Primary Care and Specialty Physicians

SOONER HEALTH NETWORK (the Network), which consists of five medical group practices, is a subsidiary of not-for-profit Sooner Health System (the System). The Network includes both primary care and specialty physicians, with an emphasis on obstetrics/gynecology, eldercare, and pediatrics. Prior to the founding of the Network, the five practices operated independently.

The Network has three practice locations, each staffed with a mix of primary care and specialist physicians. Although the Network itself is only marginally profitable, it is an important contributor to the profitability of the System because it generates a large amount of revenues from referrals for both inpatient admissions and inpatient and outpatient ancillary services. In fact, each $1 of revenue generated within the Network is estimated to lead to $8 of inpatient and ancillary revenues to the System. By limiting the amount of ancillary services provided at the three Network locations, patients are forced (or at least encouraged) to use other System facilities for such services.

Still, some ancillary services are best performed at the Network locations for one or more of the following reasons: lower costs, increased physician efficiency, and improved patient convenience and hence better CAHPS (Consumer Assessment of Healthcare Providers and Systems) scores. For example, one of the practice locations now has a diagnostic imaging capability. When the scanner was moved from another facility to the Network location, volume increased, costs decreased, and both physician and patient satisfaction improved. (For more information on the CAHPS program, see www. ahrq .gov/ cahps/ about-cahps/index.html)

The proposal currently being considered by the Network is to provide ultrasound services at the Network locations. Preliminary analysis indicates that two approaches are most suitable.

Alternative 1 involves the purchase of one ultrasound machine for each of the Network’s three locations. Patients would schedule appointments, generally at the clinic they are using, during preset times on specified days of the week. Then, the full-time ultrasound technician would travel from one location to another to administer the tests as scheduled. Alternative 2, on the other hand, involves the purchase of only one ultrasound machine, but patient scheduling would be the same. The machine would be mounted in a van that the technician would drive to each of the three Network locations. Most of the operating costs of the two alternatives are identical, but Alternative 2 has the added cost of operating the van and setting up the machine after each move.

The two alternatives differ substantially in capital investment costs because Alternative 1 requires three ultrasound machines, at a cost of $100,000 each, whereas Alternative 2 requires only one machine. However, Alternative 2 requires a van, which with necessary modifications would cost $40,000. Thus, the capital costs for Alternative 1 total 3 x $100,000 = $300,000, whereas the costs for Alternative 2 amount to only $100,000 + $40,000 = $140,000.

Because the two alternatives have different operating costs, a proper cost analysis of the two alternatives must include both capital investment and operating costs. The Network financial staff, which is the System financial staff, considered several methods for estimating the operating costs of each alternative. After much discussion, the chief financial officer (CFO) decided that the activity-based costing (ABC) method would be best. Furthermore, an ad hoc task force was assigned to perform the cost analysis.

To begin the ABC analysis, the task force had to develop the activities involved in the two alternatives. This task was accomplished by conducting walkthroughs of the entire process from the standpoint of the patient, the ultrasound technician, and the billing and collections department. The results are shown in exhibit 8.1. A review of the activities confirms that all except one – consisting of transportation, setup, and breakdown – are applicable to both alternatives.

The next step in the ABC process is to detail the costs associated with each activity. This step uses financial, operational, and volume data, along with the appropriate cost driver for each activity, to estimate resource consumption. Note that traditional costing, which often focuses on department-level costs, typically first deals with direct costs then allocates indirect (overhead) costs proportionally according to a predetermined allocation rate. In ABC costing, the activities required to produce some service, including both direct and indirect, are estimated simultaneously. For example, exhibit 8.1 contains activities that entail direct costs (such as technician time) and activities that entail indirect costs (such as billing and collection). Although the ABC method is more complex and hence costlier than the traditional method, it is the only way to accurately (more or less) estimate the costs of individual services.

