COST BENEFIT ANALYSIS OF MEDICAL LABORATORY TESTS

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Introduction:Management in clinical diagnostic fields are frequently involved in cost analysis of new procedures due to the constantly changing science and technology. Also due to the health care organization especially the diagnostic division being tightly regulated by accreditation and regulatory bodies bringing a new procedure in-house requires in depth analysis prior to an any decision being taken.

Cost Object:In a clinical laboratory in a small community hospital we currently refer specimens for free PSA (prostatic specific antigen) to a large commercial laboratory. A prominent physician on staff has requested that us to start doing the test in-house to improve turnaround time. To do this, we would need to offer a total PSA and a free PSA together. We currently perform the total PSA in-house. The physician states that if he can have timely results for the paired test, he estimates that it will eliminate the need to perform approximately 60 prostate biopsies a year.

Free PSA (cost activity / object) is available on equipment that we currently use under a reagent rental agreement (we pay only for reagents, as the cost of the equipment is rolled into the cost of the reagents). The vendor has quoted a price of $8.00 per test (not $8.00 per billable test) for free PSA reagents.

Issues to consider in evaluating the profitability of bringing the test ( Free PSA ) in house:1.Effect on direct cost.

2.Possible increase in indirect costs3.Re-evaluation of equipment costs(capital) may be needed4.Rate of re-imbursement from provincial gov. or Finance Dept.

5.Possible Intangibles to be factored into the decision6.Pricing the test7.Is it worth bringing in?Background:In the laboratory, managerial accounting includes activities such as micro-costing (the process of determining the actual cost of performing a billable procedure), performing analyses of services and equipment in order to evaluate their profitability, and budgeting (the compilation of expected expenses and revenue into a financial plan).

A billable procedure is a test that is billed to a payer. The payer may be an individual or a private or government insurance. The charge for a billable procedure includes all the expenses (costs) incurred in generating the test result, including the cost of collecting and processing the specimen, performing the test (reagents, consumables, laboratory and equipment costs), and numerous other costs plus some measure of profit. A nonbillable procedure contributes to the generation of a billable test result, but which is not directly reimbursable. Examples of nonbillable procedures include standards, quality control specimens and repeats (repeat testing in cases of questionable results).

Costing Model:The method used for determining the actual cost to perform a billable procedure used commonly by laboratories is to perform a micro-cost analysis. Micro-costing accounts for all expenses associated with performing a given test including reagents, consumables, laboratory costs, and reporting costs and includes pre-analytical, analytical and post-analytical expenses.

Direct Costs:Direct expense cost includes all costs directly related to performing a test. It includes the reagents, consumables, labor and benefits, etc. Examples of direct costs are shown in Table 1.

Table 1: Examples of Direct CostsSpecimen collection consumables (preps, Vacutainers, needles, etc)Processing consumables (tubes, caps, transfer pipets, labels, etc.

ReagentsCalibratorsControlsReagents, stains, etc.

Analytical consumables (sample cups, tips, media plates, etc.)Proficiency testing materialsLaborCollectionsAccessioningAnalysisQCReportingOtherEquipment costsMonthly lease/rental costDepreciation (purchases only)MaintenanceOngoing/in-house/daily/weekly/monthlyContractedOffice suppliesReporting costs (fax, paper, print-heads, etc.

Direct costs are relatively easy to determine and should be calculated using a line-by-line approach. For...
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