The Hospital for Sick Children, Toronto Department of Paediatric Laboratory Medicine (A) Beverley Conquest, Controller, Diagnostic

& Information Services, The Hospital for Sick Children, Toronto Brian Mackie, Financial Operations Director, DPLM, The Hospital for Sick Children, Toronto Connie Reed, Senior Lecturer, Accounting, The Joseph L. Rotman School of Management, University of Toronto Sick Kids provides leading-edge healthcare, teaches the next generation of medical leaders, and produces medical research that has helped millions. Every year thousands of children travel to Toronto for treatment unavailable elsewhere in Canada. Healthcare operations are largely funded by the Ontario Ministry of Health and LongTerm Care. Funding is provided on a global basis and does not vary as patient volume and/or complexity change. This presents problems. Paradoxically, the better Sick Kids is able to fulfil its mandate of making sick kids better, and the more the science of medicine improves, the more its healthcare costs increase. Each year efforts are made to maintain, contain, or reduce operating costs without negatively impacting the standard of care provided to an increasingly complex patient population. Support costs, like those of the Department of Paediatric Laboratory Medicine (DPLM), are under escalating scrutiny. The use of Management Information System (MIS) guidelines for coding financial transactions has been government mandated for several years. This enables the Ministry of Health to compare results of all institutions. DPLM does not score well in comparison with laboratories of other institutions due to the breadth of the test menu, the high percentage of relatively low-volume, but complex tests, and small-volume samples1. DPLM ended the prior fiscal year over budget on supplies by hundreds of thousands of dollars. While test volumes were higher than anticipated, their increase was not as great as the increase in the cost of supplies. DPLM needs a way to address or justify these variances. The calculated cost-per-test in DPLM is inflated by the very nature of Sick Kids being a teaching and academic health sciences centre. Staff time was spent not just on testing but also teaching, training, research, and test development.
1

Small-volume sample a sample which is smaller in volume than the volume required to perform the required test(s); dilution of these samples is required to process them

Copyright ICAO/Rotman Centre for Innovation in Accounting Education (CIAE). This material was prepared with the support of the CIAE. It may not be used or reproduced without the written consent of the CIAE (ciae@rotman.utoronto.ca). Helpful discussions with Alexander Dyck and Hai Lu are greatly appreciated.

Also, the fact that there are two of most pieces of equipment in DPLM increases the cost for some tests. This duplication is necessary for back up purposes. If a piece of equipment fails, the other is available immediately and little time is lost in providing the results of tests. The back up equipment may never be used. In the summer of 2001, Brian Mackie, Financial Operations Director, DPLM, asked Beverley Conquest, Controller, Diagnostic & Information Services, Bonnie Reib, Managing Director, DPLM, and the Team Leaders (see Appendix 1: DPLM Organization Structure) to attend a meeting to discuss costs. Brian commenced the meeting, The accurate calculation of costs-by-test in DPLM despite huge amounts of effort has proven to be elusive. For example, last year we planned to do 1,375,000 tests in Core2. We budgeted $2,445,000 for salaries and $330,075 for benefits. We spend $250,000 a year on equipment service contracts. Laboratory supplies were estimated at $1,700,000, and other costs will be about $200,000. So, if you take the total budget, $4,925,075, and divide it by the 1,375,000 tests we planned to do, the unit cost was estimated to be $3.58. But some routine tests, like blood work and urinalysis, cost a dollar or two per test, and other tests require one full day of technician time, equipment time, plus supplies. Within a division, within a laboratory, even on the same analyzer, test costs differ. So you can see that the average cost per test of $3.58 is not useful for planning and control purposes. Beverley chimed in, Each stage or process may include numerous steps depending on the sample type, tests ordered, and turnaround time required. A sample arriving at Front-End [the lab receiving area] may be labeled STAT3. ABC will calculate the cost of the technician, supplies, equipment, etc., associated with preparing this sample. Assuming this cost is $5 and the cost of preparing a non-STAT sample is $2 then each STAT sample costs an additional $3. Provided the LIS4 gathers statistics about STAT and non-STAT testing then the cost of STAT tests can be estimated. A change in protocol from non-STAT to STAT tests for 500 patients could cost an additional $1,500. Brian added, Its unlikely that a single variance of $1,500 on DPLMs budget of $24 million will be much noticed. But these kinds of changes occur constantly as operational leaders seek improvements, and this makes explaining cumulative variances difficult. The question becomes If the volume has increased by 4.3%, why have costs increased by 7.3%? We have to be accountable.

