Dialysis Clinic, Inc. - Case Study F

Dialysis Clinic Inc.

Dialysis Clinic Inc. (DCI) is an independent, non-profit, full-service dialysis clinic, which provides two different kinds of services; HD (haemodialysis) and PD (peritoneal dialysis). The introduction of the costing system has deeply affected the health care environment and the way service is delivered.Those changes have pushed dialysis provider to reconsider the cost treatment models.

At the moment, there is a total of three aggregate costing models being used in healthcare industry. Ratio of cost per patiend day (RCP), ratio of cost per treatment (RCT) and ratio of cost to charge (RCC). RCP model reduces total costs to a cost per patient day, RCT examines total annual costs, which are divided by the total number of treatments provided and RCC allocates aggregate indirect costs to revenue-producing departments. DCI management and employees understood that HD and PD treatments placed different burdens on the clinic’s resources. As a result, DCI began exploring the possiblity of using an activity-based costing (ABC) system for cost analysis.

Hospital administrators perceived dialysis departments as very unprofitable because RCC-based cost systems allocated, indirect costs to ancillary departments on a basis that was determined for the hospital as a whole, i.e. allocated costs were not based upon the hospital resources consumed in delivering dialysis services. As a result of a way, how costs were calculated, dialysis department was spun off because hospital management felt the clinic was a “financial loser”.

In the past, healthcare providers were reimbursed for services delivered at actual cost plus an allowable profit. Little incentive existed to control cost, because the higher the cost, the higher the level of reimbursement.

Current treatment costing model known as ABC can be understood as a combination of previously used costing models (RCP, RCT, RCC). The standard supply costs and the episodic...