Ruger Clinic The Housekeeping Service department of Ruger Clinic is a multispecialty practice in Toledo, Ohio. Direct costs in 2007 aggregated to $100,000. These costs must be allocated to Ruger's three revenue-producing patient services departments using the direct method. Two cost drivers are under consideration: patient services revenue and hours of housekeeping services used. The patient services departments generated $5 million in total revenues in 2007, and to support these clinical activities, they used 5,000 hours of housekeeping services.

Ruger's Clinic over a 12-month operating cycle accumulated direct and variable costs. The value of the cost pool us $100,000 and is a function of two cost drivers, patient services revenue and hours of housekeeping services. Patient services and housekeeping equally contributed to the cost pool at a monthly cost of $4,167.67.

The cost allocation rate is ratio of revenue or cost into the number of labour hours. When patient services revenue is the driver, the cost allocation rate is 2% or .02. When the hours of housekeeping are the cost driver, the cost allocation rate is 5% or .05.

The cost-volume-profit (CVP) analysis examines the aggregate cost needed...

The cost-volume-profit in this case is .02. The cost-volume profit is important to health service manager because it tells them how well they are turning expenses into revenues. For every penny of expenses incurred, Ruger Clinic produces .02 cents of revenue. Health managers are also able to compare this information from a base year and determine the level of improvement or inefficiency in certain years and attempt to isolate the causes to enhance the potential indicator in the future.
Capitation rates determine how much or to what percentage the insurant will pay for their care from the whole. There are different methods as either a percentage, a deductable, or a fixed cost is paid as a capitation payment. The fee-for-service approach is an optimal choice for health care consumers when the amount of service needed or the frequency of use is not expected to be excessive.

The fee-for-service enables an insurant to pay for health services on a per case basis, however, a larger percentage of the yearly cost of health care may be shifted onto the consumer in the form of higher fees. Fee-for-service is not the best choice when the…