I am need help with question 2 and 3 please. I am not confident in my findings and struggling with completing the variances.

'1' HBSP Product Number TCG 127 THE CRIMSON PRESS CURRICULUM CENTER THE CRIMSON GROUP, INC. Bandon Medical Associates (B) We've got a budget crisis! Instead of a surplus of almost $100,000, We're looking at a potential decit of over $145,000. Nol only won't we be able to buy the new equipment that everyone's been screaming for, but Idon't see how we can pay physicians the bonuses they're'counting on: Charlene King, M.D., the senior physician member of Random Medical Associates, a small physician group practice located in Oregon, was expressing her concern about the results of the year's operations. One reason for the problem was that third party payers had lowered the rate for one of the group's visit types, but there appeared to be some other, perhaps more important, expla nations as well. Dr. King decided to analyze the reasons for the poor performance and present her findings at the group's annual strategic planning retreat, which was about 10 days away. BACKGROUND Bandon Medical Associates (EMA) had been established about 20 years ago by Dr. King and a colleague she had met during her residency. Over the years,the group had grown, and currently comprised six physicians. In addition, the group used medical assistants as extenders for the physi- cians. Last year there were two extenders, but during the most recent year, at the insistence of seva eral of the newer physicians, four additional extenders had been hired to meet the increased demand for services. Three yearsago, EMA had joined Coos Bay Health System, a large integrated delivery system (IDS) with several primary care and mold-specialty group practices, a freestanding laboratory, a freestanding radiology unit, two acute care hospitals, a nursing home, a home health agency, and a hoSpice. Coos Bay coordinated care. negotiated contracts with third party payers, and provided some central services, such as information systems support. The costs of Coos Bay's central services were allocated to each provider entity in the IDS ac- cording to some prearranged formulas. Boudoir Medical Associates (A) contains details on this and several other nancial arrangements that had been agreed to at the time BMA was purchased by Coos Bay. (Knowledge of these nancial arrangements is not needed for the analysis of this case.) FINANCIAL MATTERS BMA's physicians Were paid according to a combination of a' base salary and a bonus. Because different visit types required different levels of physician intensity, Dr. King and her colleagues had had a lengthy discussion at last year's retreat about different approaches to measuring productivity. They had finally settled on revenue as the best method. Everyone had agreed that, since the payment for each visit type was a rough reflection of its intensity, revenue generation was not only a simple way to measure each physician's productivity, but a goodone as w 11. BMA'S physicians and extenders also had agreed upon the following principles to guide their budgeting activities and compensation arrangements:' 1. While most third-party payers classied visits by precise codes, four visit types (initial visit, routine physical, intensive follow up, and routine followup) were sufcient for budgeting purposes ' Some of the details that underlie these principles and other elements of BMA'S budget formulation process are con- tained in Sandor: Medical Associates (A). These details are not needed for an analysis of this case. This case was prepzu'cd by Professor David W. Young. It is intended as a basis for class discussion and not to illus- trate either effective or ineffective handling of an administrative situation. Copyright 2012 by The Crimson Group, Inc. To order copies or request permission to reproduce this document, contact Harvard Business Publications (httpzl'fhbspharvardedui). Under provisions of United States and interna- tional copyright laws. no part of this document may be reproducedstorod. or transmitted in any form or by any mnnnc un'Ilramul urrilrru-i mn\":r_-r:nn frnm Thu-n ("rirncnn nrnnn .ftuuull lhAnvimcnnnrnhn nrn'l TCGlZ? ' Handel: Medical Associates (B) 2 of 6 2. Physicians would be available to see outpatients for 32 hours a week (eight 4-hour sessions). They also had agreed that, with time off for continuing medical education and vacations, they would be available for a total of 1,500 hours a year (about 47 weeks). 