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Bridgestone Behavioral Health Center: Cost-Volume-Profit (CVP) Analysis for Planning and Control A. Ronald Kucic University of Denver James E. Sorensen University of Denver Lisa M. Victoraich University of Denver INTRODUCTION Thomas: In reality, securing some outside assistance seems to be a good option to avoid futute losses. Since my training is in psychology, I don't have the accounting background to take the task on myself. We need someone who specializes in financial management for nonprofit human service organizations In June of the current year Dr. Thomas Russell, Executive Director, and Susan Smyth, Accountant, at the Bridgestone Behavioral Health Center were discussing the necessity of gaining a better understanding of how to monitor the Center's operating and financial performance. Located in Cleveland, Ohio, Bridgestone provides prevention. intervention, and treatment services for individuals with substance abuse problems. Bridgestone's management is concerned about its financial performance after realizing a loss in the prior year although a small profit was projected. Despite management's concem and attention of Bridgestone's profitability troubles, the Center's annual budget once again contains a projection for a meager profit of $7.000 (see Exhibit 1). BRIDGESTONE BACKGROUND Thomas: According to the financial reports that you have prepared, we have been fighting to reach breakeven over the past three years. We have been able to just get past breakeven recently, but I am worried-it seems like only a slight variation in our operations could throw us into an operating loss, I've been actively involved in managing the Center, and I don't understand how we avoid showing a loss! HISTORY AND MISSION Bridgestone is a comprehensive outpatient substance abuse treatment center located in the Midwest United States. Since 1985, Bridgestone has offered a continuum of outpatient services, including counseling, crisis intervention, detoxification, and methadone maintenance. The Bridgestone mission is to be a leader in healing and changing lives by providing high quality behaviotal health care and Ichabilitation to all individuals in need. With this mission, the Center promises to advance behavioral healthcare through the creation of innovative services and enriching the lives of patients one by one. Susan: Unfortunately, I have no oversight with respect to monitoring performance since my job is to input the financial and units of service numbers into the accounting system as they occur. I am currently working more than 40 hours a week so I am not sure what else I could do. Maybe we can hire someone like a consultant to help us? EXECUTIVE DIRECTOR AND SUPPORTING STAFF Dt. Thomas Russell, Executive Director, has over 30 years of behavioral health addiction experience and holds a Masters of Social Work from Ohio University and a Ph.D. in Clinical Psychology with a specialization on Addiction Counseling from Northwestern University. He is a fellow IMA EDUCATIONAL CASE JOURNAL VOL. 3, NO. 4, ART. 1, DECEMBER 2010 of the American College of Addiction Examiners and is a former faculty member of the Ohio University Department of Psychology. Dr. Russell in the author of numerous papers in the field of addictions and presents frequently at major conferences In addition to a highly qualified Executive Director Bridgestone has an outstanding support staff. They consistently maintain a low client-to-staff ratio with highly trained professionals who are well prepared to support patients in a large array of circumstances. The staff members at Bridgestone are like a family and are defined by their integrity and expertise. They are the key reason for the Center's succes in terms of the thousands of lives that they have changed PATIENT TESTIMONIALS Patient and family member testimonials include: "I wanted to say thank you for helping my daughter! I know of lots of therapists... in fact I am one. After 20 years of practice I was very frustrated sending my daughter to treatment until Bridgestone, Yes there are therapists but your folks are THERAPISTS, with a capital "Today is my one year anniversary of sobriety, which would not have been possible without the help of the counselors at Bridgestone. I can't say thank you enough!" "I'm thankful to Bridgestone for the treatment ! received. The road to recovery was not an easy road back. I still do the same elementary things today that I had to do to achieve recovery. I realized that honesty and open-mindedness was a must. I had to surrender all-I wanted real success." BEHAVIORAL HEALTH AND ADDICTION SERVICES Bridgestone offers 10 services designed to trcat a large array of substance dependencies from the point of detoxification to supporting long-term cobriety and preventing relapres Patient Assessment-Patient assessment is performed by an addiction counselor who uses a number of methods to determine if an alcohol or drug use problem truly exists. If such a diagnosis is established, it is necessary to determine the extent or severity of disease, if there is a need for medical detoxification, and the services or level of care required to safely and successfully achieve sobriety Lab Urinalysis - Laboratory wrinalysis services are performed for screening and intervention purposes. This is aimed at helping the patient withstand urges to use drug. Such monitoring also can provide early evidence of drug use so that the individual's treatment plan can be properly adjusted. Case Management - Case management serves to monitor patient progress and compliance with recommended addiction treatment plans Reports to outside parties such as courts, children's protective services, licensing boards, and employers are provided as needed Group Counseling - Groups are considered the most effective method of breaking patterns of isolation, which is typical of clients during their active addiction stage. During group coumeling clients have the opportunity to examine their thoughts through sharing listening and receiving foedhuck from their peers. In a group setting dient also carn to develop social skills Individual Counseling - Individuals with addictions often consider their problems unique and therefore, are best understood in a one-on-one session with their counselot Individual counseling sessions focus on the patient's propens in the educational process, group participation, drug monitoring, compliance. 