Cambridge Hospital Case Summary

Q1. The existing cost system in the Cambridge University network is step-down cost system that allocates overhead to support cost centers and service cost centers. By considering cost drivers such as FTE’S, sq. footage, they calculate the rate for each cost center and then allocate the cost. This method, emphasizing on the amount charged for a procedure, provides the clear aggregate cost information in the unit of department or cost center and suitable for cost-based reimbursement system. However, the lack of emphasis on the actual cost at the procedure or patient level may leads to some hidden cost. In addition, it also makes Cambridge University network have no clue on how to increase the profit and reduce the cost, especially under the new …show more content…
The overhear rate was ambiguous and misleading because the plantwide overhead rate was used instead of specific activity rates. The Cambridge Hospital case, in particular, used the step-down method, in which costs of a service department was allocated to other service departments. This departmental assignment of costs was uninformative because it failed to provide specific costs applied to various services and job positions all across the organization, and therefore made it difficult to determine the fields in which costs were unnecessarily high but inefficient. The ABC approach, on the other hand, presents detailed cost allocations to activity cost pools and eventually cost objects, making it easier to observe costly items and conduct further analysis. For Cambridge Hospital, the first step of cost containment is to set up a benchmark for all costs incurred during the operation of the network. It can be historical costs records of years in which a high profit was made, or costs of other hospitals in similar or comparable scales. The second step is to go through the management report and identify the areas where costs exceed reasonable values. The third step is finding the services with more considerable scope for cost reduction. For example, shortening the duration time for outpatient visits is more likely to be implemented than decreasing disposable medical devices used in a surgery, because the quality of medical treatment has to be remained or reinforced. Furthermore, it is also important to control the usage of resources such as electricity, and advocate an environmentally friendly health care. As technology develops, cost containment will become more and more feasible due to increasing sustainability of facilities, intensification of Medicare & Medicaid training and rising awareness of cost-control