3. Physicians also would see their patients in the hospital, when necessary, and would make the occasional house call for patients who were home bound. Revenue frorn, and compen- sation for, their inpatient activities was accounted for and paid separately from the BMA budget. 4. The extenders would be expected to see patients for 1,400 hours a year less than the phy- sicians since they had some other responsibilities in the group. 5. Although physicians were paid by a combination of base salary and bonus. the extenders would be on a straight salary with no bonus. Physicians could share their bonuses with one or more extenders who they thought were especially helpful, however. 6. Each physician's base salary would be set at 42 percent of his or her expected revenue generation. Ten percent of that amount would be kept in reserve until the end of the year, and paid out as a year-end bonus if the group reached at least 95 percent of its total revenue target. 7. The remaining revenue would be used to cover the group' 5 operating expenses and to pro vide the surplus needed to fund ofce renovations, equipment purchases, and other similar items. This Current Year's Budget In preparing the current year's budget, Dr. King had met with each physician individually to ar- rive at a his or her visit forecast, broken down by the four visit types. She and BMA's administra- tor, Gordon Hawkins, had then summed the individual physician forecasts to obtain a total for the entire group. Dr. King had asked Mr. Hawkins to treat physicians. extenders and medical supplies as \"variable expenses" for budgeting purposes, in that they were expected to increase or decrease in rough proportion to the number of visits. While this was not completely precise, Dr. King found the approach a useful way to \"attac \" costs to each visit type. Medical supplies included a wide variety of disposable items needed in conjunction with a visit. To keep the budget simple, Dr. King had asked Mr. Hawkins to measure medical supplies in terms of\" units' 'and to use an average cost per unit The budget' 3 xed expenses included rent, cleaning, administrative staff, receptionists. office supplies, and similar items. Allocated overhead was for a variety of administrative services provided by Coos Bay, such as billing, collections, and information services. Using estimates prepared by Dr. King forthe above items, Mr. Hawkins had calculated the total variable expense per visit for each visit type. He next had multiplied the revenue and total variable expense per visit by the anticipated number of visits to get total revenue and total variable expenses by visit type. He deducted the latter from the former to give the contribution to xed expenses. Fi- nally, he deducted the anticipated xed expenses and allocated overhead from total contribution to give a total budgeted surplus for the year. Details of his work are shown in Exhibit 1. THE BUDGET CRISIS Dr. King's \"budget crisis\" is indicated in Exhibit 2. However, about $125,000 of this was in the bonus pool. Since the group had achieved its revenue target, the physicians were expecting to be paid the full $125,000. However, doing so would create a decit for the year of over $145,000. As Dr. King said: This is an even bigger problem than it rst appears to be. Although revenue generation exceeded the target, the physicians worked an average of only about I .100 hours each for the year. The rate of $1.35 per minute that we used in the budget assumed they would work 1,500 hours each during the year, for a total of 9,000 hours. With only 6,600 hours of work, their effective rate per minute has increased to $1.84. TCGIZ? 0 Bandon Medical Associates (B) 3 of 6 To better understand the reasons for the shift in nancial performance, Dr. King had asked Mr. Hawkins to use the data in Exhibits 1 and 2 as the basis for a report on results for the year. His re port was to contain a complete breakdown of the reasons why BMA's actual surplus had diverged from the budgeted one. Dr. King would use the report for her presentation at the retreat. THE ANALYSIS Reasoning that BMA had essentially no control over the number or type of visits, Mr. Hawkins began his analysis with a exible budget (Exhibit 3). This showed that with the increased volume of business (20,600 visits versus 19,000 in the budget) and a change in the mix of visits,the \"exed surplus" was $140,725an increase of $41,225 over the original surplus. Using similar reason- ing, he prepared an analysis of the variance due to the changes in third-party payer rates. This analysis (contained at the bottom of Exhibit 3) shOWed that an additional $7,000 in surplus should have resulted from the changes in