12-stop work, and identificatione steas for improvement to achieve long-term sobriety Crisis intervention - Due to the volatile nature of the disease of addiction, Bridgestone provides crisis intervention or cmcrgency counseling for stressful situations that may lead to relapse or to help patients work through tvinges or us that could lead to a relapse Intensive Outpatient - Outpatient care focuses on education and counseling in both individual and group settings to achieve abstinence and to develop a self-responsible plan of addiction recovery for each patient. The program lasts sixto eight weeks depending on individual progress and involves the three-hour sessions per week Medical Somatic - The service evaluates and monitors the needs of adults, children, and adolescents exhibiting symptoms associated with a Digestie and Statistical Mansal of Mental Disorders, Fourth Edition, (DSM-IV) diagnosis (DSM-V is expected in 2013.) This consists of evaluating a patient's need for psychotropic medications associated with psychotic disorders, severe mood disorders, impulse control disorders, bi-polar disorders, and other psychiatric conditions impairing daily functioning. SERVICE CONSULTING PLUS, LLC Methadone Maintenance - Patients with an opiate addiction are provided with individualized healthcare and medically prescribed methadone to relieve withdrawal symptoms, seduce the opiate craving and bring about a biochemical balance in the body Ambulatory Detoxification - Ambulatory detoxification (also known as outpatient deterification) is designed to safely detoxify patients from drugs and alcohol without a hospital almission Ambulatory detoxification as an outpatient treatment has the advantage of causing minimal disruption to a patient's normal day-to-day life. MEDICAID FOR BEHAVIORAL HEALTH SERVICES Ohio is one of the few states that includes behavioral health services in its Medicaid benefits package. although it is not required to do so by federal law. States that cover behavioral health services must clearly define which services are covered by Medicaid. "To facilitate receiving payment for Medicaid patients, the types of services Bridgestone offers are consistent with these defined as covered servicc by the state of Ohio When a Medical client receives mental health and of alcohol und deug addiction services, the local Alcohol. Drug Achlictive and Mental Health (ADANH) Board, Alcohol and Drug Addiction Services (ADAS) Beard or the Community Mental Health (CMED Board pays the provider The Board is then reimbursed for 60% of the cost by the federal government, which tlows to the Boards through the Ohio Department of Mental Health (ODM) and the Ohio Department of Alcohol and Drug Addiction Services (ODADAS) Vis an interagency with the Ohio Department of Job and Family Services ODJFS). The remaining 4096 Medicaid match comes from both state and local sources The Medicaid reimbursement rates for each service type and the respective level of service expected for the upcoming year are used in preparing the Center's annual budget and quarterly budget as presented in Exhibit land Exhibit 2. respectively. Since there is modest fluctuation in the demand for services from quarter to quarter, the quarterly budget is 25% of the annual budget. Although Medicaid reimbursement is the primary source of revenue for Bridgestone, a minimal amount of revenue is generated from private pay customers As identified carlier, Bridgestone has experienced significant financial stress, and the Executive Director, Thomas, was inquisitive about how to stabilize financial operations above a break-even level. As well, he would like to gain the ability to mexxure and monitor the Center's continuing performance Faced with the lack of intemal personnel who could help with this issue, Thomas contacted Serie Cantalic Plus ua local consulting firm with a reputation for working with nonprofit organizations. The firm is owned and operated by Sheryl Matshall, who is also an accounting professor at Cleveland State University. Her firm specializes in the management of governmental and nonpetit organizations At the end of their initial meeting to discuss the situatice at Bridgestone. Thomas stressed that he didn't simply want to hire Sheryl to get the job done for the current year, but rather that he wanted to leam bow to manuud mited the financial performance of Bridgestone on an anping basis. With this in mind, Sheryl explained that Cost-Volume Profit (CVP) analysis would be weful to Thomas after he gathered some basic information about costs, revenues and units of service. Shic explained that CVP is a fundamental management accounting tool that is useful for planning control and decizion making It explores important relationships between cmnes, volume e activity levels and prohl Sheryl asked Thomas to provide her with Bridgestone's annual budgetary income statement in a contribution margin format. She explained that this format