Revenue Cycle

Tip: Length of stay has a direct impact on your bottom line

Patient Financial Services Weekly Advisor, November 12, 2004

Length of stay (LOS) affects both cost and revenue and often has enormous implications to the institution's financial well-being.

To an average 250-bed hospital, a 0.1 decrease in length of stay will have a net positive impact on the bottom line of approximately $300,000 to $400,000. That is a 0.1 decrease - not a one-day decrease.

How can this be? The enormity of this impact-that a day savings in length of stay could be the difference between profit and loss-often comes as a shock to many hospital administrators and is almost incomprehensible to most physicians.

Length of stay affects the bottom line in three ways:

1. Direct variable cost. This is the cost that the hospital incurs due to the need to care for a patient who otherwise would not be in the hospital. While many hospital services are scalable, many, such as "hotel services" are not. Most hospitals estimate that this direct variable cost ranges from $275 to $400 per day. Some hospitals believe this number is higher due to the need to incur agency-nursing costs, which are significantly higher than employed nurses, in order to care for patients who could be safely discharged but are still inpatients.

2. Opportunity cost. This reflects the ability of the hospital to back fill empty beds with paying patients. This variable is most important if a hospital is on divert for even a small portion of every month - particularly during peak hours. The math is fairly simple. If a hospital in on divert for one day a month and has 15 admissions per day, then 15 admissions are lost. If the average admission generates $5,000 in revenue and $2,200 in contribution margin, then that day on divert costs $75,000 in revenue and $40,000 in contribution margin to the bottom line.

3. Uncompensated tests and procedures. This variable is difficult to quantify. It represents diagnostic tests (CAT scan, stress tests) and procedures (endoscopy, colonoscopy) that are done in an inpatient setting that could have been performed as outpatient tests. If the hospital is being reimbursed at a case rate, the hospital incurs the cost of performing the test and also loses the revenue that would have been generated from outpatient services. In the case of per diem contracts, the days of service these procedures are performed on are often not reimbursed due to a clinical denial or reimbursed at a lower level of care (skilled or subacute) due to a downgrade.

This tip was written by Joseph Zebrowitz, MD, executive vice president and senior medical director at Executive Health Resources in Drexel Hill, PA.

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