Physicians and their managers and administrators can use this easy to complete worksheet to calculate cost for each CPT code and administrative activity involved in every day practice operations.
Each and every day, providers negotiate against themselves by not knowing exactly what their costs are to comply with contract terms and care for patients. They take the easy way and negotiate managed care payment rates against some arbitrary benchmark such as Medicare or other managed care contract reimbursement without taking into consideration the revenue erosion that occurs with unpaid deductibles, unpaid copayments, retroactive chargebacks, offsets, and refund requests or non-payment, or special duties imposed exclusively by one plan and not others in their portfolios.
When contracting for reimbursement, it is essential to be able to calculate the cost of a service so that you can be sure that the contracted reimbursement is adequate. A unit cost analysis can reliably yield this information and is a valuable tool for any family practice seeking to improve its management, efficiency and planning.
By using an effective but realistic approach based on the six steps listed in this article, even the most resource-poor organizations can design and conduct a unit cost analysis that will help managers make the sound decisions needed not only to survive – but to succeed – within this environment.
This helpful worksheet will take you through the calculation step by step:
| Steps | Notes | Calculations |
| Define the Unit of Service | Adult Eye Exam | |
| Determine the number of units of service provided that are in the time period: | 2000 exams in fiscal year 2007 | |
| Physician Cost: | Salary and benefits of $150,000 per year / 50 work weeks per year / 40 work hours per week / 60 minutes per hour = $1.25 per minute x 15 minutes required | $18.75 |
| Nurse Cost: | Salary and benefits of $45,000 per year / 50 work weeks per year / 40 work hours per week / 60 minutes per hour = $.375 per minute x 10 minutes required | +3.75 |
| Receptionist Cost | Salary and benefits of $25,000 per year / 50 work weeks per year / 40 work hours per week / 60 minutes per hour = $.208 per minute x 5 minutes required | +1.04 |
| Disposable resources: | (from supply catalog) | +$5.50 |
| Other Equipment | Per typical charges | +15.00 |
| Other | ||
| TOTAL direct costs per unit of service | $44.04 | |
| Calculate the Indirect Costs | ||
| Rent, utilities, etc. | 60,000 / year | |
| Administrative Salaries and benefits | 50,000 / year | |
| Insurance | 90,000 / year | |
| Other | ||
| TOTAL | $200,000 / year | |
| Basis of Allocation | Percent of total visits | |
| Allocation rate | 20% of patient visits in FY 2007 were for Adult Eye Exams | X .20 |
| TOTAL indirect costs per unit of service | $20.00 | |
| Calculate depreciation and the value of donated goods and services: | ||
| Initial cost of equipment associated with the service | $50,000 | |
| Resale value at the end of useful life | -$10,000 | |
| TOTAL | $40,000 | |
| Estimated years the practice will use the equipment | x/10 years | |
| Basis of allocation | Ratio of total visits | |
| Allocation rate | 20% of patient visits in FY2007 were for adult eye exams | X .20 |
| Number of units of service provided | From Step 2 above | x/2,000 |
| TOTAL depreciation per unit of service: | $.40 | |
| Donated goods | ||
| Volunteer time | ||
| TOTAL depreciation and donated goods and services per unit of service | $.40 | |
| Calculate the Unit Cost: | ||
| Total from Step 3 | $44.04 | |
| Total from step 4 | $20.00 | |
| Total from step 5 | $.40 | |
| TOTAL cost per unit of Service | $64.44 |