is the basic foundation for CVP analysis since it presents revenues and expenses based on their variable or fixed behavior in relation to service activity (namely volume of services), Sheryl's understanding of Bridgestone's operating environment and the contribution margin income statement will enable to provide suggestions regarding how to increase profitability. The three key suggestions include a focus on maintaining targeted service volume, reducing discretionary fixed costs, and offering off campus programs to companies and nonprofits. SERVICE VOLUME Sheryl's prior experience consulting for health centers that tely on Medicaid reimbursement for revenue has taught her the importance of achieving projected levels of service volume in order to maintain profit targets Missing the projected levels of service will cause enters to pass up potential revenue and contribution margin Service levels underscore the importance of monitoring the volume of delivered service and to state that it doesn't fall behind the planned volume when Medicaid is involved. Thus, it's Exhibit 1: Bridgestone Behavioral Health and Addiction Center Next Year's Annual Budget Assessment Urinalysis Case Group Management Counseling Individual Crisis Intensive Counseling Intervention Outpatient Medical Somatic Methadone Ambul Maint Detox Total Revenge Medicaid Rate Units of Service Revenue State Private Pay Total $ 10 4.000 $ 160.000 $ 11,550 $ 1.156.000 6.000 $ 480,000 28,000 $ 840,000 12.000 $1,000,000 $ 10 $ 110 $ 200 $ 15 S 250 1,500 2.000 800 8.000 1,300 $ 210,000 $220.000 $ 160.000 $120,000 $338,000 $4,783,000 3.000 205,000 208.000 3.500 28.000 $ 210,000 $ 226,500 $ 160,000 $120,000 $543.000 55.000.000 10,000 S 110.000 500 $1.156,500 5,000 $ 845,000 10,000 $100,000 $ 480,000 Variable Costs Medications/Tests Other Total $ 30.000 7.900 $ 32,500 $ 404,250 2,000 S. 405,250 $10,000 5 10,000 $ 140,000 $ 120,000 2000 2.000 $ 142,000 5 122,000 $ 30,000 $ 200.000 200.000 $ 96,000 $260.000 1480.750 1,000 250 19.750 $ 31,000 $200,250 $200,000 $2,000 $200,000 $1.500.000 $ 137,500 $ 70,250 $ 470,000 $ 700,000 $ 60,000 $ 170,000 $ 1.250 140,000 $ 24,000 $200,000 $3.500.000 Contribution Margin Fixed Expenses Salaries & Benefits Consulting for Rent Transportation Office supplies Depreciation Other Total Fixed Expense 1,827,607 174,685 419.244 14,811 09.074 524.055 $3,493.700 Exhibit 2 Bridgestone Behavioral Health and Addiction Center Quarter 1 Next Year's Budget Assessment Urinalysis Case Management Group Counseling Individual Crisis Intensive Counseling Intervention Outpatient Medical Somatie Methadone Amtel Maint Detox Total 200 Revenue Medicaid Rate Units of Service Revende State Private Pay Total 40 1,000 $ 40,000 5 100 2.888 $288.750 $ 30 1,500 $120,000 7.000 $210.000 3,000 $ 270,000 $ 140 375 $ 52,500 $ 1195 500 200 $ 55,000 $40,000 750 875 $56,625 $ 40,000 $ 15$ 280 2,000 325 $ 30,000 $84,500 $1,190,750 51.250 52,000 7,250 $30,000 $135,750 $1,250,000 2,500 $ 42,500 125 $288.875 1.250 $211,250 2,500 $ 272,500 $120.000 $ 2.500 Variable Costs Medications/Tests Other Total $ 7,500 625 $ 8,125 $ 101.063 500 $ 101.963 $ 2500 $ 2.500 $ 35,000 500 $ 35500 $ 30,000 500 $ 3,500 $ 7,500 250 $ 7.750 $50,000 $50,000 63 $50,063 $50,000 $ 24,000 $ 65,000 $ 370,063 4,938 $ 26,000 $ 55,000 375,000 $ 34,375 $ 187,313 $117.500 $175,790 $20,000 $ 44.750 $ 6,563 $(10,000) $ 6,000 $70,750 $ 875,000 Contribution Margin Fixed Expenses Salaries & Benefits Consulting Fees Pent transportation Office supplies Depreciation Other Total Fixed Expense 456.901 43,671 104,811 26,200 17,469 93,356 131,014 873,495 not only important to focus on the achieved contribution margin and bottom line, it's ako important to ensure that the planned level of volume in achieved The importance of meeting the project volume is further highlighted because Medicaid rates don't increase and, as a result, aren't a means of increasing revenue. Further, annual Medicaid funding is capped attempting to increase volume over time to increase revenues isn't poble. DISCRETIONARY FIXED COSTS Sheryl mentions that another area to focus on to achieve profit targets is a reduction in discretionary fixed costs. In order to use this avenue, it's necessary to understand the difference between committed fixed costs and discretionary fixed costs. Exery organisation has some costs to which it is committed, for example, costs for facilities, equipment long term debt atrangements, et organizational strategy. Lease payments, interest payments on long-term debt, property taxes and salaries of key personnel may only change if a major shift in the scope of operations occurs. These costs ate viewed as committed fixed. The lease payments or interest payments, for example have to be made in order for the organization to stay in operation. A failure to pay a Icase payment may result in the loss of an asset or a failure to pay interest to bondholders may result in the bondholders taking over the business. Depecciation, while an allocation of historic costs, usually follows a pattern set at the time of the asset acquisition Discretionary fixed costs, en the chict hand, a set because management les decided to incur these cuts to meet organizational goals. These costs may vary at the discretion of management. Managers in the short-run for example, could vary avertising, travel, cmployce training, office supplies, or research and development costs. In die times, these coses could be decreased, and in abundant times they could be increased. Usually the discretionary fixed costs may be changed to meet short-run cost concerns, but it's usually unwise to reduce all discretionary completely or for long period of time. Who would want to work for