In order to establish the separation of direct service costs from indirect costs, the Ontario Cost Distribution Methodology (OCDM) is applied. Net expenses are calculated in the OCDM by netting allowable recoveries/revenues and restructuring costs from gross expenses. Selected expense accounts (see table below) are deducted from net expenses to derive adjusted net expenses (includes plant, materials management and administration) for all patient types (i.e., acute inpatient and day surgery, chronic & respite, ELDCAP, palliative, rehab, outpatient, other hospital or community outpatients).

As a consequence of program transfers, there may need to be a re-allocation of materials management expenses, based on the proportion of direct expenses of each reconfigured facility. No savings are generated in this step as these expenses are only re-distributed.

In order to determine the savings potential of consolidating support services, a number of options regarding the selection of these support services were considered. The HSRC settled on the following functions largely due to the size of the activity in budgetary terms; i.e., materials management, food services and laboratory services. Furthermore, there have been ample studies to support the assumptions and models employed by the HSRC in regard to these hospital activities. This is not to suggest that other cost centres are cannot be consolidated and savings realized by the hospitals.

The model developed to identify savings resulting from consolidation and improved efficiency in Food Services, Materials Management and Laboratories is based on a three dimensional matrix.

The three dimensions which influence the potential savings are:

1. Current operational performance;
   
2. Number of sites being consolidated; and


3. Critical mass or thresholds.

• Product standardization and evaluation committees.
• Coordinated contract/vendor negotiation.
• Group purchasing.
• Computerized inventory management.
• Inventory control practices yielding an average of 20 inventory turns per year.
• Centralized ordering and warehousing in one hospital site or off-site through a contracted service with just-in-time delivery to the consolidated hospitals.
• Automated purchasing - electronic data interchange (EDI) for ordering and electronic funds transfer (EFT) for supplier payment.
• Sterile processing - standardization of procedure trays and:
• either, central sterile processing for common, low cost items.
  
• or, use of a high percentage of disposable tray packs.

The table above notes that the savings can range between 2% of current expenses to 26% depending on the model, sites and current level of efficiency. Note that for chronic (i.e., complex continuing care)/rehabilitation facilities it is assumed that the complexity of cases, and therefore resource needs, is less than that for acute care facilities. Consequently, 75% of the savings rate attributed to acute care sites are applied to the chronic/rehab site.

Other savings may be identified through site closures and program reductions. These savings are community-specific and are based on net expenses as reported in the OCDM.

Should a facility or site be subject to closure in various options, then net plant expenses are identified as savings. For plants that remain in various options these expenses are maintained.

Administrative expenses are those expenses which for the most part are fixed and do not vary directly with patient volumes. These non-variable costs tend to remain inside a set limit as a percentage of total hospital operating costs.

The categories included in Administrative Expenses were chosen to correspond to the overhead costs in the OCDM with a few exclusions (e.g. plant, materials management). The following are the primary functional centres that were included in the Administrative Expenses total.

For institutions that are remaining open, Selected Expenses as identified in Step 1 are added back in total. For institutions where programs have been transferred or closed, the following expenses are transferred to the receiving facility, in proportion to the activities transferred.

The total net expenses of the reconfigured system are then calculated by adding back the selected expenses identified in Step 1. This total reflects costs associated with all patient types in an acute-care facility.

The methodology used to estimate the cost of a reconfigured chronic care (i.e., complex continuing care) and palliative care system and a reconfigured rehabilitation care system follows the methodology used in the calculation of costs for the acute care sector with a few differences. Net expenses and selected expenses are determined as outlined in Step 1 but only as related to chronic & respite, and palliative patient types.

The following assumptions are made in costing the program reductions/enhancements

• 1995/96 actual patient days are used for both chronic care (i.e., complex continuing care) and palliative patients;
• a 95% occupancy rate is used to derive the number of future days in the system based upon the number of beds sited at each institution;
• the cost of chronic care (i.e., complex continuing care) beds added to a facility is estimated at the lower of the median direct chronic cost per day or the actual direct chronic cost per day. This median is calculated separately for acute facilities and free-standing chronic care facilities;
• the cost of chronic care (i.e., complex continuing care) beds removed from a facility is estimated by multiplying the actual direct chronic cost per day by the number of days being reduced; and
• program reductions and closures are associated to chronic rather than palliative care, with the exception of the closure of a facility where all (i.e. chronic care (i.e., complex continuing care) and/or palliative) beds are removed from the system.

