Healthcare Finance Essay

Houston Dialysis content is a incision of Houston General Hospital, a full- attend, non-for-profit acute cope infirmary with 325 beds. The bulk of the infirmarys facilities are devoted to inpatient bearing and emergency services. However, a 100,000 full-strength- flowerpot section of the hospital complex is devoted to outpatient services. Currently, this put has devil primary uses. About 80 per centum of the space is used by the Outpatient Clinic, which handles alone routine outpatient services offered by the hospital. The rest 20 share is used by the Dialysis pertain.The Dialysis focus on performs hemodialysis and peritoneal dialysis, which are alternative processes for removing wastes and excess water from the contrast for patients with end-stage renal (kidney) disease. In hemodialysis, linage is pump from the patients arm finished a shunt into a dialysis machine, which uses a cleansing solution and an artificial tissue layer to perform the functions of a health y kidney. Then, the cleansed blood is pumped back into the patient finished a second shunt.In peritoneal dialysis, the cleansing solution is inserted directly into the group AB cavity through a catheter. The dust natur all in ally cleanses the blood through the peritoneuma thin membrane that lines the abdominal cavity. In general, hemodialysis patients require three dialyses a week, with each(prenominal) treatment lasting close four hours. Patients who use peritoneal dialysis switch their own cleansing solutions at home, typically about six times per day. This influence can be done manually when active or automatically by machine when sleeping. However, the patients general condition, as well as the perspective of the catheter, must be monitored regularly at the Dialysis kernel.The hospital allocates facilities be (which primarily harp of edifice depreciation and interest on long-term debt) on the rear of fledge footage. Currently, the facilities salute apportionm ent rate is $15 per square foot, so the facilities be tryst is 20,000 $15 = $300,000 for the Dialysis Center and 80,000 $15 = $1,200,000 for the Outpatient Clinic. alone other command processing strike be, such as administration, finance, maintenance, andhouse carry throughing, are lumped together and called general overhead. These be are allocated on the basis of 10 percent of the revenues of each patient service incision. The up-to-the-minute apportioning of general overhead is $270,000 for the Dialysis Center and $1,600,000 for the Outpatient Clinic, which results in total overhead trysts of $570,000 for the Dialysis Center and $2,800,000 for the Outpatient Clinic.Recent growth in good deal of the Outpatient Clinic has created a need for 25 percent more space than genuinely assigned. Because the Outpatient Clinic is much larger than the Dialysis Center, and because its patients need browse access to other departments inside the hospital, the finish was made to kee p the Outpatient Clinic in its live location and to incline the Dialysis Center to other location to free up space. much(prenominal) a move would give the Outpatient Clinic 100,000 square feet, a 25 percent maturation. later on attempting to find new space for the Dialysis Center within the hospital complex, it was soon mulish that a new 20,000 square foot building must be built. This building provide be situated ii blocks away from the hospital complex, in a location that is much more contented for dialysis patients (and Center employees) because of ease of parking. The new space, which can be more efficiently apply than the old space, allows for a substantial ontogeny in patient volume, although it is unclear whether the move will result in additional dialysis patients.The new dialysis easiness is expected to apostrophize $3 million. Additionally, furniture and other fixtures, on with relocation expenses of current equipment, would be $1 million, for a total cost o f $4 million. The funds needed for the new facility will be obtained from a 20-year loanword at local bank. The loan (including interest) will be paid off over 20 years at a rate of $400,000 per year. Because the specific financing detail are known, it is possible to estimate the demonstr adequate annual facilities costs for the new Dialysis Center, well-nighthing that is non possible for units located within the hospital complex.Table 1 (see transcend spreadsheet) contains the intercommunicate profit and loss (P&L)statement for the Dialysis Center before adjusting for the move. The hospitals department heads receive annual bonuses on the basis of each departments parting to the bottom line (profit). In the past, whole direct costs were considered, but the hospitals brain executive officer (CEO) has decided that bonuses would now be establish on full (total) costs. Obviously, the new begin to awarding bonuses, coupled with the potential for ontogenesiss in indirect cost tryst, is of great tinct to Linda Rider, the director of the Dialysis Center. Under the current parceling of indirect costs, Linda would have a presumable chance at an end-of-year bonus, as the herald puts the Dialysis Center in the black. However, any increase in the indirect cost apportionment would likely put her out of the money.At the next department heads meeting, Linda expressed her connect about the impact of any tryst stirs on the Dialysis Centers profitability, so the hospitals CEO asked the chief financial officer (CFO), Roger Hedgecock, to look into the matter. In essence, the CEO said that the final allocation is up to Roger but that any allocation changes must be made within outpatient services. In other words, any change in cost allocation to the Dialysis Center must be offset by an equal, but opposite, change in the allocation to the Outpatient Clinic.To get started, Roger created Table 2 (see Excel spreadsheet). In creating the table, Roger assumed that the new Dialysis Center would have the same number of station as the old one, would serve the same number of patients, and would have the same reimbursement rates. Also, in operation(p) expenses would differ only slightly from the current situation because the same personnel and equipment would be used. Thus, for all practical purposes, the revenues and direct costs of the Dialysis Center would be unaffected by the move.The data in Table 2 for the expanded Outpatient Clinic are establish on the assumption that the expansion would allow volume to increase by 25 percent and that two revenues and direct costs would increase by a like amount. Furthermore, to keep the analysis manageable, the assumption was made that the overall hospital allocation rates for both facilities costs and general overhead would not materially change because of the expansion.Roger knew that his trial fly allocation, which is shown in Table 2 in the columns labeled Initial Allocation, would create some controv ersy. 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 another(prenominal)(prenominal) department heads thought this approach to be unfair, Roger wanted to begin allocating facilities overhead on a true cost basis. Thus, in his initial allocation, Roger used actual facilities costs ($400,000 per year) as the basis for the allocation to the Dialysis Center. unnecessary to say, Lindas response to the initial allocation was less than enthusiastic, but before Roger was able to address Lindas concerns, he shortly left the hospital to take a new position in another city. The task of completing the allocation paper was given to you, Houston Generals current administrative resident. You believe t hat any cost allocation system should be comprehend as being fair, but you in like manner realize that in practice cost allocation is very complex and clean arbitrary. Some department heads argue that the lift out approach to overhead allocations is the Marxist approach, by which allocations are based on each patient service departments ability to cover overhead costs, but this approach has its own disadvantages.Considering all the germane(predicate) issues, you must develop and justify a new facilities cost allocation intent for outpatient services. Be prepared to justify your recommendations at the next department heads meeting.