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Why Cambridge Hospital Community Health Network embarked on the ABC study. 1. Change in macro environment 1) A series of government reform significantly reduce the revenue of hospital. Federal legislative and state legislators have cut the revenue of hospital get from Medicare and Medicaid gradually since 1995. Also, the proliferation of managed care and DRG reimbursement system to outpatient clinics have fixed the revenue of hospital regardless the type or time length of service that hospital provides to patients. 2) The wave of hospital integrations forms strong competitors, i.e. joint ventures with insurance companies or nonprofit or for profit chains that could share expensive diagnostic equipment or financial risks.

2. Network itself:
Hospital economies are very often based on public funding and the primary objective of these organizations is much more to provide the acceptable level of care with predefined budget. While the hospital was required to make a 14 million reduction in expenditures in the next two fiscal years, which is 15% of the entire hospitals operating budget.
Also, Cambridge Hospital Community Health Network is high cost provider, whose unit of service costs had been rising at a rate of 10% per year. The first step for managers of Network to reduce expenditure while maintain the quality of service is to understand the detailed cost information, however, the current cost system seems cannot fulfill this requirement.

3. The drawbacks of current cost system
The current step down method could not accurately represent the true cost of the intern/resident program, the interpretive services and the use of nurse practitioners, which only reflect the amount of care for a procedure rather than the actual cost of providing that procedure. With little information about cost at unit of service level, the hospital could neither reduce the

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