This case requires students to apply four different allocation methods (direct, step-down, double apportionment, and reciprocal) to the situation at a large group practice. The purpose is to give students some feel for how much variation in final allocation amounts is due to methodological differences. Of course, the results depend on the assumptions of the case, so there is no guarantee that the conclusions reached here are applicable to all situations. Complexity This case is relatively straightforward, but the calculations are complex and time consuming if the case is attempted without the accompanying model.
Model Description The model takes much of the busywork out of the case, enabling students to spend more time on interpretation and evaluation. Like most case models, the student and instructor versions differ only in regard to the input data. The instructor’s version contains the complete base case inputs, while these inputs are zeroed out in the student version of the model. The model for this case takes the input data (cost pool values and allocation rates) and allocates overhead costs from the three overhead departments to the three patient services departments using all four allocation methods.
Additionally, the model calculates the profitability of each patient services department under each allocation method. The model’s (instructor’s erosion) Input Data and Key Output sections are as follows: Case 4 Solution Cases in Healthcare Finance Copyright 2010 Health Administration Press case 4 – 2 Case Solution Because the case is undirected, students have ample opportunity to be creative in their solution approaches. Thus, it is impossible to provide a single solution here that applies to every student’s work.
As a starting point in evaluating students’ solutions, we provide a solution based on the questions in the online Case Questions section. However, this solution is merely a starting point, and student work should be graded t least as much on thought processes, assumptions used, creativity, and the ability to express ideas coherently as on the resulting numerical answers. Also, some questions address conceptual issues that most students understand but typically would not include in a case presentation/write-up.
Such questions are ideal for instructors to use.
Then the department is closed, and the process steps down to the support department that provides the next highest amount of services to other support departments. Because support departments are closed out in each step, there is no opportunity to allocate support costs back to the departments that have already closed. Thus, this method is not as complex as the remaining two to implement in practice, but it is superior conceptually to the direct method. The double apportionment method first allocates receives an allocation from all other support departments.
After the initial allocation the first apportionment), the step-down method is used to allocate the costs that remain in the support departments after the first apportionment, which for all support departments consists of direct costs and allocations from other support departments. This method better recognizes intra-support department relationships than do the first two, but it adds complexity. Finally, the reciprocal method uses a system of simultaneous equations (or a number of iterations) to allocate overhead costs simultaneously among support and patient services departments.
This method s the most complex, but it does the best Job of recognizing intra-support department services. Conceptually, the reciprocal method is best. The double apportionment method is next best, followed by the step-down method and, finally, the direct method. Although the direct method is conceptually the weakest, it is the easiest and least costly to implement. As in most situations, greater accuracy comes at a cost; the greater the accuracy of the allocation method, the greater the implementation cost (and the more difficult it is to explain to department heads and other interested arties). . What are the allocations to each patient services department, and resulting profitability, under the four allocation methods using the base case cost amounts (Exhibit 4. 1) and allocation rates (Exhibit 4. 2)? The base case allocations and profit forecasts are summarized in the following table. Case 4 Solution Cases in Case 4 – 4 Under base case conditions, as the allocation method moves from the direct method to the reciprocal method, the allocation of indirect costs mostly decreases to Adult Medicine, increases to Obstetrics, and exhibits random fluctuations to Pediatrics.