DPLM is divided into five main divisions: Core (including Clinical Biochemistry and Haemato-pathology), Blood bank, Microbiology, Pathology, and Molecular Genetics. Team leaders manage day-to-day operations and report to the Managing Director; scientific staff provide diagnostic expertise and report to the Chief. Appendix 1 shows DPLMs organization structure. Appendix 2 summarizes DPLMs Operation.

STAT short turn around time the sample must be taken, and processed, as soon as possible, and the results must be communicated to the attending physician as soon as possible
4

Laboratory Information System

In an effort to address the cost issues, DPLM hired Jacky McDowell, a consultant at TISMO (Time Is Money), to analyze costs. TISMO Pilot Project In the trial, costs associated with several Core Laboratory workstations were analyzed. (See Appendix 1: DPLM Operations.) Appendix 2 summarizes the tests done during the month of November, 2001 on the Abbott TDx (an analyzer). TISMOs report highlighted cost-per-test data. Appendix 3 summarizes cost per test data for tests done during the month of November, 2001 on the Abbott TDx. Jacky McDowell of TISMO visited Sick Kids to discuss the results and their findings. Once again, Brian invited Beverley, Bonnie, and the Team Leaders to attend this meeting. Jacky opened the meeting: During our last visit staff was asked to validate their activities for one week. This data was extrapolated to one month and matched with historical workload data from November 2001. Upon close examination, this month was deemed to be representative. At a high level, the first analysis to look at is the efficiency of the system in question. The test log [Appendix 2] shows the number of tests processed in several categories on the Abbott TDx. This log is an example of test efficiency of the audited systems. Now, test efficiency is not necessarily driven by the analyzing system; rather, it may be heavily influenced by testing or by policies of the laboratory. When you look at this schedule, you can see that quality control is WAY out of control! Brian: Quality is a very important issue here. We have the most critically ill children in our care. Jacky: I know that, but I think you have to re-think, or at least discuss, your policy on quality control. We discussed the cost of quality with your technical staff. The cost of quality classifies each activity and supports quality initiatives. First, you have the cost of conformance. The two activities of conformance are prevention activities and appraisal activities. Prevention activities are those activities performed to prevent problems, for example, calibration. Appraisal activities are performed for compliance or regulatory reasons, for example, quality verification. Next, you have the cost of non-conformance. The two activities of non-conformance are internal failure activities and external failure activities. Internal failure activities are performed to manage failure driven by laboratory processes. External failure activities are performed due to errors, or failures, created outside the laboratory for example, on the ward.

Beverley: Were you able to determine how these activities consume our resources? Jacky: We sure were. External failure was the highest consumer of time and the second highest consumer of cost. Beverley: External failure is common as a high driver of cost in paediatric hospitals. Small-volume samples and the importance of quality drive the laboratory to handle the samples with greater care and require more manual intervention to maximize the use of the specimen. Small-volume samples are diluted to provide the volume required to fill the test tubes and make slides. During the testing process additional calculations must be performed to ensure the dilution factor is accounted for in the result. Then the tests are repeated to verify the first set of results. Jacky: The second highest consumer of time, but the highest consumer of cost was the appraisal attribute. This data supports the extreme amount of quality management performed in this laboratory to support the instruments in question. Again, are these instrument or laboratory driven, and how can they be challenged? Overall, appraisal consumes in excess of 150 hours per month, which equates to approximately one FTE5. Beverley: Like Brian said, quality is critical. Jacky: The third highest consumer of time and cost was internal failure. Most of the activities tagged were activities associated with instrument troubleshooting or servicing of analyzers. Prevention was the least time consuming and is associated with activities that staff will perform to avoid problems from occurring. Based on the metrics from the pilot, we believe there is non-value added waste of more than 10% within the laboratory. Extrapolated across Core, the estimate for savings could be in the $500,000 range. When the analysis was completed and data compiled, Brian, Beverley, Bonnie and the Team Leaders sat down to review the reports. Brian sighed, Weve learned a lot of valuable information. We need to discuss the cost of quality. We should be able to justify the high cost of quality. We also need to look at the costs of non-conformance. These will be the two main items on the agenda for our meeting next week. I want you to think about this talk with your staff lets see how we can take advantage of this knowledge.

FTE full-time equivalent employees

ASSIGNMENT QUESTIONS 1. In preparation for the meeting next week, be prepared to discuss the following and make some recommendations. a. b. 2. The cost of conformance (quality control) both preventative and appraisal. Prepare a schedule to support your discussion. The cost of non-conformance both internal and external.

Comment on possible opportunities that may exist for DPLM.

