Converse Health System - Case study Analysis

From your reading of the case describe the issue(s) or problem(s) which should be the focus
of your case analysis.
1. Lack of reasonable and logical financial result: Ignore fixed and variable cost, ignore
case mix and thus transfer pricing of $7,906 might not be reliable and accurate which is
shown in Exhibit 4.

2. High transfer price of 14% (

$ 1,204$ 1,059
$ 1,059

x 100%) increases lead to goal

incongruence (Exhibit 6): Under the full charge method of transfer pricing, the St. Luke
Hospital would charge the HMO $1204 (Case Mix B), the same as for other third party
payers. The hospital operation managers would benefit from $1,204,000 in increased
revenues as beds are filled by the HMO patient, but the HMO manager would be foolish to
accept St Luke Hospital rate when his/her performance appraisal is based on profit. Thus, the
corporation (Mansfield Memorial Hospital and Lakeview Medical Centre) may stand to lose
the improved occupancy and increase revenue to its hospital from its HMO due to the
incongruence in objectives.

3. Bonus incentives:
-

Two way communication lacking between managers regarding the bonus system.
Budgeting linked to bonus system profiting (inaccurate results has affected transfer prices.
The Chief Financial Officer is reactive to the problems faced by the bonus system.

4. Internal Management:
-

Lack of accountability and responsibility over profit & expense centers

Lack of control measurement and adequate human resource management
Lack of consultation and cohesion between managers
Conflicts arising between Managers which could cause inner conflicts between managers

Identify and list relevant recommendations or actions derived from the analysis undertaken
above.
1. Keep fixed and variable cost split: It provides better analysis in order to make an accurate
decision making in cost reduction. For example, if we reduce the patients being admitted
unnecessarily, we reduce variable costs per patient (costs for bedding, food, supplies, etc.)

2. Revise incentives:
-

Base bonuses on number of patients treated, rather than number of patients admitted
Eliminates bonus system manipulation by managers
Patients not hospitalized unnecessarily
Resulting in lower costs for expense centre

3. Team building workshops:

-

Improves cohesiveness of employees, improves communication & staff morale and thus
increasing productivity and effectiveness
4. Decentralization in management can lead to increased motivation and job satisfaction as it
allows for closer participation between department heads and their staff, allowing for better
communication. It is more of a participative approach rather than a top-down approach that
you would see in a centralized business where the CEO makes all the decisions, including
budget setting.
5. Transfer pricing: Set a general transfer pricing rule can provide a minimum transfer price
that may reduce dysfunctional behaviour.

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