Costs are allocated on a per claim basis. Each patient's bill contains charges for various routine services and ancillary areas. We convert these charges to costs using a cost-to-charge ratio (RCC) for each service area. The corresponding RCCs are derived from each hospital's Medicare cost report.

For example, if a patient had $300 in pharmacy charges and the hospital's RCC for pharmacy was 0.5000, then the cost would be allocated as $150 (300 x 0.5000 = 150).

Costs are then totaled for each claim. Claims are subsequently summarized for reporting by DRG, by Medical Service, etc.