OBJECTIVES: Most published analysis look at charges from a payor's perspective. However, for the hospital perspective, without the actual cost, it is difficult to perform a cost-avoidance analysis to know what costs the hospital saves by avoiding admissions, procedures, and ultimately the cost of treating specific diseases or adverse events. A technique is needed to determine the hospital cost based on allocation of overhead.

METHODS: A model for the allocation of hospital overhead was developed. After first calculating variable overhead, it was allocated to each department that provided clinical services. Indirect variable overhead was allocated based on various scenarios including square footage, revenue, and number of employees. Direct overhead was allocated by department to procedures based on volume as defined by number of procedures, patient-days or admissions, depending on what was most appropriate. Utilization of the resources was then tracked through the patient's bill (i.e. time spent in ICU or PACU, number of days stay). Patients with specific treatments or diseases were then used to determine the average number of resources used, and then the variable overhead costs plus drug and supply costs were assigned to these resources and aggregated.

RESULTS: The method was able to successfully determine the actual variable cost for resources used from the hospital perspective and then determine with regularity and consistency the cost to treat specific diseases and side effects. A database was developed for use in future analyses of other diseases to enable better evaluation of the consequences of different treatments. When performing cost-avoidance analysis, the hospital was then able to more accurately determine the actual costs avoided from an intervention or from an episode prevented.

CONCLUSIONS: From the hospital perspective, once the costs per resource are calculated, this database can then be used for multiple types of evaluation throughout the hospital.