Rosemont Hill Health Center Case Solution

Case Analysis

Rosemont Hill Health Centre was established in 1968 by a consortium of community groups in Roxbury to provide comprehensive health care to Roxbury and neighboring communities. There are eight functional departments of the hospital like Pediatrics, Dental, etc. to provide a range of health facilities and there are also few support departments like laboratory, administration, and record-keeping. Formerly, the Federal government provides funding for the hospital that was ended in 1974. After that, some funding was provided by the city of Boston but now a deficit of the hospital is increasing. The expected number of patients next year is also going to increase, so proper planning is required to arrange sufficient resources.

In order to reverse this trend, the administration of the hospital wants to change the business model to self-sufficient as soon as possible. For this purpose, they want to find the cost of each service provided by the hospital to charge patients based on cost. They also need detail for getting reimbursement of expenses from donor agencies. For this purpose, they have to change their cost accounting system. The accounting system formerly used by the accountant was fairly straight forward and calculated by dividing total costs by a number of patients and the equal rate is charged to all services. The accountant was asked to calculate the precise cost for each service based on resources consumed by various departments. The average cost per patient comes out to be $11 per patient but costs for different departments should be different. He used an activity-based costing principle for assigning costs to departments using these resources.

The accountant was asked to calculate costs under two different scenarios. Under the 1^st situation, he calculates the total cost incurred by each department to calculate the cost per patient for a particular department. Calculations are given in the attached excel file. Direct cost is classified under salaries and other costs for each department. These costs are the same except for the Nursing and Social Service department. As given in the case, only the salary of one nurse is assigned to the Nursing department, one to Adult Medicine, half salary to each Pediatrics and Family Planning. Similarly, for the Social Service Department, half the cost of MSV’s is assigned to the Social Service Centre. The remaining costs of MSV and BA is assigned to the remaining five departments excluding Social Service, Nursing and Dental. In this way, total salaries for each department are assigned. Other costs for each department are taken directly from exhibits.

After that, the accountant allocates overhead costs to the functional department. There are few costs including rent, utilities, and cleaning which have to be assigned on the basis of floor space used by each department. Some of these costs come out to be $52,000 which is allocated to each functional and support department. These costs have to be allocated at a rate of $5.2 per square foot of floor space used. After that, the cost allocation rate for admin cost is calculated. Total admin costs include admin salaries, other costs and allocated rent. These admin expenses are divided by salaries of the functional department and then this cost is allocated to all functional departments accordingly. Similarly, the total costs for the laboratory and record-keeping are calculated. Laboratory costs are allocated to the functional department based on the numbers of laboratory hours used by each department. Recordkeeping costs are allocated by a number of patients dealt with by each department.

The total cost for each department is calculated. It is divided by patients dealt by each department to calculate the average cost per patient for each department. There seem to be quite big differences between the results of two calculations. The general trend that could be observed from results shows that the average cost per patient for departments that are dealing with a large number of patients is quite smaller than departments dealing with a small number of patients. The highest average cost per patient comes out to be for Adult Medicine comes out to be $47.51 which is quite higher than the average cost of $11 calculated by the previous accounting system.