Activity cost detail on a per procedure basis is contained in exhibit 8.2. Each activity is assigned a cost driver that is most highly correlated with the actual utilization of resources. Then, the number of driver units, along with the cost per unit, is estimated for each activity. The product of the number of units and the cost per unit gives the cost of each activity. Finally, the activity costs are summed to obtain the total per procedure cost.

Many of the activity costs cannot be calculated without an estimate of the number of ultrasounds that will be performed. The best estimate is that 50 procedures would be done each week, regardless of which alternative is chosen. Assuming the technician works 48 weeks per year, the annual volume estimate is 2,400 procedures. Of course, one factor that complicates the analysis is that a much greater total volume can be accommodated under Alternative 1 (with three machines) than with Alternative 2 (with only one machine). However, to keep the initial analysis manageable, the decision was made to assume the same annual volume regardless of the alternative chosen.

Other costs are thought to be relevant to the decision. First, in addition to the purchasing and operating (primarily consisting of fuel expenses) costs of the van, the estimated annual vehicle maintenance costs are $1,000. Furthermore, annual maintenance costs on each of the three ultrasound machines under Alternative 1 are estimated at $1,000, whereas the annual maintenance costs for the single machine under Alternative 2 are estimated higher, at $1,500, because of added wear and tear. The manufacturer of the ultrasound machines has indicated that a discount may be available if three machines, as opposed to only one, are purchased. The amount of the discount is somewhat uncertain, although 5 percent has been mentioned.

Finally, to get a rough estimate of the total annual costs over the life of the equipment, assumptions about the useful life of the ultrasound machines and the van must be made. Although somewhat controversial, the decision was made to assume a five-year life for both the ultrasound machines and the van and that the value of these assets would be negligible at the end of five years.


You are the chair of the Network’s ad hoc task force. Your charge is to evaluate the two alternatives and to make a recommendation on which one to accept, if revenues would be identical for the two alternatives, and hence the decision can be made solely on the basis of costs. As part of the analysis, the costs of the two alternatives must be estimated on a per procedure basis and an annual basis. In addition, any relevant qualitative factors must be considered before the recommendation is made.

To keep the base case analysis manageable, the task force was instructed to assume that the operating costs remain constant over the useful life of the equipment. For comparative purposes, this assumption is not too egregious because the activities are roughly the same for both alternatives and, hence, inflation would have a somewhat neutral impact on the cost comparison.

In addition, the System CFO has asked the task force to perform some sensitivity (scenario) analyses. He is concerned about the accuracy of the cost detail inputs. Although he is confident about many of the estimates, he thinks others are more arbitrary. Those activity cost inputs considered to be most uncertain are supplies cost per unit; billing and collection cost per unit; general administration cost per unit; and transportation, setup, and breakdown cost per unit.

Thus, first, the task force must redo the analysis assuming that these inputs are higher than the base case values by 10 and 20 percent. Activity cost inputs less than the base case values could also be examined, but the critical issue here is not to underestimate the total costs involved in the two alternatives. Second, the task force must determine what would happen to the cost estimates if the useful life of the capital equipment were as short as three years or as long as seven years. Another concern was that the useful life of the equipment depended on the alternative chosen; that is, there would be less wear and tear under Alternative 1 than under Alternative 2. Finally, the task force must assess the impact of a purchase discount: Would the discount amount influence the ultimate decision?

You believe that performing a sensitivity analysis on the number of procedures would be helpful, but you realize this task would require recalculation of the per unit cost inputs, an effort thought to be too time-consuming to undertake at this point in the analysis.

With all the information above answer the following research questions

Question 3

Redo the analysis assuming that the per unit supplies cost; billing and collection cost; general administration cost; and transportation, setup, and breakdown costs are higher than the base case values by 10 percent. Redo the analysis again assuming these costs are 20 percent higher than the base case values.

Question 4

Return to the base case. What value for transportation and set-up costs would make the costs of the two alternatives the same?


Question 5

Again, use all base case data but assume that a 5 percent discount is available if three machines are purchased. What effect does this have on the decision? What discount amount would make the two alternatives equal in costs?

