HBSP Product Number TCG147 THE CRIMSON PRESS CURRICULUM CENTER THE CRIMSON GROUP, INC. Los Reyes Hospital (A) Preparing this budget requires many assumptions that I’m not the least bit qualified to make. If the hospital is to have something that’s realistic, I’m going to have to involve the physician chiefs and a few other key managers. The real question is how best to do that. Alex Cohn, the Chief Financial Officer of Los Reyes Hospital, was commenting on the frustration he felt as he began the process of preparing the hospital’s budget for the upcoming fiscal year. As a first step in the process, he had requested some basic information from each of the hospital’s clinical and service departments. He continued: In reviewing this information, I realized that I simply couldn’t make many of the budgetary decisions in a sensible way. So, I thought it would make sense to decentralize some decisions to the clinical and service departments. However, I know that I’ll encounter some resistance in doing that since these people have never been involved in budgetary decision making before. I thought it might make sense to show them how they could become involved in a way that takes advantage of their expertise. I only hope that I’m not creating a monster of some sort! To demonstrate the potential role for physician chiefs and service department managers in formulating the hospital’s budget, Mr. Cohn chose four case types in the department of medicine and four hospital service departments as the building blocks for a sample budget. He felt that if he could demonstrate a better approach to budgeting for these four case types and four departments, his approach then could be expanded to cover the rest of the hospital. The four case types he chose were DRG089 (Simple pneumonia & pleurisy, age over 17), DRG014 (Specific cerebral vascular disorders except transient ischemic attack), DRG096 (Bronchitis & asthma, age over 17), and DRG140 (Angina pectoris). The four service departments he chose were routine care (i.e. the hospital stay itself), radiology, laboratory, and pharmacy. Financial Information Mr. Cohn used the information he had obtained from his meetings and conversations with the the chief of medicine, Maria Delgado, M.D., to determine how many cases of each type she expected the physicians in her department would treat during the upcoming year, and how many units of service she expected each case would use from each of the four service departments. Since most of the hospital’s contracts used a diagnosis-based form of payment, he then discussed the expected revenue the hospital would receive for each case type with his manager of contracting. The results of his information gathering efforts are contained in Exhibit 1. Mr. Cohn next met with the heads of the four service departments to discuss and agree on their variable expenses. Since the hospital had just completed a lengthy and extensive study of the breakdown between its fixed and variable expenses, this information was readily available. He determined that the variable expenses were as follows: Day of routine care $250 Radiology film 25 Laboratory test 15 Pharmacy unit (e.g., a prescription) 5 _____________________________________________________________________________________________ This case was prepared by Professor David W. Young. It is intended as a basis for class discussion and not to illustrate either effective or ineffective handling of an administrative situation. Copyright © 2013 by The Crimson Group, Inc. To order copies or request permission to reproduce this document, contact Harvard Business Publications (http://hbsp.harvard.edu/). Under provisions of United States and international copyright laws, no part of this document may be reproduced, stored, or transmitted in any form or by any means without written permission from The Crimson Group (www.thecrimsongroup.org) TCG147 • Los Reyes Hospital (A) 2 of 2 _____________________________________________________________________________________________ The final step in his analysis was to determine the fixed costs of the department of medicine. This information also was quite readily available because of the study that had been completed. He concluded that the department would have fixed costs totaling $1,950,600 for the upcoming year. These consisted of both the department’s direct fixed costs and costs that would be allocated to it from the hospital’s service centers (such as housekeeping, laundry, and dietary). Mr. Cohn then asked his staff assistant to use this information to prepare a budget for the department of medicine for these four case types and the four service departments. He realized that this budget