X * Free Access - Course Hero hs345_document case 3. (2).pdf 5_document_case3.%20(2).pdf * Waterf g In-naviHealth Coupa Home DHP Log In - naviHealth SECURE + Sign in to your Micr... 32 Cases in Healthcare Finance EXHIBIT 3.1 Rio Grande Medical Center Dialysis Center: Pro Forma P&L Statement Assuming Status Quo Revenues Hemodialysis program Peritoneal dialysis program Pharmaceutical supplies Total revenues $ 1,300,000 600,000 800,000 $ 2,700,000 Direct Expenses Salaries and benefits Pharmaceutical supplies Other medical administrative supplies Utilities Lease expense Other expenses Total expenses S 900,000 800,000 100,000 80,000 120,000 100,000 $ 2.100.000 Net gain (loss) before indirect costs $ 600,000 $ 300.000 Indirect Expenses Facilities costs General overhead Total overhead costs 270.000 $ 570.000 Net profit S 30.000 Note: Pharmacy revenues are based on reimbursement amounts, not costs BE BI 1 3 (Writt X hs345_document_case3. (2).pdf Free Access - Course Hero x | Q Rio Grande Medic Log In - naviHealth Wate ment_case3.%20(2).pdf aviHealth Coupa Home O SECURE 1 Sign in to your Micr... SeDHP supplies used for dialysis actually cost the pharmacy $400,000, so the pharmacy makes a profit of $400,000 on drugs that are actually sold" by the Dialysis Center. Before Rick was able to respond to John's concerns, he suddenly left Rio Grande to be the CFO of a competing investor-owned hos- pital. The task of completing the allocation study was given to you, Rio Grande's current administrative resident. You remember that to be of most benefit to the organization, cost allocations should (1) be perceived as being fair by the parties involved and (2) promote overall cost savings within the organization. However, you also realize that in practice cost allocation is complex and somewhat arbitrary. Some department heads argue that the best approach to overhead allocations is the Marxist approach, by which allocations are based on each pa- tient service department's ability to cover overhed costs. Considering all the relevant issues, you must develop and justify a new indirect cost allocation scheme for outpatient services. Summa- rize your results in the "Alternative Allocation" columns in Exhibit 3.2, and be prepared to justify your recommendations at the next depart- ment heads' meeting. BI By: Case #03 (Writt X Shs345_document case3. (2).pdf * Free Access - Course Hero x Q Rio Grande Medical Center Case s345_document_case3.%20(2).pdf Log In - naviHealth Coupa Home SEC3URE 1 Sign in to your Micr... DHP Log In - naviHealth Waterford Early Lea P&L Statements: Without Expansion DC OC With Expansion Initial Allocation Alternative Allocation DC DC OC Revenues/Direct Costs Total revenues Direct expenses Contribution margin Percent of revenues $ 2,700,000 2,100,000 $ 600,000 22.2% $16.000.000 9,833,155 $ 6,166,845 38.5% $ 2,700,000 2.100,000 $ 600,000 22.2% $20,000,000 12,291,444 $ 7,708,556 38.5% $ 2,700,000 2,100,000 $ 600,000 22.2% $20,000,000 12,291,444 $ 7.708,556 38.5% $ s Indirect Costs Facilities costs General overhead Total overhead $ 300,000 270,000 $570,000 $ 1.200.000 1,600,000 $ 2.800,000 S 400.000 270,000 $ 670,000 $ 1,500,000 2,000,000 $ 3,500,000 $ S Net profit Percent of revenues 30,000 1.1% $ 3,366,845 21.0% 70,000) 12.6%) $ 4,208,556 21.0% % Facilities Cost Allocation: Case 3: Rio Grande Medical Center 20.000 100.000 Square footage Facilities costs per square foot 20,000 15.00 80.000 15.00 20,000 20.00 100.000 15.00 S S s $ S Other Overhead Allocation: 10.0% 10.0% 10.0% 10.0% % % General overhead costs as a % of revenue Nore The term contbuton margin" as used here means the amount available to cover overhead costs, as opposed to the traditional meaning of the amount available to cover fixed costs 3 Summary and Outpat Dialysis Ce Rio Grande EXHIBIT 3. II I to 13 X * Free Access - Course Hero hs345_document case 3. (2).pdf 5_document_case3.