In September of 20X1, Mr. Joseph Blanchard became the controller of Canadian Home Health Agency (CHHA). After 10 years in the accounting department of a customer product firm, Mr. Blanchard decided to move into not-for-profit field where he felt his expertise would be needed. CHHA, a small social service agency in London, Ontario offered him that opportunity.

Before Mr. Blanchard accepted the position of controller, Ms. Louise Tucker, the director of the agency, briefed him on the financial position of CHHA. Like other home health agencies, CHHA was reimbursed for its patient visits by Ministry of Health on an average-cost-per-visit basis.

At the end of each fiscal year, the agency will total their operating costs, adjusting them according to the Ministry of Health regulations. They then divided the total costs by the number of visits to arrive at an average cost per visit. This had become the reimbursement rate by the Ministry of Health. The average for 20X1 is given in Exhibit 1.

In October of 20X1, the ministry had notified CHHA that the average cost per visit exceeded the "reasonable cost guideline" established by the Ministry. A copy - Exhibit 2 - was also given to Mr. Blanchard.

Ms. Tucker was concerned because, on an average, the 20X1 rate had been $ 57.89 per visit. According to her, at $ 52.50 per visit set by the Ministry of Health, the agency could not meet its expenses for the coming year 20X2. One of the reasons for Ms. Tucker hiring Mr. Blanchard is that he could resolve this problem.

BACKGROUND

CHHA opened in 2010 to provide nursing visits to elderly and disabled residents of London and neighbouring localities. In 2014, the agency expanded to offer physical therapy and medical social service visits. Because of another similar agency in a nearby town that provided home health aide care, CHHA did not offer this health aide service.

In 20X1, CHHA had a staff of 13. Two registered nurses, two physiotherapists, two social service workers and one psychologist were responsible for home health visits. The administration consisted of one director, an assistant director, the newly appointed controller, and a support staff of three.

The two registered nurses handled the skilled nursing visits. The two physiotherapists worked exclusively on patient-visits, and the two social workers, with the help of the psychologist, provided all the social service visits. The two registered nurses who handled all nursing visits could provide as many as seven visits each day. However, because visits varied significantly in time, effort and location for 20X1, the nurses averaged only 5.54 visits per day. The physiotherapists averaged 3.3 visits per day.

MANAGEMENT THINKING

Ms. Tucker felt their capacity could be increased by at least one-third if they had the demand.

CHHA's medical and social service visits were the most complicated. With the help of the psychologist, the social workers averaged 4.46 visits per day in 20X1. Again, Ms. Tucker thought these visits could be increased to about 5.5 visits per day. The CHHA staff worked an average of 240 days a year.

DATA

In his first few weeks, Mr. Blanchard reviewed CHHA's financial statements, employee service sheets and other working papers to become familiar with the agency's financial status and planning needs. He realized that the agency had been operating without any cost objectives before Ministry of Health imposed a guideline. After a cursory review of past records, Mr. Blanchard decided that his first priority was to ensure that their current business model worked. According to him, the agency needed to know the capacity at which their revenue would balance the costs.

Examining CHHA's Expense Records, shown in Exhibit 1, Mr. Blanchard determined that the agency had two types of costs: those that changed according to the number of visits provided and those that were unchanged regardless of volume. Mr. Blanchard reasoned that at their break-even point, CHHA's revenue of $52.50 per visit would equal their total cost of the expenses generated by each visit plus the fixed expenses.

PLANNING FORWARD

Mr. Blanchard reviewed each item on the Expense Record to determine which type of cost it was. He thought the medically related salaries and the medical and nursing supplies were items that varied directly with the number of visits. When he discussed with his analysis with Ms. Tucker, she suggested that the staff automobile allowance varied with the number of visits because it referred to mileage incurred by the medical staff in making home visits.

"Terrific" thought Mr. Blanchard. "Now I can calculate variable cost per visit and in no time, I'll know the break-even point. I can make them a graph showing their costs and revenues and where we will have to operate to keep this agency in business".

"By the way, Joseph, said Ms. Tucker, "I would appreciate a report from you discussing your proposed plan and a recommended course of action. We are a not-for-profit organization, but I want us to be known for our quality service and genuine care for the community. We need to think of providing a comprehensive health maintenance program and may even need to think of expansion. Please develop a strategy along these lines and come up with an implementation plan. I also keep hearing about the current best practice in the industry - Balanced Scorecard. Let us look into it and plan to implement this year.

"I do plan to communicate this to all our staff in our next meeting and perhaps initiate a change agenda as to how best we can deploy our resources. This is also the good time to develop the budget for 20X2.

Please prepare executive draft for us to review and finalize by next week. Thanks Joseph".

Assume the role of Mr. Blanchard and write the report covering the issues raised and a performance evaluation system along with other considerations you may deem necessary.

Exhibit 1

Expense Record - Canadian Home Health Agency

For the year ended 31 September 20X1

Details Total

1. Salaries $ 283.997

Director, Asst. Director, Controller $ 82,570

Nurses (2) 52,960

Psychologist (1) 28,000

Social workers (2) 38,500

Physiotherapists (2) 45,167

Support Staff (3) 36,800

2. Transportation Costs $ 28,000

Automobile Operation & Insurance $ 8,000

Automobile allowance for staff 20,000

3. Service Purchases $ 2,350

4. Medical and Nursing Supplies $ 7,400

5. Space Occupancy Costs $ 17,330

Rent $ 16,500

Maintenance and Repairs 600

Taxes 230

6. Office Costs $ 12,656

Stationery and Printing $ 6,042

Telephone 5,440

Postage and express 1,174

7. Other General Costs $ 17,860

Depreciation on furniture and equipment $ 1,300

Legal and accounting fees 5,300

Insurance (other than auto) 5,510

Other 3,600

Interest 2,150

Total Costs $ 369, 593

Number of visits 6,384

Average cost per visit $ 57.89

Exhibit 2

Excerpts from Ministry of Health memo to CHHA

Dated: 2 October 2018

Dear Ms. L. Tucker: Ref: Reimbursement Fees

We have reviewed your current interim rate reimbursement in accordance with the Ministry of Health guideline. In accordance with section D.455, (C) (2), your agency is being reimbursed at a rate, which is substantially out of line with other home health agencies.

The Ministry of Health recognizes that the cost of provider services may vary from one institution to another and the variation generally reflects differences in scope of services, intensity of care, geographical location and utilization.

Section D. 455(C)(2) Of the Health Act states:

"The provision for payment of reasonable cost of services is intended to meet the actual costs, however widely they may vary from one institution to another. This is subject to limitation where a particular institution's costs are found to be substantially out of line with other institutions in the same area which are similar in size, scope of services, utilization and other relevant factors."

Our records indicate that your agency is currently being reimbursed at an average cost of $57.89 for part "A" billings. In order to adjust your interim rate of reimbursement to a level of reimbursement that will not exceed the reasonable cost of services incurred by similar institutions, it will be necessary to reduce your rate to $ 52.50 per visit in 2017 and beyond.

We will institute this revised rate of interim reimbursement 90 days from the date of this letter, unless you are able to provide acceptable written documentation that would clearly provide evidence that the high costs incurred by your agency is unavoidable. The rate will be applied against services rendered as of our fiscal year starting April 1, 2017.

If you have any question, or if we can be of any further assistance, please feel free to contact us.

Signed,

Executive Branch,

Ministry of Finance.

Government of Ontario