The following interview was done and recorded at Beverly Health Services with Mr. Alexander Morrisey who is the finance manager of the Hospital.
Interview
In general, my duty at Beverly Health Services requires me to oversee and ensure that financial records and reports are well prepared. I also undertake daily cash management activities and guide investment opportunities of the organization besides other functions such as auditing, budgeting, and accounting.
We have a total of twenty departments in this hospital that ranges from the Accident & Emergency department to Anesthetics, for a complete list of this department please refer to our brochure. Among these various departments, the revenue center that we have are five in total and include the pharmacy department, Accident & Emergency department, discharge lounge, imaging department, and Breast Screening Department.
With the exceptions of revenue centers that we presume to have no expenses, all of the other departments have budgets since they incur costs, other cost centers that we have include rent & utilities and the CEO office. We therefore as a matter of accounting principles transfer the minimal cost that is incurred in revenue centers to other centers such as cost centers to avoid budgeting for these revenue centers. Some of the departments that we have which have budgets include cardiology, Intensive Care Unit, rent and utilities, laboratory, and General Surgery department among others.
Every department that we have which has its budget is essentially a cost center, this is for the simple reason that it is incurring cost, but there is an exception. One of these exceptions is revenue centers such as pharmacies since we presume that their expenses are negligible compared to their income rates.
However, there are cost centers that are not departments such as the CEO office, rent utilities center.
Cost control is necessary to ensure that budgets for each department do not exceed the required limits. This measure is important for various reasons but generally, it ensures that the department operates within its fiscal limits and therefore does not comprise on other equally important projects due to over expenditure. The objective, therefore, is both for strategic reasons and essentially to increase profits.
In principal, we determine the fixed cost to be expenses that are not determined or affected by the scale of our services or goods in that case, and the variable cost to be the type of expenses that varies with the change in scale of our operations. However, for simplicity purposes, we take the fixed cost to be all types of expenses except the cost of goods and services as well, this way it is much easier to separate fixed cost from variable costs.
The determination of variable costs is taken to be expenses that are incurred in sales of services or goods, in our case this is the cost of drugs or overtime allowances for doctors and nurses for instance. We have a list of all variable costs that we have here in the hospital which is eventually added up to make up the total costs.
The type of cost allocation that we use is the multiple distribution methods since it provides us with the advantage of factoring for multiple sources of resources and enables intermediary costs to be structured. Besides this double allocation method allows cost elements for a particular department to be funded by more than two sources of revenues which is important for a more balanced cost-revenue distribution. The downside of this method is that it is complex and difficult to implement.
The rule of the thumb in cost allocation demands that each department that benefits from another department should be allocated a portion of the cost that is emanating from that department which is determined by two factors: ideal allocation criteria and allocation method.
The allocation criteria that we use here in the hospital is mostly percentages or proportions, for instance, rent and utility bill are located based on the approximate percentage of the area taken up by the department and so on.
The double allocation method is most appropriate for such scenarios where service revenues fail to cover costs since it enables departments that do not adequately cover their expenses to benefit from other revenue centers that have excess incomes.
So far we have no department that has services that are not being adequately covered by the revenues, not that it matters since there are other checks in place to ensure that cost centers do not exceed their expenses such as cost control strategies.
Interview Summary
This hospital seems to be compliant with standard management systems of most typical healthcare organizations both in its structure of department and cost allocation methods. In general terms, the cost allocation criterion for health care organizations is not a standard procedure but is usually left to the discretion of the management. The type of cost allocation that they are using is also very appropriate since it enables them to uniformly allocate revenues to their cost centers while at the same time remaining simple enough to be manageable. As mentioned above the cost allocation criterion used by this hospital is one of the best since it relies on percentages that are easy to calculate and apply.