Harvard Case - Boston Children's Hospital: Measuring Patient Costs (V)
"Boston Children's Hospital: Measuring Patient Costs (V)" 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 : Nov 16, 2012
This case study solution recommends 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 a more granular understanding of resource consumption and ultimately enable better decision-making regarding pricing, resource allocation, and service offerings.
2. Background
Boston Children's Hospital, a renowned pediatric healthcare provider, faces increasing pressure to manage costs amidst rising patient volumes and complex medical procedures. The current cost accounting system, based on historical averages, fails to accurately reflect the true cost of providing care. This leads to inefficient resource allocation, inaccurate pricing, and potential financial losses. The case study focuses on the challenge of accurately measuring patient costs, particularly for complex cases requiring multiple departments and specialists.
3. Analysis of the Case Study
The case highlights several key issues:
- Limited Cost Visibility: The current cost accounting system relies on historical averages, failing to capture the variability of resource consumption across different patient types and procedures. This leads to inaccurate cost allocation and potentially underpricing complex cases.
- Inefficient Resource Allocation: Without accurate cost information, BCH struggles to allocate resources effectively. This can lead to overstaffing in some departments while others face shortages, impacting patient care and financial performance.
- Pricing Challenges: The lack of accurate cost data makes it difficult to establish fair and competitive pricing for services, potentially leading to financial losses or discouraging patients seeking specialized care.
- Strategic Decision-Making: The absence of a robust cost accounting system hinders strategic decision-making regarding service offerings, resource allocation, and investment in new technologies.
Framework:
To analyze the situation, we can utilize the Value Chain Analysis framework. This framework helps identify the key activities involved in delivering patient care and their associated costs. By understanding the cost drivers within each activity, BCH can develop a more accurate and granular cost accounting system.
4. Recommendations
Implementation of an Activity-Based Costing (ABC) System:
- Define Cost Drivers: Identify the key activities involved in patient care (e.g., consultations, procedures, lab tests, nursing care, etc.) and determine the cost drivers for each activity (e.g., patient time, equipment usage, supplies, staff time).
- Allocate Costs: Assign costs to each activity based on the identified cost drivers. This requires collecting detailed data on resource consumption for each activity.
- Develop Cost Pools: Group similar activities into cost pools (e.g., surgical procedures, diagnostic tests, inpatient care).
- Calculate Cost Per Unit: Determine the cost per unit of service for each activity or cost pool.
- Integrate with Existing Systems: Integrate the ABC system with existing financial and operational systems to streamline data collection and reporting.
- Train Staff: Provide comprehensive training to staff on the new ABC system and its implications for decision-making.
Additional Recommendations:
- Develop a Standardized Costing Methodology: Establish a consistent methodology for costing across all departments and services.
- Utilize Technology: Implement software solutions to automate data collection, analysis, and reporting for the ABC system.
- Conduct Regular Cost Analysis: Periodically review and analyze cost data to identify areas for improvement and adjust pricing strategies.
- Promote Cost Awareness: Educate staff and management on the importance of cost consciousness and encourage them to actively identify cost-saving opportunities.
5. Basis of Recommendations
This recommendation addresses the core competencies of BCH by enhancing its ability to provide high-quality patient care while managing costs effectively. It aligns with the mission of BCH by ensuring financial sustainability and enabling continued investment in research and innovation.
The ABC system considers both external customers (patients) and internal clients (departments and staff) by providing accurate cost information for pricing, resource allocation, and performance evaluation.
The recommendation is attractive due to its potential for significant financial benefits:
- Improved Pricing Accuracy: More accurate cost data allows for more competitive and profitable pricing strategies.
- Efficient Resource Allocation: By understanding the true cost of services, BCH can allocate resources more efficiently, reducing waste and improving productivity.
- Enhanced Decision-Making: The ABC system provides valuable insights for strategic decision-making regarding service offerings, investments, and resource allocation.
The recommendation assumes that BCH has the necessary data infrastructure and staff expertise to implement and maintain the ABC system.
6. Conclusion
Implementing an activity-based costing system will provide Boston Children's Hospital with a more accurate and granular understanding of patient costs, leading to improved financial performance, more efficient resource allocation, and better strategic decision-making. This will ultimately enable BCH to continue providing high-quality care to its patients while ensuring the long-term financial sustainability of the organization.
7. Discussion
Alternatives:
- Continuing with the Current System: This option would maintain the status quo but would continue to face the challenges of inaccurate cost allocation and limited visibility.
- Simplified Cost Allocation: This approach could involve using a simpler cost allocation method, but it would likely sacrifice accuracy and detail.
Risks:
- Implementation Challenges: Implementing the ABC system can be complex and time-consuming, requiring significant effort from staff and management.
- Data Collection and Accuracy: The success of the ABC system relies on accurate and comprehensive data collection.
- Resistance to Change: Some staff may resist the implementation of a new cost accounting system.
Key Assumptions:
- BCH has the necessary data infrastructure and staff expertise to implement and maintain the ABC system.
- The ABC system will be adopted by all departments and staff.
- The data collected will be accurate and reliable.
8. Next Steps
- Form a Task Force: Establish a cross-functional task force to oversee the implementation of the ABC system.
- Develop a Detailed Implementation Plan: Define the scope, timeline, and resources required for implementation.
- Pilot Test the System: Implement the ABC system in a pilot department to test its effectiveness and identify any challenges.
- Roll Out the System: Gradually roll out the ABC system to other departments.
- Continuous Improvement: Regularly review and refine the ABC system to ensure its effectiveness and accuracy.
By taking these steps, BCH can effectively implement an activity-based costing system and reap its benefits for improved financial performance and patient care.
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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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