Question

Each of the clinic’s three departments (administration, general peds and neonatology) has a cost code in the practice’s accounting software and all the practice’s expenses are assigned to one of these three areas. The practice manager is interested in better understanding the profitability of each division, but realizes that to do so she must allocate administrative cost to the two divisions.

1. The practice administrator gathers the following information about the two clinical departments for the past month

	Monthly revenue	Claims filed (including claims re-submitted)	Patient visits and consults	Sq. feet of clinic space
Neonatology	1,000,000	250	200	10,000
General peds	250,000	1,000	750	20,000

Based on the information you’ve been given about the clinic’s operations, which of the metrics the administrator collected do you think would be the best cost driver to use in allocating administrative department expenses to the clinical departments? Explain your answer.

2. Assume that the practice manager chooses the number of claims filed as a cost driver. Use this information, plus the information reported below, to find the total costs (direct cost plus allocated indirect costs) and total profit for each department. Please show your work.

	Direct costs	Claims filed	Monthly revenue	Allocated admin cost	Total cost	Profit
Administration	125,000		0
Neonatology	700,000	250	1,000,000
General peds	200,000	1,000	250,000

3. One of the physicians in the general pediatric department is a recent addition to the practice. He only has a few patients so far, but the practice has been marketing his arrival in an effort to build up his patient panel. Use the following information to come up with a ‘back of the envelope’ estimate for how profits for the practice as a whole will change if the new physician is able to add patients to the practice. Note that the physician is already working at the practice. Only use the relevant information in answering your question.

• Average monthly physician salary and benefits for the practice: $19,000
• Expected increase in monthly patient visits: 30
• Average reimbursement rate per patient appointment: $180
• Average cost of supplies used during an appointment: $5
• Expected increase in administrative department cost for additional appointments: $0
• Last year’s allocation rate for administration costs (per claim): $100

4. Assume that the general pediatrics department is running a monthly loss of $30,000 on average. Using the appropriate information from question 3, how many additional appointments does the new physician need to have to make up the $30,000 loss?

Answer 1

1) In the given problem there are 3 cost drivers namely - Claims filed, Patient Visits and Floor Area.

a) Floor Area may not be the best cost driver as the Monthly Revenue is not directly proportional to Sq. Feet of clinic space. Hence this cost driver will be eliminated.

b) Compared to Claims Filed, Number of Patients visits and consults seems to be the best cost driver, as monthly revenue is directly proportional to number of patient visits. Claims might have been resubmitted by a patient, which may not increase the revenue,whereas increase in patient will increase revenue to the clinic.

2) Assuming the practice manager chooses Claims Filed as the cost driver, Admin cost per unit of cost driver will be = $125,000 / 1,250 claims = $100 per claim

Particulars	Direct Costs	Claims Filed	Monthly Revenue	Allocated Admin Cost @ $100/claim	Total Cost	Profit
Admin Cost	125,000	-	0	-	-	-
Neonatology	700,000	250	1,000,000	25,000	725,000	275,000
General Peds	200,000	1,000	250,000	100,000	300,000	-50,000

3) The impact on profits as a whole on appointment of a new physician:

Physician Salary and Benefits = $ -19,000

Income from Patients (30*$180)=$    5,400

Cost of Supplies        (30*$5) = $ - 150

Administration costs (30*$100)= $ -3,000

Net Outflow                         = $ 16,750

The profits will reduce by $16,750 per month.

(Note: Cash outflows are shown in negative in above computation.

4) Assuming monthly loss of general pediatrics dept. to be $30,000

(It is assumed that the salary of the new physician and the cost of 30 patients is already included in the above loss)

Income per patient:

Reimbursement per patient appointment = $180

Less: Average cost of supplies                = $ 5

Less: Allocation rate for administration cost = $100     

Net Income                                                = $75

Number of appointments required to make up the loss of $30,000 = $30,000/$75 = 400