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Massachusetts Eye and Ear Infirmary
Author(s):
Young, David W.
O'Brien, Patricia
Functional Area(s):
   Management Accounting
Setting(s):
   Healthcare Management
Difficulty Level: Beginner
Pages: 11
Teaching Note: Available. 
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First Page and the Assignment Questions:
Charles Wood, Executive Director of the Massachusetts Eye and Ear Infirmary (MEEI), was reviewing the results of a new cost accounting system which the hospital had installed in 1976. The new system contained several innovative features, and the past year had been a trial period for it. Mr. Wood was now interested in persuading Medicare and Medicaid to accept the system for reimbursement; Blue Cross had adopted it at the outset of the pilot program. Central to his thinking were two issues: (1) whether the system actually represented a more accurate picture of hospital costs, as proponents of the system claimed; and (2) what impact the system was having on cost containment in the hospital. Mr. Wood was also concerned about transferring the system to less specialized hospitals, since his preliminary feedback from the industry indicated that some individuals questioned whether the system was applicable to a general hospital.

BACKGROUND

In 1974, the MEEI celebrated its 150th anniversary. During the century and a half from its inception in 1824 as a free clinic located on the second floor of Scollay's Building in downtown Boston, it had undertaken a wide variety of innovative and farsighted activities. By 1977, the independent, nonprofit hospital was admitting 11,273 patients and accommodating 80,000 outpatient visits per year. More striking was the increased demand on the hospital's emergency care. In a decade, emergency visits surged from 10,000 per year to nearly 36,000. (Exhibit 1 provides patient-statistic details for 1977.) In addition, the hospital coordinated numerous community outreach programs, including screening clinics to detect chronic disorders, civic group lectures, and the preparation of health care education booklets.

In 1977, a total of 1,100 employees staffed the hospital's three daily shifts. There were 136 eye specialists and 67 ear, nose, and throat specialists on the hospital's staff, and 40 residents and 50 clinical and research fellows received specialty training each year. The hospital's income statement is summarized in Exhibit 2.

Dissatisfied with the usual per diem cost accounting methods used in hospitals across the country, Mr. Wood became convinced of the need for an accounting system that would allow hospitals to measure the cost of health care more accurately. He contended that the historical approach to structuring hospital rates was clumsy and outmoded. Because it failed to identify the components of patient costs, it placed an unfair burden on the patients or payers who could least afford it. According to Mr. Wood, the present method was leading hospitals into ineffective and cumbersome accounting methods, at the expense of the public.

For years I've been trying to improve the conceptual basis for identifying the cost of hospital care. Back in the 1950s, I

Assignment

1.    What problems arose with the old per-diem cost system? How would the new split-cost accounting system remedy these problems? How might it affect patient mix?

2.    What would be the difference between the budgeted 1977 routine care cost of a cataract operation under the old accounting method and under the split-cost accounting system? What would the difference be for a tonsillectomy/adenoidectomy procedure, a laryngectomy and radical neck dissection? What accounts for the differences? Are they significant?

3.    Using the hypothetical data given by Ms. Arndt, how could a hospital under a per diem reimbursement lose revenue and how much revenue would it lose?

4.    How might the MEEI administrators use the information from the split-cost accounting system?

5.    How might a split-cost type system be implemented at a less specialized hospital? What kinds of implementation problems do you foresee and how would you avoid them? What importance or relevance do you attach to the distinction between procedures and diagnoses? What bearing does this distinction have on the transferability of the MEEI system?