Question One

Analyze the market and competitive forces faced by Boston Children's Hospital. What are BCH's
strengths, weaknesses, opportunities and threats (SWOT)?

Market forces, in particular rising healthcare costs, causes Medicaid and

healthcare insurance companies to implement all kinds of cost control actions. First,
these insurers will exclude hospitals, such as BCH, whose average costs are significantly
higher than alternative providers on certain plans and increase cost sharing on other
plans. Such actions can cause a hospital to lose market share. Second, insurers are
shifting away from fee-for-service reimbursement model to bundled payment for whole
episodes of care, such as Alternative Quality Contract.
BCH charges more under the fee-for-service model compared with pediatric
wards in adult hospitals, though BCH costs appears on par with other pediatric hospitals
in the country. Their higher charges are likely due to BCH handling more complex
patient cases and more low income patients. BCH’s overhead is likely pushed higher due
to its infrastructure for research and teaching, and for providing specialty care for rare
diseases. In contrast, pediatric wards in adult hospitals’ overhead is often disguised by
cross-subsidizing with more profitable adult divisions.

Strengths
● BCH has unique capabilities, such as specialists and equipment, in treating rare
diseases and is considered a provider of last resort.
● BCH has lower costs over a full care cycle by reducing errors and complications.
● BCH has a reputation as a top pediatric hospital in US which means it attracts lots
of patients including many from outside the local community.

Weaknesses
● BCH has a high volume of complex cases and high volume of resource intensive
cases both of which drives up costs
● BCH cannot cross subsidize OH with a parent hospital
● BCH do not have detailed cost tracking across all departments.

Opportunities
● BCH can use alternative quality contracts to capitalize on their lower costs over a
full care cycle, thus protecting or growing their market.

Threats
 ● Insurers penalize BCH due to their higher charges by limiting their access to
market.

Question Two
In this industry situation, why should clinical department heads, such as Drs. Meara and Waters, be
interested in developing more accurate costs for their procedures?

Clinical department heads must be actively involved in costing studies because financial
managers lack actual medical knowledge. Given the level of complexity in hospital activities,
costing process requires significant expertise in terms of how the department is organized and
which activities are involved in each medical specialty.
Aside from the ability of these clinical department head to help with these costing
analysis, they are also particularly interested in securing the financial health of the hospital.
Overall financial health of the hospital directly impacts their job security and compensation. If
the hospital cannot control their prices, and begin losing significant market share, the problem
will compound itself and put the hospital in worse financial situation. Even if the hospital does
not shut down, it may mean cutting back research and teaching capacity which likely motivates
these department heads. For certain departments that do not serve others, their failure to control
costs may result in their department being eliminated to improve the health of the overall hospital.

1
Question Three
Use the accompanying Excel worksheet to calculate the costs and margins of the three different office
visits using:
a. RCC method

The Ratio-of-Cost-to-Charges Method calculates cost from the equation below:

𝐴𝑐𝑡𝑢𝑎𝑙 𝐶ℎ𝑎𝑟𝑔𝑒 𝑥 𝑅𝐶𝐶 𝑅𝑎𝑡𝑖𝑜 = 𝑅𝐶𝐶 𝐶𝑜𝑠𝑡

The margin is then calculated using the following:

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑒𝑖𝑚𝑏𝑢𝑟𝑠𝑒𝑚𝑒𝑛𝑡 − 𝑅𝐶𝐶 𝐶𝑜𝑠𝑡 = 𝑅𝐶𝐶 𝑀𝑎𝑟𝑔𝑖𝑛

The results of these calculations are summarized below for each procedure.

