5.+Rosemont+Hill+Health+Centre

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9-178-189 Rev. October 5, 1978

Rosemont Hill Health Center In March, 1976, Mr. Frank Mitchell, Administrator of the Rosemont Hill Health Center expressed concern about Rosemont Hill's cost accounting system. The extensive funding Rosemont Hill had received during its early years was decreasing and Mr. Mitchell wanted to prepare the Center to be self-sufficient, yet it lacked critical cost information. At a meeting with Mr. Robert Simi, Rosemont Hill's new accountant, Mr. Mitchell outlined the principal issues: First of all, our deficit is increasing. We obviously have to reverse this trend if we're going to become solvent. But, for that, we have to know where our costs are. That leads to the second problem: we don't know the cost of each of the services we offer. I mean, our patients receive a variety of services yet we charge everyone the same per-visit fee. Mr. Mitchell provided a further motivation for analyzing Rosemont Hill's cost in that federal and local funding was available for family planning and mental health programs, but to qualify, Rosemont Hill would need a precise calculation of cost per visit in these departments. Likewise, to receive third party reimbursement for patient visits, Rosemont Hill's fee schedule had to be reasonably related to costs.

Background Rosemont Hill Health Center was established in 1968 by a consortium of community groups. Situated in Roxbury, an inner-city residential neighborhood of Boston, Massachusetts, the Health Center was intended to provide comprehensive health care to residents of Roxbury and neighboring communities. Eight years after its inception, the Health Center maintained strong ties with the community groups responsible for the Center's development and subsequent acceptance in Roxbury. Funding for Rosemont Hill was initially provided by the Federal government as part of the Department of Health, Education and Welfare's attempt to equalize health care in the United States. When these operating funds were depleted in 1974, the city of Boston supplemented Rosemont Hill's income with a small three-year grant. Because Mr. Mitchell realized that government support could not continue indefinitely, he intended to make the Health Center self-sufficient as soon as possible. Rosemont Hill's financial statements are contained in Exhibit 1. Rosemont Hill Health Center is composed of eight departments: Pediatrics, Adult Medicine, Family Planning, Nursing, Mental Health, Social Services, Dental and Community Health. In This case was prepared by Patricia O'Brien, Research Assistant, and David W. Young, Assistant Professor, as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 1978 by the President and Fellows of Harvard College. Distributed by HBS Case Services, Harvard Business School, Boston, Mass. 02163. All rights reserved to the contributors. Printed in the USA. 1 This document is authorized for use only in Managerial Accounting & Control Systems (MBA) by Ayesha Bhatti, at Lahore University of Management Sciences from January 2015 to May 2015.

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Rosemont Hill Health Center

addition, the Center has a laboratory and medical records department. Community Health, which was designed by Rosemont Hill's consumers, is a multidisciplinary department providing a link between the health and social services at Rosemont Hill and the schools and city services of the community. The department is staffed by a part-time speech pathologist, a part-time learning specialist, and a full-time nutritionist. The Center has twenty-two paid employees and a volunteer staff of 6–10 students acquiring clinical and managerial experience.

The Existing Information System Rosemont Hill's previous accountant had established a cost system to determine the charge fee for patients. According to this method, shown in Exhibit 2, the fee was derived from the average yearly cost of one patient visit. The accountant would first determine the direct cost of each department. He would then add overhead costs, such as administration or rent and utilities, to the total cost of all the departments to determine the Health Center's total costs. Finally, he would divide that total by the year's number of patient visits. Increased by an anticipated inflation figure for the following year (approximately 8 to 10 percent), this number became the charge per patient visit for the subsequent year. In reviewing this method with Mr. Simi, Mr. Mitchell explained the problems he perceived. He said that although he realized this was not a precise method of determining charges for patients, the Center's charge had to be held at a reasonable level to keep the health services accessible to as many community residents as possible. Additionally, he anticipated complications in determining the cost per patient visit for each of Rosemont Hill's departments: You have to consider that our overhead costs, like administration and rent have to be included in the cost per patient visit. That's easy to do when we have a single cost, but I'm not certain how to go about it when determining costs on a departmental basis. Furthermore, it's important to point out that some of our departments provide services to others. Nursing, for example. There are three nurses in that department, all earning the same salary. But one works exclusively for Adult Medicine, another divides her time evenly between Family Planning and Pediatrics. Only the third spends his entire time in the Nursing Department seeing patients who don't need a physician, although he occasionally refers patients to physicians. In the Social Service Department, the situation is more complicated. We have two MSW's, each earning $12,000 a year, and one bachelor degree social worker earning $8,000. The two MSW's yearly see about 1,500 patients who need general social work counseling, but they also spend about 50 percent of their time in other departments. The BA social worker cuts pretty evenly across all departments except dental, of course, where we don't need social work assistance. Mr. Simi added further dimensions to the problems: I've spent most of my time so far trying to get a handle on allocating these overhead costs to the departments. It's not an easy job, you know. Administration, for example, seems to help everyone about equally, yet I suppose we might say more administrative time is spent in the departments where we pay more salaries. Rent, on the other hand, is pretty easy: that can be done on a square-foot basis. We could classify utilities according to usage if we had meters to measure electricity, phone usage and so forth, but because we don't we have to do that on a square-foot basis as well. This applies to cleaning too, I guess. It seems to me that record keeping can be allocated on the basis of the number of records, and each department generates one record per patient visit.

