Rio Grande Medical Center Cost Allocation Concepts Essay

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Rio Grande Medical Center Cost Allocation Concepts

HCM 681
Introduction to the Financial Management of Healthcare Organizations

1. Is it “fair” for the Dialysis Center to suffer in profitability, and hence for the department head to possibly lose his bonus, just because the Outpatient Clinic needs additional space?
The building of the new facility is not expected to affect revenue, direct cost and patient volume. The Dialysis Center will provide the same services for its patients, but with different location of the facility. There is no reason for the personnel of the facility to be penalized financially, since the decision for the relocation of the building was taken due to recent growth in volume of the Outpatient Clinic.
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After twenty years the true allocation facility cost for the Dialysis Center should be zero, since the facility would be paid off and should have only minimal allocating facility costs such as opportunity costs and costs of using the center. If after the twenty years the building is not occupied it can be used from other medical centers or it could be rented out or sold. It is difficult to try to determine the opportunity costs for space occupied by all activities. The current system of facility allocation assigns equal opportunity cost across all activities and services and avoids the problem inherited in the new method.

4. Explain how the revenue from medical (pharmacy) supplies is currently handled for profit and loss reporting purposes. Is there a problem with the current system? Is there a better way of reporting this revenue? If so, what is it?
With the current systems of accounting for profit and losses the Dialysis Center records the pharmaceutical used in patient services as revenue and then records the same amount as an expense. Because general overhead is allocated on department patient service revenue the record in the system increases the general overhead allocation of the Dialysis Center.
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