Medical Diagnosis Actual RCC Average RCC

RCC Cost
Cost per patient visit Charge Ratio reimbursement Margin
Plagiocephaly $ 350 60% $ 210 224.00 $ 14.00
Neoplasm skin excision $ 350 60% $ 210 224.00 $ 14.00
Craniosynostosis $ 350 60% $ 210 224.00 $ 14.00

b. TDABC method
Time-Driven Activity-Based Costing calculates costs based on the amount of time is
spent by each person involved in a procedure. First, a capacity cost rate is determined by
dividing the total annual cost of a person by the number of available minutes annually.

Capacity per cost Surgeon ASR RN CA

rate ($ minute) $ 6.00 $ 1.00 $ 1.50 $ 0.80

Next, the number of minutes spent on each diagnosis is multiplied by the determined
rates to produce the following charges:

Medical Diagnosis Personnel Charges TDABC

Cost per patient visit Surgeon ASR RN CA Cost
Plagiocephaly $ 108.00 $ 8.00 $ 34.50 $ 4.00 $ 154.50
Neoplasm skin excision $ 132.00 $ 55.50 $ 30.00 $ 4.00 $ 221.50
Craniosynostosis $ 240.00 $ 10.50 $ 34.50 $ 8.00 $ 293.00

2
 The margin is calculated by subtracting the TDABC amount from the reimbursement
amount.

TDABC Method
Medical Diagnosis Cost Actual Average
per patient visit Charge reimbursement TDABC TDABC
Cost Margin
Plagiocephaly $ 350 224.00 $ 154.50 $ 69.50
Neoplasm skin excision $ 350 224.00 $ 221.50 $ 2.50
Craniosynostosis $ 350 224.00 $ 293.00 $ (69.00)

For more detailed analysis, refer to the excel document titled Appendix i - BCH Cost
Analysis, DPOS Assignment Worksheet.

3
Question Four
What explains the difference in costs using the two methods?

The RCC and TDABC methods produce different costs due to the way cost is allocated between
the three different care needs. The RCC method is easily calculated since it allocates costs of the
department proportionally to each type of care based on that department’s total costs to total
charges ratio. TDABC on the other hand, starts with the actual time spent by department
employees, and charges each type of care from a cost rate based on their overall cost per minute.
This is a more granular approach, and required considerable effort to implement. However, by
measuring actual time spent and annual employee expenses, a more accurate cost per care type is
produced. The three treatments in this example are all charged at the same rate despite having
varying expenses.

4
Question Five
Suppose DPOS dedicates the following resources to handle all office visits: 2.5 surgeons, 2
Ambulatory Service Representatives, 2 Registered Nurses, and 1 Clinical Assistant. During the year
the office performs 4,400 Plagiocephaly visits, 2,200 Neoplasm visits, and 1,800 Craniosynostosis
visits. Calculate the quantities and cost of used and unused capacity for the four types of personnel,
and the total cost of unused capacity for the year. How can Dr. Meare reduce the costs of unused
capacity?

Total capacity Surgeon ASR RN CA Totals

Number of personnel 2,5 2 2 1 7,5
Total clinical minutes available per year 217800 179400 179400 89700
Total yearly capacity spent Surgeon ASR RN CA Totals
Plagiocephaly (4400) 79200 35200 101200 22000
Neoplasm skin excision (2200) 48400 122100 44000 11000
Craniosynostosis (18000) 72000 18900 41400 1800
Total used capacity 199600 176200 186600 51000

Unused capacity (minutes) 18,200 3,200 -7,200 38,700 52,900

Cost of used capacity (dollar) 1197600 176200 279900 40800

Cost of unused capacity (dollar) $109,200 $3,200 -$10,800 $30,960 $132,560

See spreadsheet appendix for more details on these calculations

There are a few things that stand out here. The first is that the RNs are over their capacity.
Technically speaking, this makes the above “Totals” incorrect. If we calculate them with the RN
time and cost at 0 instead of negative, Unused Minutes is 60,100 and Cost of Unused Capacity is
$143,360. It’s unclear from the case whether or not nurses work overtime to cover this lack of
capacity, or even how it’s handled. Consideration should be given to possibly offloading some
nurse work to the ASR or CA to bring the RN capacity in line with the available hours. Further,
ASR and CA are both cheaper resources and have extra capacity which makes it an obvious
consideration.

