You work for a large pediatric practice with two primary divisions: neonatology and general pediatric medicine. The clinic has an administrative staff. The administrative staff spends most of its time on billing issues. When the practice was first getting started the staff also spent time negotiating lease terms for office space and equipment, but at this point most aspects of the practice are well established and running smoothly and the staff spends the majority of their time on billing. Each clinical division employs its own scheduling staff and the salaries and benefits for scheduling employees are included in the clinical departments' costs.

Each of the clinic's three departments (administration, general peds and neonatology) has a cost code in the practice's accounting software and all the practice's expenses are assigned to one of these three areas. The practice manager is interested in better-understanding the profitability of each division, but realizes that to do so she must allocate administrative cost to the two divisions.

1. The practice administrator gathers the following information about the two clinical departments for the past month

	Monthly revenue	Claims filed (including claims re-submitted)	Patient visits and consults	Sq. feet of clinic space
Neonatology	1,000,000	250	200	10,000
General peds	250,000	1,000	750	20,000

Based on the information you've been given about the clinic's operations, which of the metrics the administrator collected would be the best cost driver to use in allocating administrative department expenses to the clinical departments? Explain your answer.

1. Assume that the practice manager chooses the number of claims filed as a cost driver.Use this information, plus the information reported below, to find the total costs (direct cost plus allocated indirect costs) and total profit for each department. Please show your work.

	Direct costs	Claims filed	Monthly revenue	Allocated admin cost	Total cost	Profit
Administration	125,000		0
Neonatology	700,000	250	1,000,000
General peds	200,000	1,000	250,000

1. One of the physicians in the general pediatric department is a recent addition to the practice. He only has a few patients so far but the practice has been marketing his arrival in an effort to build up his patient panel. Use the following information to come up with a 'back of the envelope' estimate for how profits for the practice as a whole will change if the new physician is able to add patients to the practice. Note that the physician is already working at the practice. Only use the relevant information in answering the question.

• Average monthly physician salary and benefits for the practice: $19,000
• Expected increase in monthly patient visits: 30
• Average reimbursement rate per patient appointment: $180
• Average cost of supplies used during an appointment: $5
• Expected increase in administrative department cost for additional appointments: $0
• Last year's allocation rate for administration costs (per claim): $100

1. Assume that the general pediatrics department is running a monthly loss of $30,000 on average.Using the appropriate information from question 3, how many additional appointments does the new physician need to have to make up the $30,000 loss?

1. A few months later, administration provides the general pediatrics department with the following report that describes their financial performance relative to their budgeted goals.

Budgeted expenses	Flexible expense budget	Actual expenses	Budgeted revenue	Flexible revenue budget	Actual revenue
250,000	290,000	285,000	300,000	325,000	315,000

Use this information to answer the following questions:

a. What were the revenue and expense variances?

b. Physicians in the general pediatrics department were surprised to see these numbers. They said they felt like they'd been working hard to control costs and didn't expect to see a negative expense variance (hint: if you didn't calculate a negative expense variance for part a, check your work). The physicians do acknowledge, however that they saw more patients than they expected and they think this may account for the negative expense variance. Is this true? Provide a metric to support your answer.

c. One of the insurers that covers a large number of the practice's patients implemented a change in reimbursement rates during the past month. The physicians had been concerned about the financial effects of the rate change.After looking at the budget variance report, however, they conclude that the rate change didn't harm their revenues and may have actually been beneficial. Are they correct? Provide quantitative support for your answer (i.e. calculate a variance and use it to support your answers).