Please read through entire case. Only question 1 on page 5 will need to be answered. Please make a table for each cost accounting systems (1. Traditional 2. Department 3. Activity based accounting systems). Each accounting system table will need to be placed on a different tab of the excel sheet. Under each table please provide a brief description of the table. Also, the explanation of what accounts for the difference will also need to be on a separate tab. Please let me know if you have questions!
Croswell University Hospital Croswell University Hospital This report doesn’t describe where our costs are generated. We’re applying one standard to all patients, regardless of their level of care. What incentive is there to identify and account for the costs of each type of procedure? Unless I have better cost information, all our attempts to control costs will focus on decreasing the number of days spent in the hospital. This limits our options. In fact, it’s not even an appropriate response to senior management’s mandate. The speaker was Ann Julian, M.D., Chief of the Department of Obstetrics and Gynecology at Croswell University Hospital, a medium-sized tertiary care facility. After reviewing the most recent cost report for her department, Dr. Julian had some serious concerns, and was meeting with Jonathan Haskell, the Director of Fiscal Affairs, whose department had generated the report. Dr. Julian continued: Not only that, but over half the costs are not even within my control. How am I supposed to exert any influence over dietary or housekeeping, for example? I also know from experience that the cost figure the hospital is using for a simple lab test, such as a CBC, is exorbitant. And it’s likely that some of the other clinical services shown on my report are too expensive as well. But I can’t do anything about it! BACKGROUND Two years ago, in an effort to control rising hospital costs, Croswell’s senior management had instituted spending limits, and had made each department responsible for keeping its total costs at or below the limit determined during annual budget negotiations. Ob-Gyn, like many other departments, had felt the pinch. Some years ago, Croswell had established a departmental cost accounting system, and now, with the support of its medical staff leadership, Croswell required each service chief to become involved in the hospital’s budgeting process, and to take responsibility for the costs associated with the care of patients in his or her department. By involving service chiefs in the budgeting and control process, Croswell’s senior management hoped to gain more control over its costs, and to improve the hospital’s overall financial performance. THE COST ACCOUNTING SYSTEM Croswell’s cost accounting system was based on three costing units: a bed/day for inpatient care, a visit for outpatient care, and a procedure (or operation) for operating rooms. Each department was required to compute its unit costs, such as a cost-per-bed-per-day for inpatient care, and report them to senior management on a monthly basis. Senior management planned to use the information for cost comparisons, and it expected that each chief would make cross-department comparisons as part of its cost-control efforts. Under Mr. Haskell’s leadership, Croswell had begun to use standard costing units for its clinical care departments (such as Ob-Gyn), and it had begun to use similar units for its clinical service departments, such as radiology, laboratory, and the pharmacy. In radiology, for example, the unit was a procedure, and Mr. Haskell’s staff computed an average cost per procedure each month. The monthly radiology costs for each clinical care department then were computed by multiplying this average by the number of procedures its physicians had ordered that month. The same was true in the laboratory, where the unit was a test, and in the pharmacy, where it was a filled prescription. HBSP Product Number TCG175 THE CRIMSON PRESS CURRICULUM CENTER THE CRIMSON GROUP, INC. ____________________________________________________________________________________________________________ This case was prepared by Professor David W. Young. It is intended as a basis for class discussion and not to illustrate either effective or ineffective handling of an administrative situation. Copyright © 2017 by David W. Young and The Crimson Group, Inc. To order copies or request permission to reproduce this document, contact The Crimson Press Curriculum Center at 617-497-9600 (Voice) or 617-576-7693 (Fax), or go to www.thecrimsongroup.org. Under provisions of United States and international copyright laws, no part of this document may be reproduced, stored, or transmitted in any form or by any means without written permission from The Crimson Group. If you believe that you have an illegal copy of this document, please notify the Crimson Press Curriculum Center of this fact immediately. Thank you. For the exclusive use of M. Bonner, 2021. This document is authorized for use only by Monica Bonner in Costs/Budgets 2021 Spring taught by YONG GYO LEE, University of Houston from Jan 2021 to Jul 2021. To calculate the cost per bed/day for a clinical care department,, the fiscal affairs staff first computed that department’s direct costs. Then, using the above methodology, it added the costs of the tests, procedures, and prescriptions the department’s physicians had ordered from the clinical service departments. It called these purchased clinical services. Finally, it allocated the hospital service center costs, such as dietary, laundry, and housekeeping, to the department, using allocation bases (such as space, meals, and hours of service) that had been specified by the ministry. The