The second thing that stands out is the cost of unused surgeon time. We have 2.5 surgeons
allocated to this work. If we bring the 0.5 surgeon down to 0.3, the capacity is much more in line
with the amount of work to be done. Could the surgeon allocate that 20% of his/her time in other
departments? Could he split time with another location? This alone could trim $100,000 of
unused capacity.

The third thing that pops out is the CA utilization. It’s only at a bit over 50%. Since they are
paid far less, the dollar amount is smaller, but this is a significant amount of down time. Could
the Clinical Assistants share time in other departments? Could we consider hiring them part time

5
instead of full time? Could some of their time be used helping out the RNs as suggested above?
All of this could reduce unused capacity and cost associated with it.

6
 Question Six
Use the accompanying Excel worksheet to calculate the costs and margins of the three different
orthopedic casts using the TDABC method.

Total Costs Average

Procedure (TDABC) Reimbursement Average Profit Average % Profit
Long leg cast, cotton padding $ 165.45 $ 366.10 $200.65 121.28%
Long leg cast, Gore-Tex
padding $ 342.66 $ 408.80 $66.14 19.30%
Petrie long leg cast $ 308.98 $ 126.70 -$182.28 -58.99%
Clubfoot cast (6 total visits,
incl. initial & final) $ 721.42 $ 1,183.00 $461.58 63.98%

7
Question Seven
Compare the TDABC costs and margins with those calculated using the hospital's existing RVU
system. What differences occur and why?

The existing RVU’s system has some serious deficiencies. The standard, Long leg cast with
cotton padding is relatively reasonable, but from there on, all of the other calculated RVU’s are
very poorly estimated. In the RVU system, when they calculated the costs for the Long leg cast,
Gore Tex padding, they increased the direct materials cost by less than four dollars. In actuality,
the Gore Tex materials are over $100 more expensive than the standard cotton padding. Because
of this miss, the average profit percentage dropped from 121.28% for the cotton padding, down to
only 19.3% for the Gore Tex padding. Next, in the case of the Petrie long leg cast it seems
obvious that it should take up to twice as much labor and materials, because it is essentially two
of the previous long leg cast procedures. In their RVU calculations, however, they only increased
labor by a small amount and actually decreased direct materials by a third. This particular
procedure was VASTLY underestimated, leading to a charge that was far too low and an average
reimbursement that was far too low, since average reimbursement is just a percentage of the
charge. By our calculations, the hospital realized an average $182.28 LOSS on this procedure.
Finally, on the clubfoot cast, the RVU calculations led to a 91.16% profit, while our calculations
lead to only a 63.98% profit, but this was at least on the profitable side of the equation. This
procedure, because of the multiple visits, had higher charges for labor and materials applied to the
costs in the RVU method and the TDABC method.

8
Question Eight
Should the two TDABC pilots be extended throughout the hospital or should senior hospital
management just allow such local initiatives to arise spontaneously, based on local physician
interest?

It would be irresponsible not to extend this (as quickly as is feasibly possible) to the entire
hospital. Far too much is at stake. While the process itself is expensive and time consuming to
undertake, the alternative is continuing to improperly charge and measure costs. This is causing
BCH to lose money and patients. If BCH wants to continue to compete with the lower cost
providers it needs more accurate cost information.

Further, without this type of information BCH will have trouble when it goes to renew its AQC
contract. TDABC can provide specific evidence for the true cost of the procedures it’s
negotiating about. This more accurate cost information combined with the other physician driven
initiatives such as PPSQ and SCAMPs along with Dr. Meara’s evidence that BCH has superior
outcomes than their competitors gives the hospital strong negotiating leverage. This leverage can
allow them to secure good contracts with their payors and insurance companies.