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Harvard Business School 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 early years was decreasing and Mr. Mitchell wanted to prepare the
Center to be self-sufficient, yet it lacked critical cost information.

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 precise calculation of cost per visit in these departments. Likewise, to
receive third party reimbursement for patient visits, Rosemont Hill's fee schedule had to be
reasonably related to costs.

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 provide comprehensive health care to residents of Roxbury and neighboring
communities. Eight years after its inception, the Health Center maintained strong ties with the
community groups responsible for the Center's development and subsequent acceptance in Roxbury.

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 were depleted in 1974, the city of Boston supplemented Rosemont Hill's
income with a small three-year grant. Because Mr. Mitchell realized that government support could
not continue indefinitely, he intended to make the Health Center self-sufficient as soon as possible.
Rosemont Hill's financial statements are contained in Exhibit 1.

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, Mass. 02163. All rights reserved to the contributors. Printed in the USA.

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178-189 Rosemont Hill 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 services at Rosemont Hill and the schools and city services of the
community. The department is staffed by a part-time speech pathologist, a part-time learning
specialist, and a full-time nutritionist. The Center has twenty-two paid employees and a volunteer
staff of 6–10 students acquiring clinical and managerial experience.

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 visit. The accountant would first determine the direct cost of each
department. He would then add overhead costs, such as administration or rent and utilities, to the
total cost of all the departments to determine the Health Center's total costs. Finally, he would divide
that total by the year's number of patient visits. Increased by an anticipated inflation figure for the
following year (approximately 8 to 10 percent), this number became the charge per patient visit for
the subsequent year.

In reviewing this method with Mr. Simi, Mr. Mitchell explained the 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 be held at a reasonable level to keep the health services accessible to as
many community residents as possible. Additionally, he anticipated complications in determining
the cost per patient visit for each of Rosemont Hill's departments:

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 about it when determining costs on a
departmental basis. Furthermore, it's important to point out that some of our
departments provide services to others. Nursing, for example. There are three nurses
in that department, all earning the same salary. But one works exclusively for Adult
Medicine, another divides her time evenly between Family Planning and Pediatrics.
Only the third spends his entire time in the Nursing Department seeing patients who
don't need a physician, although he occasionally refers patients to physicians. In the
Social Service Department, the situation is more complicated. We have two 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 patients who need general social work
counseling, but they also spend about 50 percent of their time in other departments.
The BA social worker cuts pretty evenly across all departments except dental, of
course, where we don't need social work assistance.

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 equally, yet I suppose we might say more
administrative time is spent in the departments 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 utilities according to usage if we had meters to measure electricity, phone
usage 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 me that record keeping can be
allocated on the basis of the number of records, and each department generates one
record per patient visit.

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Rosemont Hill 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 hourly basis. Since there are two people in the
laboratory, each working about 2,000 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
administrative time. So we should include those other costs in the laboratory hourly
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 laboratory usage (Exhibit 3).

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 about 10 percent during 1976, spread evenly over each department. He
anticipated 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 Rosemont Hill's costs for each department. He
planned to use this information to assist him in determining charge fees for the remainder of the year.

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178-189 Rosemont Hill Health Center

Exhibit 1 Financial Statements for 1975

Balance Sheet
As of December 31, 1975
Assets Liabilities and Fund Balances
Cash 30,934 Accounts Payable 32,754
Accounts Receivable 8,800 Accrued wages 3,466
Inventory 40,540 Total Current 36,220
Total Current 80,274
Bank Loan 27,550
Furniture & Equipment 21,700 Total Liabilities 63,770
Less: Accumulated
Depreciation 8,788 Fund Balances:
Total fixed 12,912 Designated by board for 25,000
Special Outreach Project
Total Assets 93,186 Purchases of new equip. 3,000
Undesignated 1,416
Total Fund balances 29,416
Total Liabilities and Fund
Balances 93,186

Income Statement
1975
Revenue from patient fees 345,450
Other revenue 5,000
Total Revenue 350,450
Expenses
Program services 235,000
Utilities 10,000
Laboratory 25,000
General and Administrative 92,000
Total Expenses 362,000
Surplus (Deficit) ( 11,550)

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Exhibit 2 Costs and Patient Visits1 for 1975, By Department

Expenses
Number
Patient
Department Visits 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

1Patientvisits rounded to nearest 100; Expenses rounded to nearest 1,000

2Includes fringe benefits
3Materials, supplies, contracted services, depreciation and other non-personnel expenses

Exhibit 3 Floor Space and Laboratory Usage1 by Department

Department Floor Space2 Laboratory Usage3
Pediatrics 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 In Square Feet
3In hours/year

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