Redo the base case analysis assuming a useful life of 3 years. Now assume a life of 7 years.


Question 6

Do the analyses conducted for Questions 3 through 6 affect your decision as to which alternative has the lowest cost?

Order NOW to get 15% Discount!

{{total || ""}}

Why Choose Us

Top Quality and Well-Researched Papers

Keeping in mind your instructions and guidelines, our writers ensure to do extensive research before beginning to write. Unique and quality paper is our top priority.

Professional and Experienced Academic Writers

Our team of writers and editors have many years of experience in academic writing. They are native English speakers and able to handle any academic task with ease.

Free Unlimited Revisions

We offer free unlimited revision to our clients. Whenever you feel the need to revise your work submit to our able editors. Our editors will ensure that your paper will be revised to meet your guidelines.

Prompt Delivery and 100% Money-Back-Guarantee

As a team we work hard to ensure a timely delivery of your papers. All you need to do is specify the time frame that you want you paper be submitted. We will work round the clock to beat the deadline.

Original & Confidential

We value your confidentiality and all our payment method are secure. We also use high end writing tools to ensure that all papers delivered are unique.

Customer Support 24/7

Our customer support team are available 24/7 to accept your orders and queries. We are committed to provide you with the best customer experience.

What Our Paper Writing Service Guarantees

You do not have to worry on what to expect because at we guarantee you;

High Quality Academic Papers

Our team of writers and editors is composed of people with diverse writing experiences. All of them have a Ph.D. They are all Ph.D. or M.A. graduates with extensive experience in academic and essay writing. We offer high-quality, original academic writing at an affordable cost.

Every order is written from scratch. We ensure that your papers conform to English conventions and the requirements of your discipline. To ensure originality, we also perform originality checks on all academic papers. Our success rate is 99% and many of our clients achieves their desired grades.

Zero-plagiarism policy

Mypaperwriterspro has a strict anti-plagiarism policy. To ensure that your paper is not flagged as plagiarism, we take extra precautions when writing it. Professional plagiarism detection software is used by our custom paper experts.

Privacy Policy

Mypaperwriterspro takes the privacy of clients' information very seriously. Mypaperwriterspro does not disclose any information about our transactions with third-party services. Nobody will ever know that you have hired our paper writing service to help with your paper.

Our website offers online security for our customers. Your passwords and personal information are protected and cannot be accessed by anyone else. Our customers are assured that their accounts will not be compromised by hackers. Learn more about the data that we store and how it is used in our privacy statement.

Free revision

When you order our paper service, you get unlimited free revisions and unlimited drafts. We will ensure that you submit flawless papers. Our paper help website allows you to request multiple revisions.

If the order form indicates that modifications or adjustments are required, only those should be made. These guidelines include, but are not limited to:

  • Revision instructions should not conflict with your original instructions.
  • You can request a modification before the purchase is approved. However, there is a 14-day grace period in which you can do this.
  • You should not extend your deadline by more than one day from the original deadline.
  • 24/7 Customer Support

    You can reach us by email, phone, and live chat. We are always interested in hearing from our customers. We welcome any feedback regarding our paper assistance service. Our customer service representatives are available 24/7, even on holidays and weekends. They can help you place orders, check the status of your order, answer questions, or simply provide information.

    Chat with your paper specialist via our live chat. Our professionals are available for unlimited chats. All your questions will be answered within minutes

    Money-back guarantee

    Do you still feel dissatisfied with your final paper? Don't worry. Mypaperwriterspro is committed to customer satisfaction.

    Although it is rare, you can request a partial or full refund if your final paper is not written to your satisfaction. Mypaperwriterspro views our money-back guarantee more as a right than a benefit.

    We believe that our clients deserve the best paper services available online. We offer a simple and straightforward refund process if you are not satisfied with the paper.

    Open chat
    You can now contact our live agent via Whatsapp via +1(954) 751-1024
    You will get free custom written paper ready for submission to your Blackboard