Parkview Hospital, a regional hospital, serves a population of 400,000 people. The next closest hospital is 50 miles away. Parkview’s accounting system is adequate for patient billing. The system reports revenues generated per department but does not break down revenues by unit within departments.

For example, Parkview knows patient revenue for the entire psychiatric department but does not know revenues in the child and adolescent unit, the chemical dependence unit, or the neuropsychiatric unit.

Parkview receives its revenues from three principal sources: the federal government (Medicare), the state government (Medicaid), and private insurance companies (Blue Cross Blue Shield). Until recently, the private insurance companies continued to pay Parkview’s increasing costs and passed these on to the firms through higher premiums for their employees’ health insurance.

Last year Trans Insurance (TI) entered the market and began offering lower-cost health insurance to local firms. TI cut benefits offered and told Parkview that it would pay only a fixed dollar amount per patient. A typical firm could cut its health insurance premium 20 percent by switching to TI. TI was successful at taking 45 percent of the Blue Cross–Blue Shield customers. These firms faced stiff competition and sought to cut their health care costs.

Parkview management estimated that its revenues would fall 6 percent, or $3.2 million, next year because of TI’s lower reimbursements. Struggling with how to cope with lower revenues, Parkview began the complex process of deciding what programs to cut, how to shift the delivery of services from inpatient to outpatient clinics, and what programs to open to offset the revenue loss (for example, open an outpatient depression clinic). Management can forecast some of the costs of the proposed changes, but many of its costs and revenues (such as the cost of the admissions office) have never been tracked to the individual clinical unit.

Required:

a. Was Parkview’s accounting system adequate 10 years ago?

b. Is Parkview’s accounting system adequate today?

c. What changes should Parkview make in its accounting system?