It is expected that current lower intensity chronic care (i.e., complex continuing care) patients will now be cared for within the long-term care system. Future patients who require chronic care (i.e., complex continuing care) will, on average, have a higher resource intensity than is currently exhibited. Consequently, a resource intensity adjustment of 17% was allocated to all facilities who continue to have chronic care (i.e., complex continuing care) patients.

There are no administrative efficiencies calculated on acute care hospitals, as they have already been calculated in the acute care methodology. However, administrative costs are adjusted to reflect program reductions/enhancements. Administrative efficiencies are calculated for all free-standing facilities as described above in Step 7. As in the acute care methodology, for sites that close, plant and materials management net expenses are identified as savings. Selected expenses are added back for sites that remain open. The total net expenses of the reconfigured system are then calculated by adding back the selected expenses to the new direct and administrative expenses.

Net and selected expenses are determined as outlined in Step 1 but only as related to rehabilitation care.

An adjustment is made for additional allied health expenses for all rehabilitation care beds. This additional expense is expected to cover the additional cost of allied health coverage on weekends.

The following assumptions are made in estimating the costs for the transfer of rehabilitation patients.

• regional beds have an occupancy rate of 90% and long-term & short-term beds have an occupancy rate of 95%;
• any program reductions are assumed to be on short-term beds at an occupancy rate of 95%;
• the cost for program reductions is estimated using the facility’s actual rehabilitation direct cost per day, multiplied by the number of days to be reduced; and
• the cost for program enhancements is estimated at the lower of the median direct rehabilitation cost per day and the facility’s actual direct rehabilitation cost per day. This median is calculated separately for acute facilities and free-standing chronic care facilities.

Administrative efficiencies are not found for acute care hospitals, as this has already been calculated in the acute care methodology. However, administrative costs are adjusted to reflect program transfers. Administrative efficiencies are calculated for all free-standing facilities as described above in Step 7. As in the acute care methodology, for sites that close, plant and materials management net expenses are identified as savings. Selected expenses are added back for sites that remain open. The total net expenses of the reconfigured system are then calculated by adding back the selected expenses to the adjusted expenses, program transfers, adjustments, and new administrative expenses.

This methodology for identification of costs and savings associated with restructuring options was developed to do the following:

• assist the HSRC in assessing the affordability criterion for various restructuring options;
• determine the extent of savings associated with:
• clinical efficiencies
• consolidation of support services
• administrative overhead
• costs of plant operations;
• use an approach consistent with industry practices and methodologies currently in place; and
• develop advice for the Minister of Health on the expenses and savings estimates associated with HSRC Directions and Recommendations.

The original methodology for costing of restructuring options as reported in the Thunder Bay, Sudbury, Lambton and Pembroke reports was modified from one developed by the Ministry of Health. While there were issues associated with the method, the basic approach was deemed acceptable to the hospital sector. The HSRC undertook to revise the methodology by examining relevant analysis and research into various categories of expenses and potential savings.

The HSRC had engaged the firm KPMG, and their associates, Healthcor, to assist the HSRC in its endeavors. Working with the Ontario Case Cost Project, the Fiscal Planning Working Group of the Joint Policy and Planning Committee, and its consultants, Hay Management, and the Ministry of Health, the HSRC identified areas of improvement to the methodology which it will implement in future review and revise estimates from past reports.

Concurrent with the revisions to the methodology, the HSRC developed, with the assistance of KPMG and Healthcor, a software modeling system based on the revised costing methodology. The system will facilitate the consistent application of the methodology.

The costing methodology results are summarized in each report of the HSRC as advice to the Ministry of Health and to the hospitals affected by the directions. The actual expenses and savings will require further development during the implementation of the directions by the hospitals in conjunction with the HSRC and the Ministry of Health. The HSRC strives to use the most accurate and consistent information possible in developing the estimates because it is aware that they can become targets and guideposts for implementation.

As always, the HSRC invites comment on any materials and approaches that it promulgates. This policy of openness will allow the HSRC to improve upon its methods through the feedback from the industry and from the results of implementation as it proceeds in various communities.

If you have any comments regarding this report of any of the sections therein, the HSRC would appreciate your views in writing to the HSRC.