Western Dialysis Clinic is an independent, nonprot full-service renal dialysis clinic. The clinic provides two types of dialysis treatments. Hemodialysis {HD} requires patients to visit the clinic three times a week, where they are connected to special, expensive equipment to perform the dialysis. Peritoneal dialysis (PD) allows patients to administer their own treatment daily at home. The clinic monitors PD patients and assists them in ordering supplies consumed during the home treatment. The existing cost system assigned the traceable supply costs directly to the two dialysis treatments. The total service costs, however, were not analyzed by type of treatment. The total service costs of $1,800,000 were allocated to the treatments using the traditional ratio-of-costtocharges (RCC) method developed for government cost-based reimbursement programs. With this procedure, since HD treatments represented about 60% of total revenues, HD received an allocation of 60% of the service costs ($1,080,000) and PD received an allocation of 40% of service costs ($720,000). For many years clinics such as Western Dialysis received much of their reimbursement on the basis of reported costs. In recent years, however, payment mechanisms shifted, and Western Dialysis now received most of its reimbursement on the basis of a xed fee not the cost of the service provided. In particular, because HD and PD procedures were categorized by the government as a single category dialysis treatmentthe weekly reimbursement for each patient was the same: $390.00. As a consequence, the three HD treatments per week led to a reported revenue per HD treatment of $130, and the seven PD treatments per week led to a reported revenue per PD treatment of $55.71. According to the clinic's existing cost and revenue recognition system, both procedures appeared to be profitable (See Table 1 below)