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Laboratory work is the most confusing. Some departments don't use the laboratory at all, while others use the laboratory regularly. I guess the fairest would be to charge for laboratory work on an hourly basis. Since there are two people in the laboratory, each working about 2,000 hours a year, the charge per hour would be about $4.00. But this is a bit unfair, since the laboratory also uses supplies, space and administrative time. So we should include those other costs in the laboratory hourly rate. Thus, the process is confusing and I haven't really decided how to sort it out. However, I have prepared totals for floor space and laboratory usage (Exhibit 3).

The Future As Mr. Mitchell looked toward the remainder of 1976, he decided to calculate a precise cost figure for each department. The Health Center was growing and he estimated that total patient volume would increase by about 10 percent during 1976, spread evenly over each department. He anticipated that costs would also increase by about 10 percent. He asked Mr. Simi to prepare a stepdown analysis for 1975 so that they would know Rosemont Hill's costs for each department. He planned to use this information to assist him in determining charge fees for the remainder of the year.

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Rosemont Hill Health Center

Financial Statements for 1975

Exhibit 1

Balance Sheet As of December 31, 1975 Assets Cash Accounts Receivable Inventory Total Current Furniture & Equipment Less: Accumulated Depreciation Total fixed Total Assets

Liabilities and Fund Balances Accounts Payable Accrued wages Total Current

30,934 8,800 40,540

32,754 3,466 36,220

80,274 Bank Loan Total Liabilities

21,700 8,788 12,912 93,186

27,550 63,770

Fund Balances: Designated by board for Special Outreach Project Purchases of new equip. Undesignated Total Fund balances Total Liabilities and Fund Balances

25,000 3,000 1,416 29,416 93,186

Income Statement 1975 Revenue from patient fees Other revenue Total Revenue Expenses Program services Utilities Laboratory General and Administrative Total Expenses Surplus (Deficit)

345,450 5,000 350,450 235,000 10,000 25,000 92,000 362,000 ( 11,550)

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Costs and Patient Visits1 for 1975, By Department

Exhibit 2

Expenses Number Patient Visits

Department Pediatrics Family Planning Adult Medicine Nursing Mental Health Social Services Community Health Dental Sub-Total Administration Rent Utilities Laboratory Work Cleaning Record Keeping Total Number of Patient Visits Average Cost per Visit

5,000 10,000 2,100 4,000 1,400 1,500 2,500 6,400 32,900

Salaries2 $ 20,000 5,000 30,000 27,000 15,000 32,000 5,000 20,000 154,000 38,000

16,000 7,000 $215,000

Others3

Total

$

8,000 15,000 16,000 6,000 8,000 8,000 10,000 10,000 81,000 2,000 36,000 10,000 9,000 6,000 3,000 $147,000

$ 28,000 20,000 46,000 33,000 23,000 40,000 15,000 30,000 235,000 40,000 36,000 10,000 25,000 6,000 10,000 $362,000 32,900 $11.00

1Patient

visits rounded to nearest 100; Expenses rounded to nearest 1,000 fringe benefits 3Materials, supplies, contracted services, depreciation and other non-personnel expenses 2Includes

Floor Space and Laboratory Usage1 by Department

Exhibit 3

Department Pediatrics Family Planning Adult Medicine Nursing Mental Health Social Service Community Health Dental Administration Record Keeping Laboratory Total

Floor Space2 1,000 1,300 1,800 300 1,000 500 1,100 1,000 500 300 1,200 10,000

Laboratory Usage3 1,000 200 2,400 100 ----100 200 ------4,000

1Rounded

to nearest 100 In Square Feet 3In hours/year 2

5 This document is authorized for use only in Managerial Accounting & Control Systems (MBA) by Ayesha Bhatti, at Lahore University of Management Sciences from January 2015 to May 2015.