Rio Grande Medical Center Cost Allocation Concepts
Rio Grande Medical Center Cost Allocation Concepts
HCM 681
Introduction to the Financial Management of Healthcare Organizations
1. Is it “fair” for the Dialysis Center to suffer in profitability, and hence for the department head to possibly lose his bonus, just because the Outpatient Clinic needs additional space?
The building of the new facility is not expected to affect revenue, direct cost and patient volume. The Dialysis Center will provide the same services for its patients, but with different location of the facility. There is no reason for the personnel of the facility to be penalized financially, since the decision for the relocation of the building was taken due to recent growth in volume of the Outpatient Clinic.
However the Dialysis Center will have better advantage and potential increase of the volume of patients, better parking location for patients and service employees and lower amortization cost of the building in the future. The new center has the potential to increase its revenue, net of direct costs, with more than $100,000 increase in facility allocation. The new building with its new location can be a base for a new marketing campaign that might attract new patients by providing conveniences and increasing utilization. The move of the facility in a new building with better location would give a long term advantage for the center compare to its competitors with similar services.
2. In the past, the medical center aggregated all facility costs and then allocated the total amount on the basis of square footage. This methodology assigned an average cost rate to each patient service department, regardless of whether its space is new or old, or prime or poor. The proposed allocation for the Dialysis Center, on the other hand, requires it to bear the true facility costs of its new space. What are the advantages and disadvantages of the new methodology? Do you support the new allocation scheme?
When choosing cost driver it is best
HCM 681
Introduction to the Financial Management of Healthcare Organizations
1. Is it “fair” for the Dialysis Center to suffer in profitability, and hence for the department head to possibly lose his bonus, just because the Outpatient Clinic needs additional space?
The building of the new facility is not expected to affect revenue, direct cost and patient volume. The Dialysis Center will provide the same services for its patients, but with different location of the facility. There is no reason for the personnel of the facility to be penalized financially, since the decision for the relocation of the building was taken due to recent growth in volume of the Outpatient Clinic.
However the Dialysis Center will have better advantage and potential increase of the volume of patients, better parking location for patients and service employees and lower amortization cost of the building in the future. The new center has the potential to increase its revenue, net of direct costs, with more than $100,000 increase in facility allocation. The new building with its new location can be a base for a new marketing campaign that might attract new patients by providing conveniences and increasing utilization. The move of the facility in a new building with better location would give a long term advantage for the center compare to its competitors with similar services.
2. In the past, the medical center aggregated all facility costs and then allocated the total amount on the basis of square footage. This methodology assigned an average cost rate to each patient service department, regardless of whether its space is new or old, or prime or poor. The proposed allocation for the Dialysis Center, on the other hand, requires it to bear the true facility costs of its new space. What are the advantages and disadvantages of the new methodology? Do you support the new allocation scheme?
When choosing cost driver it is best