an organisation that reduced its training contesto eto year after year just to improve the bottom line! While reducing advertising costs in the short-run might not hurt revenues, what about the long- run effects on revenues? Perhaps out-of-state travel could be trimmed in the short-fun, but would the failure to attend national professional meetings out-of-state eventually have an unfavorable effect on opinizational performance In the Bridgestone Bchuvial Health Centercae. depreciation or rent may be committed while others such as salaries and benctis,coming feextraportation office supplies, and other may be discretionary Sheryl encourages Thomas to identify which fixed costs are discretionary and which are committed. He then can make a modest solution in the discretionary fixed conte chiese Bridgestone specifit objective. This all abogachum an idea how discretionary the identified fixed cose in reality and whether the icon be reduced in the long-term or short-term OFF-CAMPUS PROGRAMS Other behavioral health centers that Sheryl has consulted for have increased revenue by offering off-campus program to corporations, governmental departments, or other nonprofit corporations. Possibilities include employee assistance program (EAP) to deal with alcohol or other drug disorders or behavioral health counseling or other kinds of programs. According to the limited States Department of Health and Human Services, mental illness causes more days of work loss and work impairment than any other chronic condition, such as dubtes asthma and anti! Approximately 217 million days of work we lost anually due to productivity decline telated to mental illness and substance abuse disorders, costing Unites States employers 517 billion each year. To provide services such as these, the idea is to use Bridgestone talent, but the client's premises at a location selected by the client to see anymity. There would be companies that could pay for these sites If the services we used on a regular basis, they could be 2 supplemental and steady source of teenue with high contribution margins. Really large companies may be able to afford EAP or counseling programs, but struller ones can't, so this type of contract would be attractive to boost employce benefits at a minimum cest. The cost to these companies could be a variablc one (based on usage without incurring the fixed cost of hining permanent staff to do the counseling It could be an advantage to Bridgestone became the Center is already incurring the fixed salary expense of the councloe I US Department of Elcalil Services Mesa Report of the Surgeon General-Est Serie MD US Department of Health and Services Son Abend Mental Service Center for all lealth Services New Mental Healing 5. Fised costs can be discretionary or committed. Using yout jedement based on the discussion in the case. ilentify which costs are likely to be discretionary Various services that could be offered include: Support management in addressing issues of productivity and alssenteeism that may be caused by mental health or substance abuse problems Support effective supervisory practices Assist employees with deteriotating performance relating to chavit or other health problems Address work-related issues intluencing disability of return to work Assist in the identification of stressrelated problems that may be a result of work organization Assist the organization in its response to drug-free workplace policies and regulations and disaster and terrorism preparedness as it relates to paychenecial issues Serve as an internal consultant to management regarding issues of employee behavioral health. 6. As Bridgestone operates during the next year do some services deserve more attention than other (Hint: What is their relative contribution to the WACMS and to the total contributia matgin? Which services & lfsbudgetary weighted werage contribution margin (WACM) percentage has been descloped with an peted level of revenue and a penned fixed cost and the budgetary WACM percentage is in fact achieved in the next(future) time period. could the organization still face losses if the total revenue drops below the budgeted level or total fixed costs increme beyond the budgeted levels? Can you explain how lees still might occur cien though the planned ACM pererategis being scalized in the future time period? . Can you demonstrate financial losses might occut? Describe the effects of the following the possibile scenarios 2. What is the financial impact if Bridgestone's group counseling unit of service colme decreases tuy 100% during the first quarter ISSUES FOR DISCUSSION 1. What is the weighted average contribution margin(WACM) percentage for Bridgestone's next annual budget? 2. What does a high weighted average contribution margin (WACN) percentage mean for the management of Bridgestone What is the financial impact if Bridgestone fixed.com increase by 1 during the first quartet 10. What are your overall recommendations for Bridgestone's management regarding the use of CVP analysis? 