Harvard Case - Boston Children's Hospital: Measuring Patient Costs
"Boston Children's Hospital: Measuring Patient Costs" Harvard business case study is written by Robert S. Kaplan, Mary L. Witkowski, Jessica A. Hohman. It deals with the challenges in the field of Accounting. The case study is 28 page(s) long and it was first published on : Mar 23, 2012
At Fern Fort University, we recommend Boston Children's Hospital (BCH) implement a comprehensive Activity-Based Costing (ABC) system to accurately measure patient costs. This system should be integrated with existing financial reporting and accounting procedures, enabling BCH to gain a deeper understanding of cost drivers, optimize resource allocation, and ultimately improve financial performance.
2. Background
Boston Children's Hospital, a renowned pediatric healthcare provider, faces challenges in accurately measuring patient costs. The current cost accounting system relies on traditional allocation methods, which fail to capture the complexity of BCH's diverse services and patient populations. This lack of granular cost information hinders decision-making, resource allocation, and ultimately, the hospital's ability to achieve its strategic goals.The case study highlights the efforts of Dr. John Williams, the Chief Financial Officer (CFO), who recognizes the need for a more sophisticated cost accounting system. He seeks to implement a system that aligns with the hospital's mission of providing high-quality, cost-effective care.
3. Analysis of the Case Study
The case study reveals several key issues hindering BCH's financial performance:- Limited Cost Visibility: The current cost accounting system lacks the granularity to accurately measure the costs associated with different patient types, procedures, and departments. This limits BCH's ability to understand cost drivers and make informed decisions regarding resource allocation and pricing strategy.
- Inefficient Resource Allocation: Without accurate cost data, BCH struggles to optimize resource allocation. This can lead to underutilization of resources, inefficiencies, and ultimately, higher costs.
- Difficulty in Benchmarking: The lack of a standardized cost accounting system makes it challenging for BCH to benchmark its performance against other hospitals, hindering its ability to identify areas for improvement.
- Limited Pricing Transparency: The absence of a robust cost accounting system makes it difficult to determine accurate pricing for services, potentially leading to underpricing or overpricing, impacting profitability.
To address these issues, BCH can leverage a comprehensive Activity-Based Costing (ABC) system. This approach involves identifying and tracking the activities that drive costs and allocating those costs based on the resources consumed by each activity.
4. Recommendations
To implement an effective ABC system, BCH should take the following steps:
- Define Cost Drivers: Identify the key activities that drive costs within each department, including patient care, administrative support, and facility maintenance. Examples include:
- Patient care: Surgical procedures, diagnostic tests, nursing care, and medication administration.
- Administrative support: Billing and coding, patient scheduling, and insurance verification.
- Facility maintenance: Cleaning, repairs, and equipment maintenance.
- Develop Cost Pools: Group similar activities into cost pools. For example, a cost pool for surgical procedures could include all activities related to operating room use, anesthesia, and surgical supplies.
- Allocate Costs to Cost Pools: Allocate costs to each cost pool based on the resources consumed by each activity. This requires collecting data on resource consumption, such as labor hours, equipment usage, and materials.
- Assign Costs to Patients: Assign costs to individual patients based on the activities they consume. This involves tracking the specific activities used for each patient, such as the number of surgical procedures, diagnostic tests, and nursing hours.
- Integrate with Existing Systems: Integrate the ABC system with BCH's existing financial reporting and accounting procedures to streamline data collection and reporting.
- Develop Performance Metrics: Establish performance metrics based on the ABC data, such as cost per patient, cost per procedure, and cost per unit of service. These metrics can be used to track progress, identify areas for improvement, and make informed decisions regarding resource allocation and pricing.
- Provide Training and Support: Provide training to staff on the new ABC system and offer ongoing support to ensure its successful implementation.
5. Basis of Recommendations
The recommended ABC system aligns with BCH's core competencies and mission of providing high-quality, cost-effective care. By accurately measuring patient costs, BCH can:
- Improve Resource Allocation: Optimize resource allocation based on actual cost drivers, leading to greater efficiency and cost savings.
- Enhance Pricing Strategy: Develop more accurate pricing for services based on actual costs, ensuring fair reimbursement and improving profitability.
- Strengthen Financial Performance: Gain a deeper understanding of cost drivers and identify areas for cost reduction, ultimately improving financial performance and sustainability.
- Improve Decision Making: Provide decision-makers with more accurate and granular cost data to support informed decisions regarding resource allocation, service offerings, and strategic investments.
The implementation of ABC is supported by its quantifiable benefits:
- Increased Profitability: By accurately allocating costs and identifying cost-reduction opportunities, BCH can improve profitability and financial stability.
- Improved Efficiency: By optimizing resource allocation and streamlining processes, BCH can enhance operational efficiency and reduce waste.
- Enhanced Transparency: The ABC system provides greater transparency into cost drivers and patient costs, fostering trust with stakeholders and improving accountability.
6. Conclusion
Implementing a comprehensive Activity-Based Costing system will equip Boston Children's Hospital with the tools necessary to accurately measure patient costs, optimize resource allocation, and improve financial performance. This approach aligns with BCH's mission of providing high-quality, cost-effective care while ensuring long-term financial sustainability.
7. Discussion
While ABC offers significant benefits, there are potential risks and challenges associated with its implementation:
- Data Collection and Maintenance: Collecting and maintaining accurate data for the ABC system can be time-consuming and resource-intensive.
- Resistance to Change: Staff may resist the change in accounting procedures and reporting requirements.
- Complexity: Implementing and maintaining an ABC system can be complex, requiring expertise in cost accounting and IT management.
To mitigate these risks, BCH should:
- Phased Implementation: Implement the ABC system in phases, starting with a pilot program in a specific department.
- Strong Leadership and Communication: Communicate the benefits of the ABC system to staff and gain their buy-in.
- Invest in Training and Support: Provide adequate training and ongoing support to staff to ensure the successful implementation and maintenance of the system.
8. Next Steps
BCH should develop a timeline for implementing the ABC system, including the following key milestones:
- Phase 1 (Months 1-3): Develop a detailed implementation plan, including budget, resources, and timeline. Conduct a pilot program in a specific department to test the system's effectiveness.
- Phase 2 (Months 4-6): Refine the ABC system based on the pilot program results. Train staff on the new system and begin collecting data.
- Phase 3 (Months 7-9): Integrate the ABC system with existing financial reporting and accounting procedures. Develop performance metrics and begin reporting on cost data.
- Phase 4 (Months 10-12): Evaluate the effectiveness of the ABC system and make adjustments as needed. Expand the system to other departments.
By following these steps, BCH can successfully implement an ABC system that will provide valuable insights into patient costs, improve resource allocation, and enhance financial performance.
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Case Description
The case describes two pilot projects on applying activity-based costing to measuring the cost of treating patients. It presents process maps and financial data relating to the processes used during (1) an office visit to a plastic surgeon for three different diagnoses, and (2) application and removal of three different casts in the orthopedic cast room. Students calculate and compare the costs and margins of the three procedures at the two different sites using the hospital's existing cost system and a proposed new system based on time-driven activity-based costing.
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