%20(2).pdf * Waterf g In-naviHealth Coupa Home DHP Log In - naviHealth SECURE + Sign in to your Micr... 32 Cases in Healthcare Finance EXHIBIT 3.1 Rio Grande Medical Center Dialysis Center: Pro Forma P&L Statement Assuming Status Quo Revenues Hemodialysis program Peritoneal dialysis program Pharmaceutical supplies Total revenues $ 1,300,000 600,000 800,000 $ 2,700,000 Direct Expenses Salaries and benefits Pharmaceutical supplies Other medical administrative supplies Utilities Lease expense Other expenses Total expenses S 900,000 800,000 100,000 80,000 120,000 100,000 $ 2.100.000 Net gain (loss) before indirect costs $ 600,000 $ 300.000 Indirect Expenses Facilities costs General overhead Total overhead costs 270.000 $ 570.000 Net profit S 30.000 Note: Pharmacy revenues are based on reimbursement amounts, not costs BE BI 1 3 (Writt X hs345_document_case3. (2).pdf Free Access - Course Hero x | Q Rio Grande Medic Log In - naviHealth Wate ment_case3.%20(2).pdf aviHealth Coupa Home O SECURE 1 Sign in to your Micr... SeDHP supplies used for dialysis actually cost the pharmacy $400,000, so the pharmacy makes a profit of $400,000 on drugs that are actually sold" by the Dialysis Center. Before Rick was able to respond to John's concerns, he suddenly left Rio Grande to be the CFO of a competing investor-owned hos- pital. The task of completing the allocation study was given to you, Rio Grande's current administrative resident. You remember that to be of most benefit to the organization, cost allocations should (1) be perceived as being fair by the parties involved and (2) promote overall cost savings within the organization. However, you also realize that in practice cost allocation is complex and somewhat arbitrary. Some department heads argue that the best approach to overhead allocations is the Marxist approach, by which allocations are based on each pa- tient service department's ability to cover overhed costs. Considering all the relevant issues, you must develop and justify a new indirect cost allocation scheme for outpatient services. Summa- rize your results in the "Alternative Allocation" columns in Exhibit 3.2, and be prepared to justify your recommendations at the next depart- ment heads' meeting. BI By: Case #03 (Writt X Shs345_document case3. (2).pdf * Free Access - Course Hero x Q Rio Grande Medical Center Case s345_document_case3.%20(2).pdf Log In - naviHealth Coupa Home SEC3URE 1 Sign in to your Micr... DHP Log In - naviHealth Waterford Early Lea P&L Statements: Without Expansion DC OC With Expansion Initial Allocation Alternative Allocation DC DC OC Revenues/Direct Costs Total revenues Direct expenses Contribution margin Percent of revenues $ 2,700,000 2,100,000 $ 600,000 22.2% $16.000.000 9,833,155 $ 6,166,845 38.5% $ 2,700,000 2.100,000 $ 600,000 22.2% $20,000,000 12,291,444 $ 7,708,556 38.5% $ 2,700,000 2,100,000 $ 600,000 22.2% $20,000,000 12,291,444 $ 7.708,556 38.5% $ s Indirect Costs Facilities costs General overhead Total overhead $ 300,000 270,000 $570,000 $ 1.200.000 1,600,000 $ 2.800,000 S 400.000 270,000 $ 670,000 $ 1,500,000 2,000,000 $ 3,500,000 $ S Net profit Percent of revenues 30,000 1.1% $ 3,366,845 21.0% 70,000) 12.6%) $ 4,208,556 21.0% % Facilities Cost Allocation: Case 3: Rio Grande Medical Center 20.000 100.000 Square footage Facilities costs per square foot 20,000 15.00 80.000 15.00 20,000 20.00 100.000 15.00 S S s $ S Other Overhead Allocation: 10.0% 10.0% 10.0% 10.0% % % General overhead costs as a % of revenue Nore The term contbuton margin" as used here means the amount available to cover overhead costs, as opposed to the traditional meaning of the amount available to cover fixed costs 3 Summary and Outpat Dialysis Ce Rio Grande EXHIBIT 3. 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