11. As accountants, it is common to focus on quantitative tools such as CVP analysis to increase the profitability of a business. But it is important for accountants to think outside of the box to identify avenues of increasing profitability. What suggestions could you provide to assist Bridgestone in increasing profitability? ABOUT IMA With a worldwide network of more than 60,000 professionals, IMA is the world's leading organization dedicated to empowering accounting and finance professionals to drive business performance. IMA provides a dynamic forum for professionals to advance their careers through Certified Management Accountant (CMA) certification, research, professional education, networking and advocacy of the highest ethical and professional standards. For more information about IMA, please visit www.imanet.org Bridgestone Behavioral Health Center: Cost-Volume-Profit (CVP) Analysis for Planning and Control A. Ronald Kucic University of Denver James E. Sorensen University of Denver Lisa M. Victoraich University of Denver INTRODUCTION Thomas: In reality, securing some outside assistance seems to be a good option to avoid futute losses. Since my training is in psychology, I don't have the accounting background to take the task on myself. We need someone who specializes in financial management for nonprofit human service organizations In June of the current year Dr. Thomas Russell, Executive Director, and Susan Smyth, Accountant, at the Bridgestone Behavioral Health Center were discussing the necessity of gaining a better understanding of how to monitor the Center's operating and financial performance. Located in Cleveland, Ohio, Bridgestone provides prevention. intervention, and treatment services for individuals with substance abuse problems. Bridgestone's management is concerned about its financial performance after realizing a loss in the prior year although a small profit was projected. Despite management's concem and attention of Bridgestone's profitability troubles, the Center's annual budget once again contains a projection for a meager profit of $7.000 (see Exhibit 1). BRIDGESTONE BACKGROUND Thomas: According to the financial reports that you have prepared, we have been fighting to reach breakeven over the past three years. We have been able to just get past breakeven recently, but I am worried-it seems like only a slight variation in our operations could throw us into an operating loss, I've been actively involved in managing the Center, and I don't understand how we avoid showing a loss! HISTORY AND MISSION Bridgestone is a comprehensive outpatient substance abuse treatment center located in the Midwest United States. Since 1985, Bridgestone has offered a continuum of outpatient services, including counseling, crisis intervention, detoxification, and methadone maintenance. The Bridgestone mission is to be a leader in healing and changing lives by providing high quality behaviotal health care and Ichabilitation to all individuals in need. With this mission, the Center promises to advance behavioral healthcare through the creation of innovative services and enriching the lives of patients one by one. Susan: Unfortunately, I have no oversight with respect to monitoring performance since my job is to input the financial and units of service numbers into the accounting system as they occur. I am currently working more than 40 hours a week so I am not sure what else I could do. Maybe we can hire someone like a consultant to help us? EXECUTIVE DIRECTOR AND SUPPORTING STAFF Dt. Thomas Russell, Executive Director, has over 30 years of behavioral health addiction experience and holds a Masters of Social Work from Ohio University and a Ph.D. in Clinical Psychology with a specialization on Addiction Counseling from Northwestern University. He is a fellow IMA EDUCATIONAL CASE JOURNAL VOL. 3, NO. 4, ART. 1, DECEMBER 2010 of the American College of Addiction Examiners and is a former faculty member of the Ohio University Department of Psychology. Dr. Russell in the author of numerous papers in the field of addictions and presents frequently at major conferences In addition to a highly qualified Executive Director Bridgestone has an outstanding support staff. They consistently maintain a low client-to-staff ratio with highly trained professionals who are well prepared to support patients in a large array of circumstances. The staff members at Bridgestone are like a family and are defined by their integrity and expertise. They are the key reason for the Center's succes in terms of the thousands of lives that they have changed PATIENT TESTIMONIALS Patient and family member testimonials include: "I wanted to say thank you for helping my daughter! I know of lots of therapists... in fact I am one. After 20 years of practice I was very frustrated sending my daughter to treatment until Bridgestone, Yes there are therapists but your folks are THERAPISTS, with a capital "Today is my one year anniversary of sobriety, which would not have been possible without the help of the counselors at Bridgestone. I can't say thank you enough!" "I'm thankful to Bridgestone for the treatment ! received. The road to recovery was not an easy road back. I still do the same elementary things today that I had to do to achieve recovery. I realized that honesty and open-mindedness was a must. I had to surrender all-I wanted real success." BEHAVIORAL HEALTH AND ADDICTION SERVICES Bridgestone offers 10 services designed to trcat a large array of substance dependencies from the point of detoxification to supporting long-term cobriety and preventing relapres Patient Assessment-Patient assessment is performed by an addiction counselor who uses a number of methods to determine if an alcohol or drug use problem truly exists. If such a diagnosis is established, it is necessary to determine the extent or severity of disease, if there is a need for medical detoxification, and the services or level of care required to safely and successfully achieve sobriety Lab Urinalysis - Laboratory wrinalysis services are performed for screening and intervention purposes. This is aimed at helping the patient withstand urges to use drug. Such monitoring also can provide early evidence of drug use so that the individual's treatment plan can be properly adjusted. Case Management - Case management serves to monitor patient progress and compliance with recommended addiction treatment plans Reports to outside parties such as courts, children's protective services, licensing boards, and employers are provided as needed Group Counseling - Groups are considered the most effective method of breaking patterns of isolation, which is typical of clients during their active addiction stage. During group coumeling clients have the opportunity to examine their thoughts through sharing listening and receiving foedhuck from their peers. In a group setting dient also carn to develop social skills Individual Counseling - Individuals with addictions often consider their problems unique and therefore, are best understood in a one-on-one session with their counselot Individual counseling sessions focus on the patient's propens in the educational process, group participation, drug monitoring, compliance. 