A linear programming approach to the casemix management problem

Imposition by the federal government of respective pricing system upon hospitals creates the need for greater strategic planning. Historical retrospective systems reimburse hospitals for cost incurred by patients. Such payment methods provide little incentive for cost containment. Under prospective payment systems, hospitals are reimbursed with a fixed fee for a patient with a specific diagnosis within a Diagnostic Related Grouping (DRG). Thus, hospital management finds itself in a tenuous position. They physician makes the diagnosis and orders services that the hospital provides. The federal government reimburses a fixed fee regardless of the accrued costs. Within this environment hospital management must make strategic decisions as to which DRG services it can offer cost effectively and what impact public service in DRG's will have. Strategic planning as to acquisition of equipment and skills for future DRG's offerings are also necessary.

Presented here is an analysis of the impact of the prospective pricing system and the selection of a modelling technique which best services the needs of hospital management. Linear Programming is determined to offer the greatest potential because of its extensive post optimal and parametric analysis. Furthermore, an extension of a probabilistic analysis in the deterministic model is discussed. Finally, this approach proves beneficial for analysis in not-for- profit hospitals. A typical hospital application is presented.

The value of this study exists in a comprehensive approach to cost containment and strategic planning in a unique environment where federal programs affect private enterprise.