Western Dialysis

Topics: Costs, Dialysis Pages: 5 (1483 words) Published: November 16, 2011
Western Dialysis Clinic
This case describes the cost system at a regional non-profit full service renal dialysis clinic. The current system installed at the clinic is based on the traditional ratio-of-cost-to-charges method that was developed for government cost based reimbursement programs. Under this system, the service expenses were allocated to a particular department on basis of the percentage contribution in the revenues of the clinic by that department. There were two types of treatments provided for patients, hemodialysis (HD) and peritoneal dialysis (PD). For many years, the reimbursement to the clinic was done on basis of the reported costs. However, this mechanism was changed in 1980s and now the reimbursement was provided on basis of a fixed fee. Because hospitals/clinics must maintain costs below these fixed payments received to be profitable, it has become increasingly important for proper costing methods to be incorporated for better decision making. This analysis reflects the results of changes in the cost allocation system in Western Dialysis and suggests some ways to improve the cost system.  

The ratio-of-cost-to-charges method of allocation of service costs had been used for several years in the clinic. However, David Thomas, the controller of Western Dialysis was not sure if this system lead to a true allocation of expenses to the two treatments based on the services actually used by those treatments. It was necessary to understand the cost drivers associated with the various cost centers and then allocate costs on basis of the actual use of these drivers by the two treatments. The objective was to help managers make more informed decisions about extending or contracting products and services and improving the processes.  

Phase I
The revised set of cost estimates and treatment profit and loss statements for HD and PD are given in Exhibit 2. The new general overhead allocations to the two treatments on basis of the general overhead cost drivers are given in Exhibit 1. The major difference between the RCC method for allocating cost and the Phase I ABC method is that in the first method HD treatments were generating a profit of $9.17 per treatment and under the Phase I ABC method HD generated a loss of $5.92. This happened because a small proportion (about 2.5%) of the general overhead cost shifted from PD treatments to HD treatments. However, a larger proportion (23%) of the durable equipments and nursing services costs were shifted from PD to HD treatments as these costs were allocated as 85% to HD and 15% to PD. Thus, HD was an unprofitable treatment now.  

Phase II
The revised product-line income statements and profit and loss statement for individual treatments, after allocation of nursing and machine operator resources, is given in Exhibit 4. The analysis of nursing and machine operator resources is given in Exhibit 3. The new allocation of service expenses drastically changes the profits incurred by the two treatments. Under the revised cost estimates, HD is allocated $466,610 for general overheads, $116,489 for durable equipment use and $661,966 for nursing services, a total of $1,245,065 as service costs. This reduces the net income of HD treatments to $3,923 from $131,525 under the ratio-of-cost-to charge system. On the other hand, the net income for PD treatments has increased from $93,504 under the old system to $221,106 under ABC system. The cost allocations are as follows: $319,215 for general overheads, $20,557 as durable equipment use and $221,314 for nursing services, a total of $561,086 as service costs.  

Analysis of newly produced information
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The newly produced information gives some surprising results. In Phase II the nursing costs were also allocated to...
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