12-stop work, and identificatione steas for improvement to achieve long-term sobriety Crisis intervention - Due to the volatile nature of the disease of addiction, Bridgestone provides crisis intervention or cmcrgency counseling for stressful situations that may lead to relapse or to help patients work through tvinges or us that could lead to a relapse Intensive Outpatient - Outpatient care focuses on education and counseling in both individual and group settings to achieve abstinence and to develop a self-responsible plan of addiction recovery for each patient. The program lasts sixto eight weeks depending on individual progress and involves the three-hour sessions per week Medical Somatic - The service evaluates and monitors the needs of adults, children, and adolescents exhibiting symptoms associated with a Digestie and Statistical Mansal of Mental Disorders, Fourth Edition, (DSM-IV) diagnosis (DSM-V is expected in 2013.) This consists of evaluating a patient's need for psychotropic medications associated with psychotic disorders, severe mood disorders, impulse control disorders, bi-polar disorders, and other psychiatric conditions impairing daily functioning. SERVICE CONSULTING PLUS, LLC Methadone Maintenance - Patients with an opiate addiction are provided with individualized healthcare and medically prescribed methadone to relieve withdrawal symptoms, seduce the opiate craving and bring about a biochemical balance in the body Ambulatory Detoxification - Ambulatory detoxification (also known as outpatient deterification) is designed to safely detoxify patients from drugs and alcohol without a hospital almission Ambulatory detoxification as an outpatient treatment has the advantage of causing minimal disruption to a patient's normal day-to-day life. MEDICAID FOR BEHAVIORAL HEALTH SERVICES Ohio is one of the few states that includes behavioral health services in its Medicaid benefits package. although it is not required to do so by federal law. States that cover behavioral health services must clearly define which services are covered by Medicaid. "To facilitate receiving payment for Medicaid patients, the types of services Bridgestone offers are consistent with these defined as covered servicc by the state of Ohio When a Medical client receives mental health and of alcohol und deug addiction services, the local Alcohol. Drug Achlictive and Mental Health (ADANH) Board, Alcohol and Drug Addiction Services (ADAS) Beard or the Community Mental Health (CMED Board pays the provider The Board is then reimbursed for 60% of the cost by the federal government, which tlows to the Boards through the Ohio Department of Mental Health (ODM) and the Ohio Department of Alcohol and Drug Addiction Services (ODADAS) Vis an interagency with the Ohio Department of Job and Family Services ODJFS). The remaining 4096 Medicaid match comes from both state and local sources The Medicaid reimbursement rates for each service type and the respective level of service expected for the upcoming year are used in preparing the Center's annual budget and quarterly budget as presented in Exhibit land Exhibit 2. respectively. Since there is modest fluctuation in the demand for services from quarter to quarter, the quarterly budget is 25% of the annual budget. Although Medicaid reimbursement is the primary source of revenue for Bridgestone, a minimal amount of revenue is generated from private pay customers As identified carlier, Bridgestone has experienced significant financial stress, and the Executive Director, Thomas, was inquisitive about how to stabilize financial operations above a break-even level. As well, he would like to gain the ability to mexxure and monitor the Center's continuing performance Faced with the lack of intemal personnel who could help with this issue, Thomas contacted Serie Cantalic Plus ua local consulting firm with a reputation for working with nonprofit organizations. The firm is owned and operated by Sheryl Matshall, who is also an accounting professor at Cleveland State University. Her firm specializes in the management of governmental and nonpetit organizations At the end of their initial meeting to discuss the situatice at Bridgestone. Thomas stressed that he didn't simply want to hire Sheryl to get the job done for the current year, but rather that he wanted to leam bow to manuud mited the financial performance of Bridgestone on an anping basis. With this in mind, Sheryl explained that Cost-Volume Profit (CVP) analysis would be weful to Thomas after he gathered some basic information about costs, revenues and units of service. Shic explained that CVP is a fundamental management accounting tool that is useful for planning control and decizion making It explores important relationships between cmnes, volume e activity levels and prohl Sheryl asked Thomas to provide her with Bridgestone's