Rio Grande Medical Center Cost Allocation Concepts

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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 to pick up driver that best matches the actual utilization of the overhead service provided. It seems appropriate if the facility costs are assigned and represent the true costs of the facility each patient service uses. As example from the case activities in newer space will be charged higher rate than activities housed in similar older spaces. In the case of the Dialysis Center it is easy to estimate the exact cost for the facility, since it is new and has been just built. If the facility was in a old building than it would have been much harder to estimate the actual facility costs.” it is possible to estimate the actual annual facilities costs for the new Dialysis Center, something that is not possible for units located within the hospital complex”( Rio Grande Medical Center) From the case we know that the move of the facility from the main medical complex was necessary due to “the Outpatient Clinic has created a need for 25 percent more space than is currently assigned” (Rio Grande Medical Center) and it would be very helpful if some of the departments bear the burden of the move and the higher cost associated with it. The case restricts any cost associated with the move to be shared with the Outpatient Clinic, but by spreading the cost inherent in the new space to all patient services this would help the Dialysis Center with the financial burden of building a new facility. “In the past, facilities costs were aggregated, so all departments were charged a cost based on the average embedded (historical) cost regardless of the actual age (or value) of the space occupied. Thus, a basement room with no windows was allocated the same facilities costs (per square foot) as was the fifth floor executive suite. Because many department heads thought this approach to be unfair” (Rio Grande Medical Center) It would be much fair if allocated costs are incrementally increased or decreased based on individual departments and the quality of space that they occupy. If this is...
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