For exclusive use at Lahore University of Management Sciences, 2015 Ey Harvard Business School 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 Ata meeting with Mr. Robert Simi, Rosemont Hill's new accountant, Mr. Mitchell outlined. the principal issues: Fist 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: Pediatries, Adult Medicine, Family Planning, Nursing, Mental Health, Social Services, Dental and Community Health. In ‘This case woas 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. 7 “his document is authorzd or use nn Managerial Accounting & Cont ystems (MBA) by Ayesha Ball a hore Univer of Management Siencs tom Januar 2015 o May 2015.For exclusive use at Lahore University of Management Sciences, 2015 vete9 Rosemont Hil 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 slaff 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. z “his document is authorzd or use nn Managerial Accounting & Cont ystems (MBA) by Ayesha Ball a hore Univer of Management Siencs tom Januar 2015 o May 2015.For exclusive use at Lahore University of Management Sciences, 2015 Rosemont Hill Health Center v7e-189 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 step- down 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. 3 “his document is authorzd or use nn Managerial Accounting & Cont ystems (MBA) by Ayesha Ball a hore Univer of Management Siencs tom Januar 2015 o May 2015.For exclusive use at Lahore University of Management Sciences, 2015 vete9 Rosemont Hil Health Center Exhibit 1 Financial Statements for 1975 Balance Sheet ‘As of December 31, 1975 Assets Liabilities and Fund Balances Cash 30,934 ‘Accounts Payable 82,754 ‘Accounts Receivable 8,800 Acerued wages 3.468 Inventory 40540 Total Current 36,220 Total Current 80,274 Bank Loan 27.550 Furniture & Equipment 21,700 Total Liabilities 63,770 Less: Accumulated Depreciation 8.788 Fund Balances: Total fixed 12,912 Designated by board for 25,000 Special Outreach Project Total Assets 93,186 Purchases of new equip. 3,000 Undesignated 1.416 Total Fund balances 2o416 Total Liabilties and Fund Balances. 93,186 Income Statement 1975 Revenue from patient fees 345,450 Other revenue 5,000 Total Revenue 350,450 Expenses Program services 235,000 Usiities 10,000 Laboratory 25,000 General and Administrative 92,000 Total Expenses 362,000 ‘Surplus (Deficit) (11,550) 7 “his document is authorzd or use nn Managerial Accounting & Cont ystems (MBA) by Ayesha Ball a hore Univer of Management Siencs tom Januar 2015 o May 2015.For exclusive use at Lahore University of Management Sciences, 2015 Rosemont Hill Health Center v7e-189 Exhibit 2 Costs and Patient Visits! for 1975, By Department Expenses Number Patient Department Visits Salaries? Others? Total Pediatrics 5,000 $ 20,000 $ 8,000 $ 28,000 Family Planning 10,000 5,000 15,000 20,000 ‘Adult Medicine 2,100 30,000 16,000 46,000 Nursing 4,000 27,000 6,000 33,000 Mental Health 1,400 15,000 8,000 23,000 Social Services 1,500 32,000 8,000 40,000 Community Health 2,500 8,000 10,000 15,000 Dental 6.400 20,000 40,000 30,000 Sub-Total 32,900 154,000 '81,000 235,000 Administration 38,000 2,000 40,000 Rent 36,000 36,000 Ubiities 10,000 10,000 Laboratory Work 16,000 9,000 25,000 Cleaning 6,000 6,000 Record Keeping 7.000 2.000 10,000 Total $215,000 $147,000 $362,000, Number of Pationt Visits 32,900 Average Cost per Visit $11.00 ‘Patient visits rounded to nearest 100; Expenses rounded to nearest 1,000, includes fringe benefits ’Materials, supplies, contracted services, depreciation and other non-personnel expenses Exhibit 3 Floor Space and Laboratory Usage! by Department Department Floor Space? Laboratory Usage3 Pediatrics 1,000 1,000 Family Planning 1,300 200 ‘Adult Medicine 1,800 2,400 Nursing 300 100 Mental Heatth 1,000 Social Service ‘500 ‘Community Health 1,100 Dental 1,000 ‘Administration ‘500 Record Keeping 300 Laboratory 4,200 Total 10,000 Rounded to nearest 100 2 In Square Feet, 3In hours/year 5 “his document is authorzd or use nn Managerial Accounting & Cont ystems (MBA) by Ayesha Ball a hore Univer of Management Siencs tom Januar 2015 o May 2015.