Houston Dialysis Center

Houston Dialysis Center

CASE STUDY 1

Jessica Hardyway-Ngugi

Friends University

Financial Management

HLCL 518

Dr. Hume

September 13, 2015

Houston Dialysis Center

        This case study is to determine cost allocations for the Houston Dialysis Center, pharmacy and the Outpatient Clinic.   Throughout this case study it discussed the need to expand the facility (outpatient clinic) to bring in more patients and revenue.  

1. Is it “fair” for the Dialysis Center to suffer in profitability, and hence for Linda to possibly lose her bonus, just because the Outpatient Clinic needs additional space?

As I indicated in this week discussion I find that it would be “fair” for Linda to possibly lose her bonus due to the Outpatient Clinic needing additional space.  After reading other students discussions for this week I found that many determine it was not “fair”.  Yet, each one of them made a valid point on why it would not be “fair”. I still consider it to be fair because the Outpatient Clinic is beyond more profitable for the hospital opposed to the Dialysis Center.  It would be 30K versus 3.3 million before expansion takes place.  The Outpatient Clinic service is in great need for the actual size to be expand.  The Dialysis Center could initially improve its revenue through managerial negotiations with the hospital regarding special cost allocations. If we take into consideration of the direct cost profit of $6.2K to $7.7K annually, we would be able to increase the system revenue.    

2. In the past, the medical center has aggregated all facilities costs, and then allocated the total amount on the basis of square footage.  The proposed allocations for the Dialysis Center, on the other hand, requires it to bear the true facilities costs of its new space.  What are the advantages and disadvantages of the new methodology? Do you support the new allocation scheme? 

Personally, I support the hospital moving to the true facilities costs for the new space.  The advantages of the basis of square footage cost is that it is easy to measure and typically remains the same.  It provides an exact amount on what the costs of the facility will be each year for the dialysis center.  Also, it will give an ideal picture of what the facility cost would opt to be.  It will initially add the $300,000 fee for the dialysis center which was used to pay the outpatient clinic services facility cost.  Yet, the disadvantages would be that different departments will utilize various levels of services.  This method will ultimately cost more and hurt the dialysis center’s bottom line.  The building costs and the loans will have to be paid annually in order for the center to sustain open.

3. If the new allocation method for facilities costs is implemented, what should be the facilities allocation in 29 years, when the loan, and hence total cost of the move, has been paid off and there are no longer any actual facilities costs?

 I find that there should be some sort of incentive the hospital gives the Dialysis Center in making a drastic move like this one.  It was the outpatient center’s need to expand by at least 25 percent that forced the Dialysis Center to move, although the outpatient center is the hospital’s bigger source of revenue.  After 20 years and the loan being paid in full, I find that it is necessary the new facilities costs to be about $200,000.  This is $100,000 cheaper than before the move and they can use the money to reinvest in the facility and the patients they serve.  

4. Do you think the new Dialysis Center will be able to attract more patients? What impact would additional volume have on the facilities allocation decision?

Unfortunately, I believe that this expansion would be a great asset to the new Dialysis Center.  It will attract patients because it is a new facility, it will be more convenient because the parking will be accessible to all of their patients, and it will open the doors to patients because the location would be efficient and reasonable to serve the patients. The dialysis center will expand cliental and increase revenue.  The CFO (Roger Hedgecock) did not account for an increase in direct expenses for revenues due to an increase volume of patients. The forecasted P&L statement should be revised to reflect an estimated volume increase.

5. Although not shown on Table 1, the center uses (sells) $8000,000 of drugs annually in its dialysis treatments, which cost the hospital (pharmacy) $400,000.  The $4000,000 profit on these drugs accrues to the pharmacy, which records $8000,000 of revenue and $4000,000 if cost on its P& L statement.

As I reviewed this case thoroughly, the pharmacy department should share part of the $400,000 revenue with the Dialysis Center. One significant reason is that the pharmacy revenue is partially from the clientele they serve at the Dialysis Center.  If the Dialysis Center was not associated with the pharmacy the volume would not be as high.  The pharmacy would be profiting the $400,000 worth of medications to the clientele that the center provides.  The manager of the Dialysis Center (Linda), should negotiate with the hospital and pharmacy department in the sharing of this revenue.  The Dialysis Center is what makes the revenue increase and without the center the pharmacy would not be able to sustain the $400,000 annually profit.  

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