annual budgetary income statement in a contribution margin format. She explained that this format is the basic foundation for CVP analysis since it presents revenues and expenses based on their variable or fixed behavior in relation to service activity (namely volume of services), Sheryl's understanding of Bridgestone's operating environment and the contribution margin income statement will enable to provide suggestions regarding how to increase profitability. The three key suggestions include a focus on maintaining targeted service volume, reducing discretionary fixed costs, and offering off campus programs to companies and nonprofits. SERVICE VOLUME Sheryl's prior experience consulting for health centers that tely on Medicaid reimbursement for revenue has taught her the importance of achieving projected levels of service volume in order to maintain profit targets Missing the projected levels of service will cause enters to pass up potential revenue and contribution margin Service levels underscore the importance of monitoring the volume of delivered service and to state that it doesn't fall behind the planned volume when Medicaid is involved. Thus, it's Exhibit 1: Bridgestone Behavioral Health and Addiction Center Next Year's Annual Budget Assessment Urinalysis Case Group Management Counseling Individual Crisis Intensive Counseling Intervention Outpatient Medical Somatic Methadone Ambul Maint Detox Total Revenge Medicaid Rate Units of Service Revenue State Private Pay Total $ 10 4.000 $ 160.000 $ 11,550 $ 1.156.000 6.000 $ 480,000 28,000 $ 840,000 12.000 $1,000,000 $ 10 $ 110 $ 200 $ 15 S 250 1,500 2.000 800 8.000 1,300 $ 210,000 $220.000 $ 160.000 $120,000 $338,000 $4,783,000 3.000 205,000 208.000 3.500 28.000 $ 210,000 $ 226,500 $ 160,000 $120,000 $543.000 55.000.000 10,000 S 110.000 500 $1.156,500 5,000 $ 845,000 10,000 $100,000 $ 480,000 Variable Costs Medications/Tests Other Total $ 30.000 7.900 $ 32,500 $ 404,250 2,000 S. 405,250 $10,000 5 10,000 $ 140,000 $ 120,000 2000 2.000 $ 142,000 5 122,000 $ 30,000 $ 200.000 200.000 $ 96,000 $260.000 1480.750 1,000 250 19.750 $ 31,000 $200,250 $200,000 $2,000 $200,000 $1.500.000 $ 137,500 $ 70,250 $ 470,000 $ 700,000 $ 60,000 $ 170,000 $ 1.250 140,000 $ 24,000 $200,000 $3.500.000 Contribution Margin Fixed Expenses Salaries & Benefits Consulting for Rent Transportation Office supplies Depreciation Other Total Fixed Expense 1,827,607 174,685 419.244 14,811 09.074 524.055 $3,493.700 Exhibit 2 Bridgestone Behavioral Health and Addiction Center Quarter 1 Next Year's Budget Assessment Urinalysis Case Management Group Counseling Individual Crisis Intensive Counseling Intervention Outpatient Medical Somatie Methadone Amtel Maint Detox Total 200 Revenue Medicaid Rate Units of Service Revende State Private Pay Total 40 1,000 $ 40,000 5 100 2.888 $288.750 $ 30 1,500 $120,000 7.000 $210.000 3,000 $ 270,000 $ 140 375 $ 52,500 $ 1195 500 200 $ 55,000 $40,000 750 875 $56,625 $ 40,000 $ 15$ 280 2,000 325 $ 30,000 $84,500 $1,190,750 51.250 52,000 7,250 $30,000 $135,750 $1,250,000 2,500 $ 42,500 125 $288.875 1.250 $211,250 2,500 $ 272,500 $120.000 $ 2.500 Variable Costs Medications/Tests Other Total $ 7,500 625 $ 8,125 $ 101.063 500 $ 101.963 $ 2500 $ 2.500 $ 35,000 500 $ 35500 $ 30,000 500 $ 3,500 $ 7,500 250 $ 7.750 $50,000 $50,000 63 $50,063 $50,000 $ 24,000 $ 65,000 $ 370,063 4,938 $ 26,000 $ 55,000 375,000 $ 34,375 $ 187,313 $117.500 $175,790 $20,000 $ 44.750 $ 6,563 $(10,000) $ 6,000 $70,750 $ 875,000 Contribution Margin Fixed Expenses Salaries & Benefits Consulting Fees Pent transportation Office supplies Depreciation Other Total Fixed Expense 456.901 43,671 104,811 26,200 17,469 93,356 131,014 873,495 not only important to focus on the achieved contribution margin and bottom line, it's ako important to ensure that the planned level of volume in achieved The importance of meeting the project volume is further highlighted because Medicaid rates don't increase and, as a result, aren't a means of increasing revenue. Further, annual Medicaid funding is capped attempting to increase volume over time to increase revenues isn't poble. DISCRETIONARY FIXED COSTS Sheryl mentions that another area to focus on to achieve profit targets is a reduction in discretionary fixed costs. In order to use this avenue, it's necessary to understand the difference between committed fixed costs and discretionary fixed costs. Exery organisation has some costs to which it is committed, for example, costs for facilities, equipment long term debt atrangements, et organizational strategy. Lease payments, interest payments on long-term debt, property taxes and salaries of key personnel may only change if a major shift in the scope of operations occurs. These costs ate viewed as committed fixed. The lease payments or interest payments, for example have to be made in order for the organization to stay in operation. A failure to pay a Icase payment may result in the loss of an asset or a failure to pay interest to bondholders may result in the bondholders taking over the business. Depecciation, while an allocation of historic costs, usually follows a pattern set at the time of the asset acquisition Discretionary fixed costs, en the chict hand, a set because management les decided to incur these cuts to meet organizational goals. These costs may vary at the discretion of management. Managers in the short-run for example, could vary avertising, travel, cmployce training, office supplies, or research and development costs. In die times, these coses could be decreased, and in abundant times they could be increased. Usually the discretionary fixed costs may be changed to meet short-run cost concerns, but it's usually