A Markov Sensitivity Model for Examining the Impact of Cost Allocations in Hospitals

The cost allocation process in hospitals typically entails an accounting step-down procedure whereby costs are allocated from non-revenue producing service centres to revenue centres. The resulting revenue centre costs are then compared with the third party (Blue Cross, Medicare, Medicaid) allowable costs. Any costs in excess of the allowable costs are not reimbursable. This procedure has been conceptualized using a Markov chain in a recent journal article. The purpose of this paper is to demonstrate how the Markov model may be used to assess the impact of various changes in the original data without having to recalculate the entire step-down process via a Markov model or any other procedure. The changes include an alternate step-down model, a different cost allocation basis for one or more service centres, and the expansion or contraction of one or more service centres.