9-178-189

Rev. October 5, 1978

Rosemont Hill Health Center

In March, 1976, Mr. Frank Mitchell, Administrator of the Rosemont Hill Health Center
expressed concern about Rosemont Hill's cost accounting system. The extensive funding Rosemont Hill had received during its
At a meeting with Mr. Robert Simi, Rosemont Hill's new accountant, Mr. Mitchell outlined
the principal issues:
First of all, our deficit is increasing. We obviously have to reverse this trend
if we're going to become solvent. But, for that, we have to know where our costs are.
That leads to the second problem: we don't know the cost of each of the
services we offer. I mean, our patients receive a variety of services yet we charge everyone the same per-visit fee.
Mr. Mitchell provided a further motivation for analyzing Rosemont Hill's cost in that federal
and local funding was available for family planning and mental health programs, but to qualify, Rosemont Hill would need a pr
Background
Rosemont Hill Health Center was established in 1968 by a consortium of community groups.
Situated in Roxbury, an inner-city residential neighborhood of Boston, Massachusetts, the Health Center was intended to provid
Funding for Rosemont Hill was initially provided by the Federal government as part of the
Department of Health, Education and Welfare's attempt to equalize health care in the United States. When these operating funds
Rosemont Hill Health Center is composed of eight departments: Pediatrics, Adult Medicine,
Family Planning, Nursing, Mental Health, Social Services, Dental and Community Health. In
This case was prepared by Patricia O'Brien, Research Assistant, and David W. Young, Assistant Professor, as a basis for
class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
Copyright 1978 by the President and Fellows of Harvard College. Distributed by HBS Case Services, Harvard Business School, Boston, M
178-189 Roaemont Hiii Health Center
addition, the Center has a laboratory and medical records department. Community Health, which
was designed by Rosemont Hill's consumers, is a multidisciplinary department providing a link between the health and social s
The Existing Information System
Rosemont Hill's previous accountant had established a cost system to determine the charge
fee for patients. According to this method, shown in Exhibit 2, the fee was derived from the average yearly cost of one patient v
In reviewing this method with Mr. Simi, Mr. Mitchell explained lhe problems he perceived.
He said that although he realized this was not a precise method of determining charges for patients, the Center's charge had to b
You have to consider that our overhead costs, like administration and rent
have to be included in the cost per patient visit. That's easy to do when we have a single cost, but I'm not certain how to go abou
Mr. Simi added further dimensions to the problems:
I've spent most of my time so far trying to get a handle on allocating these
overhead costs to the departments. It's not an easy job, you know. Administration, for example, seems to help everyone about eq
2
Rosemont Hiii Health Center 178-189
Laboratory work is the most confusing. Some departments don't use the
laboratory at all, while others use the laboratory regularly. I guess the fairest would be to charge for laboratory work on an hour
The Future
As Mr. Mitchell looked toward the remainder of 1976, he decided to calculate a precise cost
figure for each department. The Health Center was growing and he estimated that total patient volume would increase by abou
3
178-189
Exhibit 1 Financial Statements for 1975
Roaemont Hiii Health Center
Assets
Cash
Accounts Receivable Inventory
Total Current
30,934
8,800
40,540
Balance Sheet
As of December 31, 1975
Liabilities and Fund Balances Accounts Payable
Accrued wages
Total Current
80,274
32,754
3,466
36,220
Furniture & Equipment
Less: Accumulated
21,700
Bank Loan
Total Liabilities
27,550
63,770
Depreciation
Total fixed
8,788 Fund Balances:
Designated by board for Special Outreach Project
25,000
Total Assets 93,186
Purchases of new equip.
Undesignated
Total Fund balances Total Liabilities and Fund Balances
3,000
1,416
29,416
93,186
Revenue from patient fees
Other revenue Total Revenue
Expenses
Program services Utilities Laboratory
General and Administrative Total Expenses
Surplus (Deficit)
Income Statement
1975
235,000
10,000
25,000
92,000
345,450
5,000
350,450
362,000
( 11,550)
4
Rosemont Hiii Health Center 178-189
Exhibit 2 Costs and Patient Visits' for 1975,By Department
Exn-
Number Patient Visits
Department Salaries2 Others3 Total

Pediatrics 5,000 $ 20,000 $ 8,000 $ 28,000

Family Planning 10,000 5,000 15,000 20,000
Adult Medicine 2,100 30,000 16,000 46,000
Nursing 4,000 27,000 6,000 33,000
Mental Health 1,400 15,000 8,000 23,000
Social Services 1,500 32,000 8,000 40,000
Community Health 2,500 5,000 10,000 15,000
Dental 6,400 20,000 10,000 30,000
Sub-Total 32,900 154,000 81,000 235,000
Administration 38,000 2,000 40,000
Rent 36,000 36,000
Utilities 10,000 10,000
Laboratory Work 16,000 9,000 25,000
Cleaning 6,000 6,000
Record Keeping 7,000 3,000 10,000
Total $215,000 $147,000 $362,000
Number of Patient Visits 32,900
Average Cost per Visit $11.00
'Patient visits rounded to nearest 100; Expenses rounded to nearest 1,()00
21ncludes fringe benefits
3Materials, supplies, contracted services, depreciation and other non-personnel expenses
Exhibit 3 Floor Space and Laboratory Usage' by Department
Deoartment Pediatrics Floor Space2 Laboratorv Usage3
1,000 1,000
Family Planning 1,300 200
Adult Medicine 1,800 2,400
Nursing 300 100
Mental Health 1,000
Social Service 500
Community Health 1,100 100
Dental 1,000 200
Administration 500
Record Keeping 300
Laboratory 1,200
Total 10,000 4,000
1Rounded to nearest 100
2 1n Square Feet
31n hours/year
5
ont Hill had received during its early years was decreasing and Mr. Mitchell wanted to prepare the Center to be self-sufficient, yet it lack

me per-visit fee.

