diagnosis. The other portion of the charge would be based on the actual services provided, and would reflect provider time and consumables. A somewhat tricky aspect of this approach is dividing personnel costs into their fixed and variable components. The fixed (stand-by) amount would need to 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 variable portion would account for the time spent actually providing care. Clearly, the methodology for dividing costs between these two categories would not be perfect, but with a little effort, an ED manager could provide a reasonable approximation. Exhibit 1 provides a simplified example of the impact of using a separate stand-by cost rather incorporating stand-by costs into a pervisit rate. As it shows, when stand-by costs are included in the visit rate, and when consumables are used as the basis of allocation, the amount of stand-by costs for a visit requiring relatively low variable costs ($125) is about 40 percent less than when a separate stand-by cost figure is used ($12 versus$31). By contrast, for a visit requiring relatively high variable costs ($350), the stand-by costs included in the rate are over 200 percent greater ($69 versus \$31).

Citation: Young DW. Charging Appropriately for Emergency Department Visits. Austin Emerg Med. 2016; 2(7): 1038. ISSN : 2473-0653