Case%Study%#3% HCM%4550% % Big%Bend%Medical%Center%has%a%diversified%facility%similar%to%many%care%centers% around%the%US,%with%a%majority%of%resources%utilized%by%the%hospital%through%inpatient%care.% Big%Bends%outpatient%facility%is%the%second%largest%revenue%stream%in%the%organization% followed%by%their%dialysis%center%which%is%fractionally%profitable.%The%dilemmas%faced%by%Big% Bend%on%how%to%allocate%the%costs%of%expanding%the%current%outpatient%facility%while% building%a%new%dialysis%center%in%a%more%profitable%area%are%complex.%The%solution%for% proper%cost%allocation%must%incorporate%both%strong%business%and%ethical%considerations% before%a%decision%can%be%made.%This%report%serves%as%a%discussion%of%alternative%allocation% methods%and%the%determination%of%a%suitable%and%mutually%beneficial%cost%structure%before% proceeding%with%the%expansion.% The%original%allocation%process%primarily%focuses%on%square%footage%and%disregards% profitability%or%revenue%generation%for%the%unexpanded%facility.%The%outpatient%center% generates%a%much%larger%revenue%stream.%Both%facilities%are%charged%$15%per%square%foot% even%though%the%outpatient%center%holds%80%%of%the%facilities%square%footage.%The%postM expansion%initial%allocation%of%costs%provides%an%expansion%of%the%outpatient%center%by% 20,000%square%feet,%while%the%new%dialysis%centers%size%remains%constant%at%20,000%square% feet.%The%initial%allocation%for%the%new%dialysis%facility%also%increases%square%footage%cost%by% 5%%while%the%outpatient%facility%expands%with%no%increase%in%cost.%It%is%unfair%for%the%dialysis%

center%to%suffer%financially%while%the%Outpatient%Center%instigated%the%expansion%to%increase% capacity%and%thus%generating%additional%revenues.%% Our%recommendation%is%similar%in%most%aspects%compared%to%the%original%allocation% but%differs%in%regards%to%sharing%the%profits%gained%by%the%pharmaceutical%department.%%The% pharmacy%generates%$800,000%in%revenues,%and%bills%the%dialysis%center%$800,000%in%direct% costs.%Our%proposal%is%to%give%the%dialysis%center%a%37.5%%discount%on%their%expenses% allocating%the%facility%$300,000%with%which%would%cover%a%substantial%portion%of%their% facility%costs.%The%$300,000%allocated%over%a%twenty%year%period%will%allow%the%dialysis% center%to%remain%profitable%and%enable%the%Department%Head%to%still%realize%a%performance% bonus%at%the%end%of%the%year.%Allowing%the%dialysis%center%to%retain%some%of%their%revenues% for%the%20%years%is%justifiable%because%they%directly%generate%revenue%by%selling% pharmaceutical%products.%With%this%proposed%discount%the%Dialysis%Center%will%still%be%able% to%generate%$230,000%in%profits%as%seen%in%Exhibit%A.%Under%this%cost%sharing%approach,%the% Dialysis%Center%will%also%remain%competitive%with%a%proportional%contribution%margin%of% $900,000%compared%to%the%Outpatient%Clinic’s%contribution%margin%of%$7,708,556%as%seen%in% Exhibit%B.%%

Exhibit A

! Exhibit!B!

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