Hospital Internal Control You have been assigned to study various means to help reduce the overall cost of running a hospital.’ Your first project is in the 7 Assume that an objective of the hospital is to have total revenue exceed total expenses by 6 percent. Another objective is to minimize hospital cost to the patient in the face of tremendous past price increases.

pharmacy. Upon discussing the issue of drug usage and control, various pharmacists have indicated a suspicion that a significant quantity of drugs is not accounted for. There were three possible sources of loss:

(a) breakage, spillage, and wastage,

(b) failute to charge patient for drugs actually delivered, and

(c) theft.
The chief pharmacist estimates that the revenue value of these losses is about $120,000 per year. The three causes listed earlier probably each account for one-third of this amount. The actual invoice cost of drugs is about onequarter of the billing price that patients pay. Drugs are ordered in bulk, and large quantities are held in inventory to minimize stockouts. Ordering and handling costs account for another 10 percent of the drug invoice cost. The remaining drug markup covers miscellaneous pharmacy overhead and contribution to hospital overhead.
Under the present system, the source document for billing purposes is the medical record sheet filled out by the nurse each time she administers medication. When the doctor prescribes a specific drug, the request is sent to the pharmacy, where the order is filled and sent up to the floor along with the rest of the drugs for that ward. The medication containers have the patients’
names on them and are placed in open bins in the storeroom according to room number. The storeroom is located in the central nursing area, adjacent to the head nurse’s office. The storeroom is never locked, since many different nurses and doctors use the room around the clock to prepare medication.
When the pharmacist fills the order, he includes the number of doses that will probably be required during the next three or four days. Unused portions of the order that can be reused (i.e., pills, sealed immunization ampules)
are returned to the pharmacy when the patient no longer requires them. The actual number of units in the container is not tallied because it is irrelevant, as billing comes from the medical record sheet. So, if any medication is lost either through accident, neglect, or mischief, no one would really be able to trace the actual amount lost.
Two new systems have been proposed to improve the situation. One involves charging patients for all medication when the orders are filled by the pharmacist and crediting each patient for any usable returns. This “frontend-billing” is commonly used in some other hospitals. With this system, there is no lost revenue; the patient pays for all drugs that theoretically have been allocated to him. It is estimated that revenue would increase by $120,000 annually if this system were implemented. Two clerks would be needed to handle credits at a total annual cost of $16,000.
The other system involves installation of three satellite pharmacies in strategic locations in the wards. These would replace the present medication storerooms. Full-time pharmacists would be in charge of these satellites. They would be responsible for all inventory and would place the exact medication needed for each shift in a tray for the nurse. If the pharmacist felt that a particular nurse might be neglectful in recording drug administration, he could compare her medical record sheet with his records. Since the pharmacist would be the only person to have access to the satellite inventory, and since this inventory would be accurately quantified as it left the central pharmacy and had to be completely accounted for, it was felt that losses would be almost entirely eliminated. Rescheduling of personnel and shifting of inventory from the central pharmacy would enable satellite operation at an increased annual cost of $24,000.
1, What is the actual current loss of net income due to the drug-control problem? 2. Of the systems being considered, which would you recommend? Explain fully. lo1