THE CRIMSON PRESS CURRICULUM CENTER THE CRIMSON GROUP, INC. Riverview Community Health Clinic The Riverview Community Health Clinic (RCHC) delivered outpatient care only, i.e. all patients came to the center, were treated by a physician or nurse, and left. RCHC wanted to determine the cost of serving in- dividual patients in order to obtain reimbursement from third-party payers. The clinic was divided into several patient-care departments, one of which was Pediatrics. In this depart- ment, physicians' were salaried at the rate of $25 per hour, and nurses at $10 per hour. Direct costs of the Pediatrics Department for a typical month included the salaries of physicians and nurses that were applicable to activities other than direct patient care ($3,000), depreciation on equipment ($4,000) and supplies and medicines ($5,000), for a total of $12,000. In a typical month the payroll of physicians and nurses applicable to direct patient care in the Pediatrics Department was approximately $9,000. Direct costs of all other clinical departments totaled $80,000. In addition, there were two service centers at RCHC: occupancy and central administration. The information on Exhibit 1 relates to the allocation of costs for a typical month. Assignment 1. Determine the full cost of the Pediatrics Department and all other clinical departments. What is the cost per pediatric patient for a typical month? 2. What, in your opinion, should be the cost object of RCHC? Ignoring third-party reimbursement constraints, how should RCHC determine the price for this cost object? Exhibit 1. Allocation of Costs for a Typical Month Central Administration All other Clinical Departments Service Center Occupancy Total Cost Basis of Allocation Pediatrics Department $6,000 Sq. Feet 6,000 sq. ft. 3,000 sq. ft 15,000 sq. ft. Central No. of Administration $22,500 patients 1,500 patients 6,000 patients Service Center Total Cost Basis of Allocation Pediatrics Department Central Administration Occupancy $ 6,000 Square feet Central Administration $ 22,500 Number of patients 6,000 1,500 3,000 Answers to questions Q1 Direct method of cost allocation Allocation rates: Occupancy Central Administration Cost allocation table: Service Center Occupancy Central Administration Total allocation Pediatrics All other Clinical Q2 Pediatrics All other Clinical Direct costs Allocated indirect costs Total costs Q3 Cost per patient Q4 Step down method of cost allocation Allocation rates: Occupancy Central Administration Cost allocation table: Service Center Central Administration Pediatrics All other Clinical Occupancy Central Administration Total allocation Q5 Direct costs Allocated indirect costs Total costs Q6 Cost per patient Pediatrics All other Clinical All other Clinical Departments 15,000 6,000