payment rates. Mr. Hawkins next met with Dr. King to show her the results of his work. Dr. King explained to him that he needed to look into matters such as physician and extender productivity and wage rates, and medical supply usage and costs. She asked him to analyze these other reasons why actual results might have diverged from the budget, and to prepare avariance analysis that would explain how each of them had affected the difference. Assignment 1 . Be sure you understand how Exhibits 2 and 3 were prepared. Do you agree with Mr. Hawkins' analyses so far? 2. Besides changes in the number of visits and the payment rate per visit, what are the other reasons why actual re- sults might have diverged from budget? ' 3. Calwiate the variance associated with Eacli'of'tl-ie reasoiis'fo'u gave in Question 2. How, if at all. might this in- formation to used in managing the group practice? 4. How might BMA's approach to physician compensation have affected the group's nancial performance for the year? 5. What should Dr. King do about the bonuses? What changes, if any, should she make to the group's budgeting and control system? BANDON MEDICAL ASSOCIATES (B) Exhibit 1 Original Budget Initial Routine Intensive Routine Overall Budget Consult Physical Visit Visit Total Number of visits 3,000 4,000 6.000 5.000 19,000 Price per visit $150.00 $110.00 $80.00 $60.00 Total revenue $450,000 $440,000 $480,000 $360,000 $1,730,000 Variable expenses per visit $106.50 $77.75 $44.00 $31.00 Total variable expenses $319,500 $311,000 $264.000 $186,000 1,080,500 Contribution $130,500 $129,000 $216,000 $174,000 $649,500 Total fixed expenses 300,000 Allocated overhead 250,000 Surplus $99,500 Variable expense detail: Physician care Average #/minutes per visit 60 45 20 10 Average wage per minute $1.35 $1.35 $1.35 $1.35 Total expense per visit $81.00 $60.75 $27.00 $13.50 Extender care Average #minutes per visit 15 10 10 15 Average wage per minute $0.90 $0.90 $0.90 $0.90 $13.50 $9.00 $9.00 $13.50 A Total expense per visit Medical Supplies Average # units per visit Average expense per unit $4.00 $4.00 $4.00 $4.00 Total expense per visit $12.00 $8.00 $8.00 $4.00 Total average variable expense per visit $106.50 $77.75 $44.00 $31.00BANDON MEDICAL ASSOCIATES (B) Exhibit 2. Actual Results Initial Routine Intensive Routine Overall Results Consult Physical Visit Visit Total Actual number of visits 2,500 5,500 5.600 7.000 20,600 Actual price per visit $150.00 $110.00 $75.00 $65.00 Total revenue $375,000 $605,000 $420,000 $455,000 $1,855,000 Total variable expenses $303.250 $622.600 $288.960 $235.900 1,450,710 Contribution $7.1,750 ($17,600) $131,040 $219,100 $404,290 Total fixed expenses 300,000 Allocated overhead 250,000 Surplus ($145,710) Variable expense detail: Physician care leo Average #minutes per visit 45 30 20 10 15 Average wage per minute $1,84 $1.84 $1.84 $1.84 Total expense per visit $82.80 $55.20 $27.60 $9.20 Extender care 10 15 Average #minutes per visit 125 15 20 Average wage per minute $1.00 $1.00 $1.00 $1.00 Total expense per visit $25.00 $40.00 $15.00 $20.00 Medical Supplies 3 2 2 Average # units per visit Average expense per unit $4.50 $4.50 $4.50 $4.50 Total expense per visit $13.50 $18.00 $9.00 $4.50 Total average variable mar 44. 00 31.00 expense per visit $121.30 $113.20 variable $51.60 Total aug exp increased $33.70Overall Budget Actual number of visits Budgeted price per visit Total revenue Budgeted variable expenses per visit Total variable expenses Contribution Total xed expenses Allocated overhead Surplus Revenue Volume Variance ActualBudgeted visits Budgeted price per visit Variance Expense Volume Variance Budgeted-Actual visits Budgeted expense per visit Variance Contribution Margin Variance Revenue Volume Variance + Expense Volume Variance Revenue Price Variances Actual-Budgeted price per visit Actual number visits Revenue price variance BANDON MEDICAL ASSOCIATES (B) Exhibit 3. Flexible Budget and Related Variances Initial Consult 2,500 $ 150.00 $375 ,000 $106.50 $200,250 $108,750 4500 $150.00 ($75,000) 500 $10650 $53,250 ($21 ,750) $0.00 2,500 $0 Routine Physical 5 ,500 $110.00 $605,000 $77 .75 321% $177,375 1500 $110.00 $165,000 1500 $77 .75 ($116,625) $48,375 $0.00 5,500 $0 Intensive Visit 5,600 $80.00 $448,000 $44.00 $240.00 $201 .600 -400 $80.00 ($32,000) 400 $44.00 $ 17,600 ($ 14,400) ($5.00) 5,600 ($28 .000) Routine Visit 7,000 $60.00 $420,000 $31.00 52.11.0131 $203,000 1000 $60.00 $60,000 1000 $31 .00 ($3 1,000) $29,000 $5 .00 7,000 $35 .000 Total 20 .600 $1,848,000 1 75 $690,725 300 .000 250% $140,725 $118,000 ($76,775) $41 ,225 $7 .000 A