ASANTE TEACHING HOSPITAL: ACTIVITY-BASED COSTING Melissa Jean and Courtney Young wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials. contact lvey Publishing, lvey Business School, Western University, London, Ontario, Canada, N66 0N1: (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Copyright 2016, Richard lvey School of Business Foundation Version: 2016-09-14 In August 2015, Courtney Young had only two weeks le in her internship at Asante Teaching Hospital (Asante), a prestigious not-for-prot hospital in Johannesburg, South Africa, to organize the cost data she had gathered from staff interviews into clear recommendations for the chief executive ofcer (CEO). The hospital's maternity ward competitors had begun offering bundled pricing for natural births, and Young wondered if Asante should do the same. In order to calculate the costs of the service, Young planned to employ both activity-based and time-driven activity-based costing techniques With this information, Young would be prepared to present the results of her analysis and recommendations for a pricing strategy to the CEO. ASANTE TEACHING HOSPITAL Asante had served its community for 40 years, and was the top-ranked hospital in the region for surgery, trauma, neonatal care, and teaching, as evidenced by its status as the ofcial emergency facility for visiting presidents and prime ministers. Asante had 274 beds, employed 1,652 staff, and served over 22,000 patients each year with an annual budget of over R378 million.' The hospital received 100 per cent of its funding from a private foundation, and was governed by a board of directors. Because Asante received no government support, patients paid for their services through a combination of insurance coverage and out-of-pocket payments. If patients were unable to afford services, they could apply for coverage under Asante's Patient Welfare Program. This program was jointly funded by the foundation, donations, and any hospital surpluses. The charitable mission of the foundation was to improve living conditions and opportunities for millions of people, without regard to race or religion. Despite Asante's not-forprot status, it operated like a competitive enterprise whose revenue gure was comprised of cost recovery from patients and their insurers As a not-for-prot organization, Asante's challenge was to extract maximum benets for each dollar of annual funding from the foundation. Examples of these benets included more doctors learning at a higher level, and advances in eye surgery that created greater benet for those suffering from cataracts. Quantifying these metrics objectively (even so ones such as \"better\") was an important part of the challenge for the organization. 1 R = ZAR = South African rand: all currency amounts are 'in R unless otherwise specied: USD$1 = R1269 on August 1, 2015. Authorized lor use only In the course ACCT 301 at University of Calgary taught by Alice Gao lrorri Jan 01, 2021 to Apr 30, 2021. Use outside these parameleis Is a copyright violation Page 2 93163012 Asante's CEO was a chartered professional accountant, and was recruited in 2013 'om a for-prot hospital in Califomia, where he had earned a reputation for disciplined cost control. This skill set appealed to the board because it had the potential to broaden the number of positive patient outcomes through astute cost management. THE ENVIRONMENT Locatlon Johannesburg had a population of 4.4 million in the city itself, 7.8 million including the metropolitan area, and 10.3 million with the outer suburbs and townships.Z The city's unusual history had le vast segments of rich and poor citizens, but growth in the middle class had been strong in the decades since the end of Apartheid.3 The city and townships were economically varied, but with an average gross domestic product of R249,900,4 Johannesburg residents' wealth was higher than that of any other area in Africa. In particular, the city's middle class had grown rapidly, which meant that many residents could afford levels of health care their parents had never imagined. Although the buying power of Johannesburg residents had increased, only 20 per cent of South Africans had private health insurance coverage. Government spending on health care comprised less than half of total health expenditure Approximately 70 per cent of all doctors and most specialists worked only in the private sector; the remaining 30 per cent served the public sectors A Competitive Landscape Competing hospitals in the region operated on a for-prot basis, so they were able to raise capital from investors to expand and cam prots from operations to pay dividends. By contrast, Asante's not-for-profit model meant that it needed to survive independentlyany surplus from one department was used to offset care in another department. Competition was stiff in the health care industry, and as the population's wealth grew, so did the health care marketplace. Competitors generally offered cheaper services with fewer variations in price, but some argued that these organizations provided a lower quality of care and fewer perks in terms of comfort, such as enhanced privacy for mothers. The maternity ward pricing and services offered by competitors for natural births without complications varied across the city (see Exhibit 1), All but Johannesburg Hospital offered bundled pricing for labour with no complications. Hospitals in the best sections of the city tended to have the newest facilities and the highest prices. St. Luke's Hospital was housed in a modern building and was located in the afuent suburb of Sandton. In sharp contrast, Johannesburg Women's Hospital and Metro Hospital were located in low-income areas. All competitors except St. Luke's were configured for efficiency, with four patients per room, which rendered them less appealing to the growing demand for privacy among maternity ward patients. Privacy was a core driver of perceived luxury, and Asante was the only hospital that offered single rooms to patients for an additional fee. 2 Statistics South Africa, Census 2011 Statistical ReleaseP0301.4, October 30, 2012, accessed January 24, 2016, e Gao irom Jan 01, 2021 to Apr 30, 2021. c 9 a > E 9 S u o o m 4a 1' 2 o E E m a a) m a: 5 m E :2 3 o a: m 3 n E 01 3 a 2' m 9\" m 0 s 2' E a) Z c :3 a E m p O 0