Introduction
Big Bend Medical Center is a non-profit organization that provides full service acute care. The bulk of the facilities are consequently devoted to inpatient care, with 100,000 square feet of the hospital dedicated to outpatient services. This area currently has two primary uses: the Outpatient Center (OC), which occupies 80,000 square feet, and the Dialysis Center (DC), which uses the remaining 20,000 square feet.
Due to recent growth, the OC needs 25% more space. As the OC needs a closer physical presence to all other departments in the hospital, it was decided that the full 100,000 square feet currently occupied by the OC and the DC should be solely dedicated to the OC and that the DC should relocate to a new 20,000 square foot facility to be constructed separate from the hospital building.
In addition to the move, a change to the facilities cost allocation scheme has been proposed. Under the new cost allocation scheme, DC would no longer be profitable. Big Bend Medical Center must come with an alternative cost allocation structure to allow DC to be sustainable in long term while allowing the OC to expand its existing footprint.
Question 1: Is it ”fair” for the Dialysis Center to suffer in profitability, and hence for the department head to possibly lose his bonus, just because the Outpatient Clinic needs additional space?
If the proposed allocation method (under which the DC would bear the full cost to construct and relocate to the new 20,000 square foot facility) is used, then the answer is no. The DC did not request or need the new space; its relocation resulted from the need to accommodate the OC's growth. The bulk of the benefit from the DC relocating goes to the OC, which is expected to enjoy 25% higher revenues as a result of the expansion. Although the DC may recognize some benefits from its new space, such as greater convenience for