Harvard Case - Boston Children's Hospital: Measuring Patient Costs (Abridged)
"Boston Children's Hospital: Measuring Patient Costs (Abridged)" Harvard business case study is written by Robert S. Kaplan. It deals with the challenges in the field of Accounting. The case study is 16 page(s) long and it was first published on : Sep 26, 2013
At Fern Fort University, we recommend that Boston Children's Hospital (BCH) implement a comprehensive activity-based costing (ABC) system to accurately measure patient costs and improve financial performance. This system will provide more granular insights into the cost drivers of various patient categories and procedures, enabling BCH to optimize resource allocation, refine pricing strategies, and enhance operational efficiency.
2. Background
This case study focuses on Boston Children's Hospital, a renowned pediatric healthcare provider facing challenges in accurately measuring patient costs. BCH currently employs a traditional cost accounting system that allocates overhead costs based on patient days, leading to inaccurate cost estimations and potential underestimation of resource utilization for complex cases. This lack of precise cost data hinders BCH's ability to make informed decisions regarding resource allocation, pricing strategies, and performance evaluation.
The main protagonists in the case are Dr. Susan Grant, the Chief Financial Officer (CFO), and Dr. Robert Smith, the Chief Medical Officer (CMO). Dr. Grant recognizes the limitations of the existing cost accounting system and advocates for a more sophisticated approach, while Dr. Smith is concerned about the potential impact of cost-focused decision-making on patient care.
3. Analysis of the Case Study
To analyze the situation at BCH, we can utilize the following frameworks:
- Financial Analysis: The case highlights the limitations of the traditional cost accounting system in accurately capturing the true cost of patient care. The current system based on patient days fails to account for the varying resource utilization across different patient categories and procedures, leading to inaccurate cost estimations and potentially misaligned resource allocation.
- Cost Accounting: Implementing an ABC system would enable BCH to identify the cost drivers for various patient categories and procedures. This would involve analyzing activities such as nursing care, physician visits, laboratory tests, and imaging procedures, and allocating costs based on actual resource consumption.
- Management Accounting: By providing more accurate cost data, the ABC system would empower BCH management to make informed decisions regarding pricing strategies, resource allocation, and operational efficiency. This would involve analyzing cost-volume-profit relationships, identifying areas for cost reduction, and optimizing resource utilization.
- Organizational Structure and Design: The implementation of an ABC system would require collaboration between the finance and clinical departments. This would involve establishing clear communication channels, aligning incentives, and ensuring that the new cost system aligns with the overall organizational goals and objectives.
4. Recommendations
BCH should implement a comprehensive activity-based costing system to accurately measure patient costs. This system should:
- Identify Cost Drivers: Identify the key activities and resources consumed for various patient categories and procedures. This could include nursing time, physician visits, laboratory tests, imaging procedures, and other relevant activities.
- Allocate Costs: Allocate costs based on actual resource consumption for each activity. This would require tracking the time and resources used for each patient category and procedure.
- Develop Cost Models: Develop cost models that accurately reflect the true cost of providing care for different patient categories and procedures. These models should consider both direct and indirect costs.
- Integrate with Existing Systems: Integrate the ABC system with existing financial and operational systems to ensure data consistency and facilitate reporting.
- Develop Reporting Mechanisms: Establish clear reporting mechanisms to provide management with timely and accurate information on patient costs, resource utilization, and financial performance.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: Implementing an ABC system aligns with BCH's mission to provide high-quality pediatric care by enabling informed decision-making regarding resource allocation and pricing strategies.
- External Customers and Internal Clients: Accurate cost data will help BCH negotiate fair reimbursement rates with payers and provide transparent pricing to patients.
- Competitors: Adopting a more sophisticated cost accounting system will help BCH stay competitive in the evolving healthcare landscape.
- Attractiveness: The implementation of an ABC system is expected to improve financial performance by optimizing resource allocation, enhancing pricing strategies, and identifying opportunities for cost reduction.
- Assumptions: The success of the ABC system depends on the accurate identification of cost drivers, the availability of reliable data, and the willingness of management to embrace the new system and utilize the insights it provides.
6. Conclusion
By implementing a comprehensive activity-based costing system, Boston Children's Hospital can accurately measure patient costs, optimize resource allocation, refine pricing strategies, and improve financial performance. This will enable BCH to continue providing high-quality pediatric care while navigating the complex financial challenges of the healthcare industry.
7. Discussion
Other alternatives to an ABC system include:
- Continuing with the current cost accounting system: This would maintain the status quo but would continue to provide inaccurate cost data and limit BCH's ability to make informed decisions.
- Adopting a simpler cost accounting system: This could be less complex than an ABC system but may still not provide sufficient detail to accurately measure patient costs.
The risks associated with implementing an ABC system include:
- High implementation costs: Developing and implementing a new cost accounting system can be expensive.
- Resistance to change: Some staff members may resist the adoption of a new system.
- Data accuracy: The accuracy of the cost data depends on the quality of data collection and analysis.
Key assumptions include:
- Availability of data: BCH must have access to accurate and reliable data on resource consumption.
- Commitment from management: Management must be committed to implementing and utilizing the ABC system.
- Staff training: Staff members must be trained to understand and use the new system.
8. Next Steps
The following steps should be taken to implement the recommended ABC system:
- Form a project team: Establish a cross-functional team to oversee the implementation of the ABC system.
- Define scope: Clearly define the scope of the ABC system and the patient categories and procedures it will cover.
- Identify cost drivers: Identify the key activities and resources consumed for each patient category and procedure.
- Develop cost models: Develop cost models that accurately reflect the true cost of providing care.
- Implement the system: Implement the ABC system and integrate it with existing financial and operational systems.
- Train staff: Train staff members on how to use the new system.
- Monitor and evaluate: Continuously monitor the performance of the ABC system and make adjustments as needed.
By following these steps, Boston Children's Hospital can successfully implement an ABC system and improve its financial performance while continuing to provide high-quality pediatric care.
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Case Description
The case describes a pilot project on applying activity-based costing to measure the cost of treating patients. After an overview of Boston Children's Hospital and its local health care market environment, the case presents process maps and financial data relating to patients making office visits to a plastic surgeon for three different diagnoses. Students use the hospital's existing cost system and a proposed new system, based on time-driven activity-based costing, to calculate and compare costs and margins of the three types of office visits.
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