Appendix 1: DPLM Organization Structure

DPLM Organization Chart 2001 - 2002 Vice President, Information & Diagnostic Services

Chief, DPLM Financial Operations Director, DPLM

Managing Director, DPLM

Other Depts

Head Pathology

Head Haemato- Head Clinical pathology Chemistry

Head Microbiology

Head Molecular Genetics

(Core)
Team Leader Team Leader Team Leader Team Leader Team Leader Team Leader Team Leader

Director Virology Director Molecular Microbiology Director Transfusion Medicine

Director Forensic Unit Director Molecular Pathology

Clincial Biochemistry

Trans-fusion Medicine Lab Info Systems (LIS)

Director Infection Director Cytogenetics Control

Pathology

Haematopathology

Micro-biology

Molecular Genetics

Quality Mgmt

Admin & Support Srvs

Medical & Scientific Staff

Resource Technologists Technical Staff - Medical Lab Technologists, Technicians, Assistants Support and Administrative Staff

Appendix 2: Test Log for Abbott TDx, November, 2001 A description of the headings follows: Assay test In Patient patients admitted to the hospital Out Patient patients treated at one of the hospitals clinics Emerg. emergency Outside work tests referred in from other institutions or laboratories. These tests generate revenue for the lab. The categories in Quality Control are as follows: Rpts. repeats tests which were repeated because the original result was questionable Dil. Rpts. dilution repeats on small-volume samples Calib. calibrations -- Quality Control also includes calibration. This is necessary to make certain the analyzer is still performing accurately, or, to calibrate the equipment. Quality Verif. verification For actual quality control purposes, a certain portion of tests is repeated to verify quality. As a matter of policy, 10% of all tests are to be repeated for quality verification. Test Log for Abbott TDx November, 20016 - - - - - Quality Control - - - - Assay Acetominophen Theophylline Valproic Acid Gentamycin Digoxin II Phenobarbital Tobramycin Phenytoin Carbamezapine Amikacin Methotrexate Primidone Vancomycin Ethosuximide Benzodiazepine Salicylate TCA In Patient 28 0 0 0 0 0 0 0 0 0 92 1 53 1 0 1 0 Out Patient 0 0 0 0 0 0 0 0 0 0 5 1 1 5 0 0 0 Emerg. 6 0 0 0 0 0 0 0 0 0 0 0 1 0 5 9 5 Outside Work 26 0 0 0 0 0 0 0 0 0 24 0 0 0 46 15 46 Rpts. 0 0 0 0 0 0 0 0 0 0 7 0 0 0 0 0 0 Dil. Rpt. 0 0 0 0 0 0 0 0 0 0 21 0 0 0 0 0 0 Calib. 24 9 12 12 12 12 12 12 0 0 0 12 12 0 48 36 24 Quality Verif. 34 0 12 12 12 12 12 12 12 0 102 3 191 18 45 30 18 Total Tests 118 9 24 24 24 24 24 24 12 0 251 17 160 24 144 91 93

The Hospital for Sick Children Cost Xplorer Draft Cost Analysis May, 2002.

Appendix 3: Cost per Test Data for the Abbott TDx7 A description of the headings follows: Patient Tests This includes in patients, out patients, emergency patients, and outside work. Cost per Test The cost developed using ABC. Billable Cost The cost per patient test performed. For the assays with 0 patient tests, the costs documented are the total costs of performing the non-patient tests (quality control tests). For example, Theophylline 9 tests x $20.54 per test = $185.95. None of the tests is a patient test. If one of the tests done during the period had been a patient test, the actual cost of this one test would be $185.95. For the assays with some patient tests and some quality control tests (where total tests does not equal patient tests) the calculation is total tests x cost per test divided by patient tests = billable cost. For example, Acetaminophen 118 tests x $4.56 per test / 60 tests = $8.97. Billing Price The per test price Sick Kids charges for outside work. Cost per Test Data for the Abbott TDx
Assays Acetaminophen Theophylline Valproic Acid Gentamycin Digoxin II Phenobarbital Tobramycin Phenytoin Carbamezapine Amikacin Methotrexate Primidone Vancomycin Ethosuximide Benzodiazepine Salicylate TCA Total Tests 118 9 24 24 24 24 24 24 12 0 251 17 258 24 144 91 93 Patient Tests 60 0 0 0 0 0 0 0 0 0 121 2 55 6 51 25 51 Cost per Test $4.56 20.54 10.50 10.50 10.50 10.50 10.50 10.50 16.78 0.00 3.51 13.14 4.08 9.58 4.43 5.17 4.87 Billable Cost* $8.97 184.85 252.00 252.00 252.00 252.00 252.00 252.00 201.36 0.00 7.28 116.69 19.14 38.32 12.51 18.82 8.88 Billing Price $12.75 20.80 18.20 20.80 23.40 18.20 20.80 18.20 18.20 20.80 18.20 18.20 20.80 18.20 12.20 7.00 12.21

Ibid