Rosemont Hill would need a precise calculation of cost per visit in these departments. Likewise, to receive third party reimbursement for pa

Center was intended to provide comprehensive health care to residents of Roxbury and neighboring communities. Eight years after its ince

es. When these operating funds were depleted in 1974, the city of Boston supplemented Rosemont Hill's income with a small three-year gra

as a basis for

arvard Business School, Boston, Mass. 02163. All rights reserved to the contributors. Printed in the USA.

between the health and social services at Rosemont Hill and the schools and city services of the community. The department is staffed by a

age yearly cost of one patient visit. The accountant would first determine the direct cost of each department. He would then add overhead co

ts, the Center's charge had to be held at a reasonable level to keep the health services accessible to as many community residents as possible

I'm not certain how to go about it when determining costs on a departmental basis. Furthermore, it's important to point out that some of ou

eems to help everyone about equally, yet I suppose we might say more administrative time is spent in the departments where we pay more s

for laboratory work on an hourly basis. Since there are two people in the laboratory, each working about 2,000 hours a year, the charge per h

olume would increase by about 10 percent during 1976, spread evenly over each department. He anticipated that costs would also increase b
Total

$ 28,000
20,000
46,000
33,000
23,000
40,000
15,000
30,000
235,000
40,000
36,000
10,000
25,000
6,000
10,000
$362,000
32,900
$11.00
er to be self-sufficient, yet it lacked critical cost information.

third party reimbursement for patient visits, Rosemont Hill's fee schedule had to be reasonably related to costs.

munities. Eight years after its inception, the Health Center maintained strong ties with the community groups responsible for the Center's de

come with a small three-year grant. Because Mr. Mitchell realized that government support could not continue indefinitely, he intended to m

y. The department is staffed by a part-time speech pathologist, a part-time learning specialist, and a full-time nutritionist. The Center has tw

t. He would then add overhead costs, such as administration or rent and utilities, to the total cost of all the departments to determine the Hea

y community residents as possible. Additionally, he anticipated complications in determining the cost per patient visit for each of Rosemont

rtant to point out that some of our departments provide services to others. Nursing, for example. There are three nurses in that department,

epartments where we pay more salaries. Rent, on the other hand, is pretty easy: that can be done on a square-foot basis. We could classify u

000 hours a year, the charge per hour would be about $4.00. But this is a bit unfair, since the laboratory also uses supplies, space and admin

d that costs would also increase by about 10 percent. He asked Mr. Simi to prepare a step down analysis for 1975 so that they would know
s responsible for the Center's development and subsequent acceptance in Roxbury.

nue indefinitely, he intended to make the Health Center self-sufficient as soon as possible. Rosemont Hill's financial statements are contain

e nutritionist. The Center has twenty-two paid employees and a volunteer staff of 6-10 students acquiring clinical and managerial experienc

departments to determine the Health Center's total costs. Finally, he would divide that total by the year's number of patient visits. Increased

atient visit for each of Rosemont Hill's departments:

three nurses in that department, all earning the same salary. But one works exclusively for Adult Medicine, another divides her time evenly

e-foot basis. We could classify utilities according to usage if we had meters to measure electricity, phone usage and so forth, but because w

o uses supplies, space and administrative time. So we should include those other costs in the laboratory hourly rate. Thus, the process is con

r 1975 so that they would know Rosemont Hill's costs for each department. He planned to use this information to assist him in determining
 financial statements are contained in Exhibit 1.

linical and managerial experience.

mber of patient visits. Increased by an anticipated inflation figure for the following year (approximately 8 to 10 percent), this number becam

another divides her time evenly between Family Planning and Pediatrics. Only the third spends his entire time in the Nursing Department

sage and so forth, but because we don't we have to do that on a square-foot basis as well. This applies to cleaning too, I guess. It seems to m

rly rate. Thus, the process is confusing and I haven't really decided how to sort it out. However, I have prepared totals for floor space and la

tion to assist him in determining charge fees for the remainder of the year.
o 10 percent), this number became the charge per patient visit for the subsequent year.

time in the Nursing Department seeing patients who don't need a physician, although he occasionally refers patients to physicians. In the So

eaning too, I guess. It seems to me that record keeping can be allocated on the basis of the number of records, and each department generate

pared totals for floor space and laboratory usage (Exhibit 3).
 patients to physicians. In the Social Service Department, the situation is more complicated. We have two MSW's, each earning $12,000 a y

ds, and each department generates one record per patient visit.
MSW's, each earning $12,000 a year, and one bachelor degree social worker earning $8,000. The two MSW's yearly see about 1,500 patien
's yearly see about 1,500 patients who need general social work counseling, but they also spend about 50 percent of their time in other dep
percent of their time in other departments. The BA social worker cuts pretty evenly across all departments except dental, of course, where w
xcept dental, of course, where we don't need social work assistance.