unwise to reduce all discretionary completely or for long period of time. Who would want to work for an organisation that reduced its training contesto eto year after year just to improve the bottom line! While reducing advertising costs in the short-run might not hurt revenues, what about the long- run effects on revenues? Perhaps out-of-state travel could be trimmed in the short-fun, but would the failure to attend national professional meetings out-of-state eventually have an unfavorable effect on opinizational performance In the Bridgestone Bchuvial Health Centercae. depreciation or rent may be committed while others such as salaries and benctis,coming feextraportation office supplies, and other may be discretionary Sheryl encourages Thomas to identify which fixed costs are discretionary and which are committed. He then can make a modest solution in the discretionary fixed conte chiese Bridgestone specifit objective. This all abogachum an idea how discretionary the identified fixed cose in reality and whether the icon be reduced in the long-term or short-term OFF-CAMPUS PROGRAMS Other behavioral health centers that Sheryl has consulted for have increased revenue by offering off-campus program to corporations, governmental departments, or other nonprofit corporations. Possibilities include employee assistance program (EAP) to deal with alcohol or other drug disorders or behavioral health counseling or other kinds of programs. According to the limited States Department of Health and Human Services, mental illness causes more days of work loss and work impairment than any other chronic condition, such as dubtes asthma and anti! Approximately 217 million days of work we lost anually due to productivity decline telated to mental illness and substance abuse disorders, costing Unites States employers 517 billion each year. To provide services such as these, the idea is to use Bridgestone talent, but the client's premises at a location selected by the client to see anymity. There would be companies that could pay for these sites If the services we used on a regular basis, they could be 2 supplemental and steady source of teenue with high contribution margins. Really large companies may be able to afford EAP or counseling programs, but struller ones can't, so this type of contract would be attractive to boost employce benefits at a minimum cest. The cost to these companies could be a variablc one (based on usage without incurring the fixed cost of hining permanent staff to do the counseling It could be an advantage to Bridgestone became the Center is already incurring the fixed salary expense of the councloe I US Department of Elcalil Services Mesa Report of the Surgeon General-Est Serie MD US Department of Health and Services Son Abend Mental Service Center for all lealth Services New Mental Healing 5. Fised costs can be discretionary or committed. Using yout jedement based on the discussion in the case. ilentify which costs are likely to be discretionary Various services that could be offered include: Support management in addressing issues of productivity and alssenteeism that may be caused by mental health or substance abuse problems Support effective supervisory practices Assist employees with deteriotating performance relating to chavit or other health problems Address work-related issues intluencing disability of return to work Assist in the identification of stressrelated problems that may be a result of work organization Assist the organization in its response to drug-free workplace policies and regulations and disaster and terrorism preparedness as it relates to paychenecial issues Serve as an internal consultant to management regarding issues of employee behavioral health. 6. As Bridgestone operates during the next year do some services deserve more attention than other (Hint: What is their relative contribution to the WACMS and to the total contributia matgin? Which services & lfsbudgetary weighted werage contribution margin (WACM) percentage has been descloped with an peted level of revenue and a penned fixed cost and the budgetary WACM percentage is in fact achieved in the next(future) time period. could the organization still face losses if the total revenue drops below the budgeted level or total fixed costs increme beyond the budgeted levels? Can you explain how lees still might occur cien though the planned ACM pererategis being scalized in the future time period? . Can you demonstrate financial losses might occut? Describe the effects of the following the possibile scenarios 2. What is the financial impact if Bridgestone's group counseling unit of service colme decreases tuy 100% during the first quarter ISSUES FOR DISCUSSION 1. What is the weighted average contribution margin(WACM) percentage for Bridgestone's next annual budget? 2. What does a high weighted average contribution margin (WACN) percentage mean for the management of Bridgestone What is the financial impact if Bridgestone fixed.com increase by 1 during the first quartet 10. What are your overall recommendations for Bridgestone's management regarding the use of CVP analysis? 11. As accountants, it is common to focus on quantitative tools such as CVP analysis to increase the profitability of a business. But it is important for accountants to think outside of the box to identify avenues of increasing profitability. What suggestions could you provide to assist Bridgestone in increasing profitability? ABOUT IMA With a worldwide network of more than 60,000 professionals, IMA is the world's leading organization dedicated to empowering accounting and finance professionals to drive business performance. 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