How much does excess inpatient capacity really cost?

Excess inpatient capacity is a major problem for the healthcare industry, according to a survey conducted by the AmHS Institute.a There are about 450,000 excess beds in the United States.

This excess capacity leaves healthcare systems with two choices-either close down inpatient facilities or fill beds by reducing prices for inpatient care.

Although inpatient care prices are market-driven and do not depend on the actual costs of delivering care, some healthcare systems attempt to fill beds by reducing their prices. These systems need reliable cost information to determine whether this strategy is feasible.

However, many healthcare systems may make this strategic decision based on a flawed cost allocation approach that does not accurately establish the cost of providing one patient-day of inpatient care. For example, systems that rely on estimates of expected usage to determine the fixed cost per patient-day divide budgeted yearly fixed inpatient costs (eg, depreciation on buildings, property taxes, hospital administration costs) by the number of patient-days of inpatient care expected to be provided. The practical consequence of using expected usage is that as expected usage declines, the fixed cost per patient-day increases-even when fixed inpatient and medical technology costs remain constant. Current healthcare accounting practices generally recommend including fixed inpatient costs in patient charges; thus, inpatient charges would have to be increased when the fixed cost per patient-day increases.

The use of expected usage cost accounting recently has been questioned.Ll In the context of the healthcare industry, expected usage of inpatient care units should not be used because inpatient costs are capacity costs. The fixed cost per patient-day thus should be determined on a practical capacity basis by dividing the budgeted yearly fixed inpatient costs by the maximum feasible patient-days of inpatient care that can be provided in a year, a number that remains constant in the short run. Therefore, assuming that fixed inpatient and medical technology costs remain constant, the fixed costs per patient-day would not change.

Even if fixed inpatient and medical technology costs were to increase moderately, the fixed costs per patientday would be much more stable than the corresponding rates derived by using expected usage cost accounting. In addition, a stable fixed cost per patient-day would allow for the more accurate calculation of unused inpatient capacity costs...