ACTUAL REQUIRED: Single bundled price for all three natural birth deliveries
THE BILLING SYSTEM The existing invoicing system billed Asante's patients for the specific services and supplies used in their particular situation. Since patient needs varied widely (even beyond the simplistic distinction between with complications and without complications), expectant parents at Asante had no certainty regarding the cost of a birth. Prices at Asante ranged from R13,912 to R19,917 for a natural birth. These costs were broken down for the patients in dizzying detail upon final discharge, which could be overwhelming for some patients. Some new parents were forced to wait for hours at discharge while their bill was being meticulously compiled and vetted by the insurance providers. The stress of anticipation and the disappointment that their birth cost more than expected was often upsetting to parents, even when much of the cost was covered by insurance. Three broad categories of care were provided in the maternity ward, from no complications (Level 1) to most complications (Level 3). Complications could range from prolonged labour (Level 2 complication) to fetal distress (Level 3 complication) (see Exhibit 2). THE TASK Before the end of her internship, Young needed to recommend a pricing strategy for the natural birth maternity ward services at Asante. The options included a single bundled price for all natural birth deliveries, three bundled prices (for each of the three different levels of care), or the status quo. To begin her analysis, Young determined the total overhead of the maternity ward by identifying cost drivers and applying those drivers to the total hospital overhead costs (see Exhibit 3). Given her understanding of the operations, she believed that utilities, rent, housekeeping, laundry, information technology, and dining hall expenses would vary with the length of stay. With the extra time involved, she thought that the general and administrative expenditures would be driven by the amount of time the registration clerk used to process the patient's paperwork. Total staff costs for the maternity ward (see Exhibit 4) were based on employees working a standard 42- hour, five-day work week, taking an average of eight personal leave days and six sick days per year, and twelve days of holidays. Each employee participated in weekly training for an average of two hours per week. The only exceptions were residents who worked 80 hours per week, but were still entitled to the same number of personal leave days, sick days, holidays, and employee training. The chief financial officer indicated that benefits and taxes added an additional 23 per cent to these costs (see Exhibit 5). ACTION REQUIRED In order to finalize her pricing recommendation, Young needed to assign costs to each level, and also consider incorporating a markup to help the hospital cover any unexpected costs. She thought a 20 per cent markup would be reasonable. With this information, she would build her presentation to the CEO, which would include a review of the total costs for each level of delivery, as well as her pricing recommendation. EXHIBIT 1: MATERNITY WARD COMPETITOR INFORMATION Asante Teaching Hospital Johannesburg Johannesburg Women's Hospital Hospital Metro Hospital St. Luke's Hospital 3 2 3 3 2 Yes Yes No Yes No Average Days in Ward Obstetrician Services Paediatrician Services Midwife Services Baby Accommodation Postnatal Care Yes Yes No Yes Yes Yes No Yes No Yes Yes Yes Yes No Yes Yes No Yes Yes No Average Price 16,915 5,271* Not Available 7,906 13,177 Note: * Not a bundled price. Source: Company documents. EXHIBIT 2: SELECTED HOSPITAL INFORMATION Level 1 Level 2 Level 3 3 3 4 4,160 240 390 Average Days in Maternity Ward Total Natural Birth Maternity Ward Patients Total Maternity Ward Patients Total Maternity Ward Square Feet Total Hospital Square Feet 11,975 30,294 455,000 Note: Patient volumes shown as an annual total. Source: Company documents. EXHIBIT 3: TOTAL ANNUAL MATERNITY WARD OVERHEAD (IN R) Overhead Item Equipment Depreciation General and Administrative Insurance Utilities Rent Housekeeping Laundry Information Technology Dining Hall Security Groundskeeping Marketing Total 363,672 314,622 233,991 7,454,026 16,195,458 206,241 395,295 6,119,349 856,684 302,076 898,940 105,412 Source: Company documents. EXHIBIT 4: ANNUAL SALARIES FOR MATERNITY WARD STAFF BY POSITION Position OB/GYNTotal for Team of Three Paediatrician-Total for Team of Four Midwife/Nurse Resident Registration Clerk Practical Nurse Salary 35,403,451 23,477,139 114,557 231,841 9,092 7,122 Note: OB/GYN = Obstetrician/Gynecologist. Source: Company documents. EXHIBIT 5: BREAKDOWN OF MATERNITY STAFF TIME PER DELIVERY (MINUTES) Position Level 1 Level 2 Level 3 30 37 80 55 71 OB/GYN Paediatrician Midwife/Nurse Resident Registration Clerk Practical Nurse 43 1,422 225 1,422 240 1,600 412 43 43 60 99 99 110 Note: OB/GYN = Obstetrician/Gynecologist. Source: Company documents. THE BILLING SYSTEM The existing invoicing system billed Asante's patients for the specific services and supplies used in their particular situation. Since patient needs varied widely (even beyond the simplistic distinction between with complications and without complications), expectant parents at Asante had no certainty regarding the cost of a birth. Prices at Asante ranged from R13,912 to R19,917 for a natural birth. These costs were broken down for the patients in dizzying detail upon final discharge, which could be overwhelming for some patients. Some new parents were forced to wait for hours at discharge while their bill was being meticulously compiled and vetted by the insurance providers. The stress of anticipation and the disappointment that their birth cost more than expected was often upsetting to parents, even when much of the cost was covered by insurance. Three broad categories of care were provided in the maternity ward, from no complications (Level 1) to most complications (Level 3). Complications could range from prolonged labour (Level 2 complication) to fetal distress (Level 3 complication) (see Exhibit 2). THE TASK Before the end of her internship, Young needed to recommend a pricing strategy for the natural birth maternity ward services at Asante. The options included a single bundled price for all natural birth deliveries, three bundled prices (for each of the three different levels of care), or the status quo. To begin her analysis, Young determined the total overhead of the maternity ward by identifying cost drivers and applying those drivers to the total hospital overhead costs (see Exhibit 3). Given her understanding of the operations, she believed that utilities, rent, housekeeping, laundry, information technology, and dining hall expenses would vary with the length of stay. With the extra time involved, she thought that the general and administrative expenditures would be driven by the amount of time the registration clerk used to process the patient's paperwork. Total staff costs for the maternity ward (see Exhibit 4) were based on employees working a standard 42- hour, five-day work week, taking an average of eight personal leave days and six sick days per year, and twelve days of holidays. Each employee participated in weekly training for an average of two hours per week. The only exceptions were residents who worked 80 hours per week, but were still entitled to the same number of personal leave days, sick days, holidays, and employee training. The chief financial officer indicated that benefits and taxes added an additional 23 per cent to these costs (see Exhibit 5). ACTION REQUIRED In order to finalize her pricing recommendation, Young needed to assign costs to each level, and also consider incorporating a markup to help the hospital cover any unexpected costs. She thought a 20 per cent markup would be reasonable. With this information, she would build her presentation to the CEO, which would include a review of the total costs for each level of delivery, as well as her pricing recommendation. EXHIBIT 1: MATERNITY WARD COMPETITOR INFORMATION Asante Teaching Hospital Johannesburg Johannesburg Women's Hospital Hospital Metro Hospital St. Luke's Hospital 3 2 3 3 2 Yes Yes No Yes No Average Days in Ward Obstetrician Services Paediatrician Services Midwife Services Baby Accommodation Postnatal Care Yes Yes No Yes Yes Yes No Yes No Yes Yes Yes Yes No Yes Yes No Yes Yes No Average Price 16,915 5,271* Not Available 7,906 13,177 Note: * Not a bundled price. Source: Company documents. EXHIBIT 2: SELECTED HOSPITAL INFORMATION Level 1 Level 2 Level 3 3 3 4 4,160 240 390 Average Days in Maternity Ward Total Natural Birth Maternity Ward Patients Total Maternity Ward Patients Total Maternity Ward Square Feet Total Hospital Square Feet 11,975 30,294 455,000 Note: Patient volumes shown as an annual total. Source: Company documents. EXHIBIT 3: TOTAL ANNUAL MATERNITY WARD OVERHEAD (IN R) Overhead Item Equipment Depreciation General and Administrative Insurance Utilities Rent Housekeeping Laundry Information Technology Dining Hall Security Groundskeeping Marketing Total 363,672 314,622 233,991 7,454,026 16,195,458 206,241 395,295 6,119,349 856,684 302,076 898,940 105,412 Source: Company documents. EXHIBIT 4: ANNUAL SALARIES FOR MATERNITY WARD STAFF BY POSITION Position OB/GYNTotal for Team of Three Paediatrician-Total for Team of Four Midwife/Nurse Resident Registration Clerk Practical Nurse Salary 35,403,451 23,477,139 114,557 231,841 9,092 7,122 Note: OB/GYN = Obstetrician/Gynecologist. Source: Company documents. EXHIBIT 5: BREAKDOWN OF MATERNITY STAFF TIME PER DELIVERY (MINUTES) Position Level 1 Level 2 Level 3 30 37 80 55 71 OB/GYN Paediatrician Midwife/Nurse Resident Registration Clerk Practical Nurse 43 1,422 225 1,422 240 1,600 412 43 43 60 99 99 110 Note: OB/GYN = Obstetrician/Gynecologist. Source: Company documents