result for Dr. Julian’s department is shown in Exhibit 1. Exhibit 1 also shows the units used for the clinical service departments, and the bases used for allocating service center costs. To calculate the cost per bed/day for a clinical care department,, the fiscal affairs staff first computed that department’s direct costs. Then, using the above methodology, it added the costs of the tests, procedures, and prescriptions the department’s physicians had ordered from the clinical service departments. It called these purchased clinical services. Finally, it allocated the hospital service center costs, such as dietary, laundry, and housekeeping, to the department, using allocation bases (such as space, meals, and hours of service) that had been specified by the ministry. The result for Dr. Julian’s department is shown in Exhibit 1. Exhibit 1 also shows the units used for the clinical service departments, and the bases used for allocating service center costs. After fiscal affairs had determined a clinical care department’s direct costs, added the costs, for clinical services, and allocated the service center costs, it calculated the average cost per unit by dividing the department’s total costs by its number of bed/days. The average for inpatient surgery-gynecology is shown at the bottom of Exhibit 1. Exhibit 2 shows the average cost per unit for several other surgical specialty departments. After reviewing his department’s cost report, Dr. Julian felt that the obstetrics service was fairly well-defined in terms of its costs. By contrast, surgical gynecology presented a problem. She commented: Gynecological procedures are less amenable to assignment into cost categories. This is mainly because of the age range and diversity of the patients, but it’s also due to the distinctions among the surgical subspecialties in gynecology. Because of this, the present cost accounting system is of little use for gynecology cases. This is extremely frustrating, especially since the hospital is expecting me to use this information to manage the department’s costs. The average figure simply does not account for the real use of clinical resources by gynecology patients. Mr. Haskell disagreed: Dr. Julian just doesn’t understand. This system is ideal for comparative purposes. It allows me to quickly compare the costs among different departments within the hospital. It also helps me to compare the cost of a particular department at Croswell with a similar department at another hospital. Additionally, I can use the information to estimate the cost of treating an entire illness at Croswell. For example, with this system, I can easily determine the approximate cost of treating a patient having a total abdominal hysterectomy [TAH],1 and compare it to other hospitals. According to Mr. Haskell’s figures, the cost of a non-oncology TAH (which usually required four days in the hospital) was 3,708 (927 x 4). To this would be added the cost of a major operation with general anesthesia, or 1,197. (The procedure might also be performed with epidural or spinal anesthesia at the discretion of the attending physician and the anesthesia staff, in which case the total cost of the procedure would be slightly less.) The inpatient operating room costs were based on a two-year study, and the figures were updated regularly by the fiscal affairs department. At present, Dr. Julian was not held accountable for these costs, nor for the costs of anesthesia management. She was responsible only for the costs associated with the pre- and postoperative care of the patients in his department. These costs were the ones causing her difficulty. She continued: Some patients, especially those undergoing treatment for cancer, use more resources than others. This is mainly because the testing and therapeutic treatment of patients varies widely. Some patients require more or fewer diagnostic and therapeutic interventions, depending on their admitting diagnoses. For example, radiation therapy is used almost exclusively by oncology patients. ____________________________________________________________________________________________________________ TCG175 • Croswell University Hospital 2 of 10 1 This is a procedure in which the uterus, fallopian tubes, and ovaries are removed. If the procedure is done for reasons other than cancer, it is classified as a non-oncology procedure. For the exclusive use of M. Bonner, 2021. This document is authorized for use only by Monica Bonner in Costs/Budgets 2021 Spring taught by YONG GYO LEE, University of Houston from Jan 2021 to Jul 2021. Somehow, a good cost accounting system needs to recognize these differences. I also don’t want my department to appear overly costly simply because some patients don’t conform to the norm. The current cost accounting system just doesn’t account for the differences among patients. As a result, it doesn’t give me the data I need to manage costs, and it includes a variety of items that I can’t control. THE USE OF CLINICAL DISTINCTIONS After some discussion, Dr. Julian convinced Mr. Haskell that the average unit cost calculation could be revised to account for the differences among patients having different gynecology procedures. In an effort to address these clinical differences, The two decided that gynecology patients could be divided into three categories according to clinical subspecialty: 1. General gynecology/urogynecology (non-oncology) 2. Reproductive/invitro fertilization 3. Oncology With the help of Dr. Julian, Mr. Haskell calculated time and material estimates for each type of patient stay. For example, he estimated that, in general, more medication was used on oncology patients than on general gynecology patients. Also, oncology