Financial Considerations of Laboratory Management in an Inner City Hospital

The financial aspects of hospital laboratory management are examined. The usual practice of setting prices a few percentage points above costs in order to make a profit or break even is shown to be inapplicable. This is due to the unusual strictures placed upon hospitals by a governmentally imposed system wherein reimbursement is, for many patients, based upon costs rather than upon charges. A model is then proposed which takes this factor into account. A linear equation is derived which, given the value of various statistical variables (such as the ratio of inpatient to outpatient workload, a definition of the mix of all patients based upon mode of reimbursement, and the extent to which bills submitted to various patient or third party payors are paid), determines the profit or loss of the laboratory. A function, designated as ßP=O, which is the ratio of total billings to total costs at profit equal to zero, is then defined using the same statistical variables. It is shown that ßP=O is dimensionless and therefore independent of cost or billings and applies to a hospital of any size. Analysis for optimization is carried out. Certain conclusions are drawn, after variations of the patient mix and collectibility coefficients concerning the fiscal hardships endured by inner city teaching hospitals versus community or proprietary hospitals. The model derived in this paper, with suitable modifications, should be applicable to other sections of hospital management in addition to the laboratories.