would not show the complete operating activities for the department of medicine, since the department treated many more case types. Nevertheless, he felt that if he could present the information to Dr. Delgado in an easily understandable form, she would see its value, and would be willing to use the same process for completing the budget for the remaining cases in her department. Assignment 1. Using the information contained in the case and Exhibit 1, prepare a budget for the department of medicine for the four case types shown. Organize your figures so that Dr. Delgado will find them understandable and useful. In so doing, try to set up a spreadsheet to calculate the budget, and make it as formula-driven as possible. This will allow you to easily test assumptions in answering Question 2. 2. Assuming Dr. Delgado and Mr. Cohn are unhappy with the “bottom line” of this budget, what options are available to change it? Which options seem the most feasible to implement? 3. What approach should be taken to include the department’s fixed costs in the budget? If, after attaching the appropriate amount of fixed costs to each DRG, one DRGs is losing money, what action should Dr. Delgado take? 4. What problems do you think Mr. Cohn will encounter in attempting to expand this effort to the rest of the department of medicine? The rest of the hospital? What should be done about those problems? LOS REYES HOSPITAL (A) Exhibit 1. Budget Data DRG Expected Number of Cases Expected Revenue per Case Expected Days of Routine Care per Case Expected Radiology Films per Case 089 014 096 140 300 200 100 50 $6,000 6,500 5,000 3,000 9 11 7 4 5 6 4 1 Expected Expected Laboratory Pharmacy Tests Units per Case per Case 10 10 3 5 55 20 12 21 1 Cleveland Clinic Students Name Institutional Affiliation Professors Name Course Name Date 2 Cleveland Clinic Company’s website: https://my.clevelandclinic.org Consolidated Financial statements: https://my.clevelandclinic.org/- /scassets/files/org/about/financial-statements/2q-2023-interim-unaudited-fs-mda.pdf?la=en, Financial statements:https://my.clevelandclinic.org/-/scassets/files/org/about/financialstatements/cchs-2022-w-ob-nonob.pdf?la=en The healthcare organization that I have chosen is Cleveland Clinic. Cleveland Clinic, a renowned nonprofit healthcare organization with a network of clinics, hospitals, and other healthcare facilities, is based in Cleveland, Ohio. The organization is well-known for its multispecialty education sites, research, and superior hospital and clinical services (Cleveland Clinic, 2023). Cleveland offers a variety of medical disciplines, including neurology, oncology, and cardiology. Furthermore, it also offers medical innovation and outstanding patient care in the healthcare field. According to Ernst & Young LLP. (2022), Cleveland has been pioneered by many successful medical breakthroughs, including being the first to perform a successful face transplant and coronary artery bypass surgery. The organization has also been regarded and ranked as a performing hospital in performing heart, cardiology, and vascular surgery in the past twenty years. It has a children’s clinic where it conducts pediatric operations and is ranked the best on the honor roll. Since its foundation, Cleveland Clinic has transformed the world of medicine through extensive innovations and research they conduct and share with the world. Among many successful breakthroughs, other Cleveland innovations include the discovery that damaged brain cells can regenerate, and they were the first in the world to conduct deep brain stimulation surgery to restore brain functions after stroke. Recently, Cleveland Clinic has developed a 3 vaccine that can be used to prevent triple-negative breast cancer (Orsini et al., 2020). In addition, they discovered serotonin, a neurotransmitter that affects the body and moods, and brain mapping techniques that pinpoint epileptic seizures. They have made diagnosing and treating the world’s complex medical problems possible. 4 References Cleveland Clinic. (2023). We’re here when you need us — for every care in the world. https://my.clevelandclinic.org/ Ernst & Young LLP. (2022). Cleveland Clinic Health System Consolidated Financial Statements and Supplementary Information Years Ended December 31, 2022 and 2021. Cleveland Clinic: Every Life Deserves World-Class Care. https://my.clevelandclinic.org//scassets/files/org/about/financial-statements/cchs-2022-w-ob-nonob.pdf?la=en Orsini, E., Mireles-Cabodevila, E., Ashton, R., Khouli, H., & Chaisson, N. (2020). Lessons on outbreak preparedness from the Cleveland Clinic. Chest, 158(5), 2090-2096.
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