Meditech Hospital is a 250-bed tertiary care hospital specializing in the treatment of many forms of cancer. Founded in $1950$ as a centre for the treatment of tuberculosis patients, it has evolved into a major research and treatment institution. Many experimental therapies have been pioneered at Meditech Hospital. Patients with advanced diseases who did not find treatment anywhere else were treated here. From its inception until $1970,$ Meditech Hospital was a charitable institution, providing care to patients free of charge. In $1970,$ as the hospital authorities felt that the funds they received were insufficient, they began to bill patients. In order to bring professional management practices to the hospital operations, the staff decided to develop sound cost accounting and control procedures. Traditionally, hospitals have done little or no cost accounting. In the past, cost reimbursement was based upon $“$actual costs incurred$”$ for patients. The government$’$s policy to set different reimbursement levels for different diagnosis categories based on the severity of the diagnosis had resulted in tremendous pressure on hospitals., including Meditech Hospital, to determine their $“$true$”$ cost for each relevant diagnosis category, so that costs could be reduced below the reimbursement level in order to provide subsidies for those services in which costs could not be reduced. Meditech hired a cost accounting manager to install a new cost accounting system that could be used for budgeting and cost control at the hospital. The cost accounting manager identified the top revenue$-$producing procedures. He interviewed each departmental head and related technicians to determine the actual costs of each procedure performed in the department. Also, the amount of time each employee spent on a given task was identified with the help of a questionnaire. The process was repeated for the medical group. The cost data developed as per this procedure were then used to develop the annual operating budget. 

Each departmental head was expected to forecast a volume of procedures for the next year. Besides the actual volume of procedures, the case mix $($kinds of patents$)$ was also forecasted by each department head. Here departments estimated the kinds of patients they are expected to treat over the next year. A standard treatment plan was prepared to identify what it took to treat an average patient with a given disease. On this basis, an approximate treatment cost to the hospital for a particular diagnosis and therapy was developed. In this way the hospital could gain insight into which procedures were more cost$-$effective as well as the costs of treating specific diseases. Departmental managers did not like the cost accounting manager and tried to avoid him as they felt that the cost accounting manager was confronting them with problems that were outside their areas of competence. Further, they felt that budgeting was not directly related to the mission of the organization, which was to provide the highest$-$quality health care to patients. Since the process of developing operating budgets in relation to patient volume was a new concept for many medical managers, a considerable amount of time had to be spent explaining the process. A monthly cost report was used to determine productivity levels for all non$-$physician personnel. Physicians refused to use monthly cot reports to control their behavior.

Questions

$1.$ Can you describe Management Control Systems in the service sector vis$-à-$vis the manufacturing sector $?$

$2.$ How can control procedures help improve practices in a non$-$profit organization such as Meditech Hospital$?$

Answer rating: 100% (QA)

1 Management Control Systems in the service sector vs the manufacturing sector Management control systems involve strategies and procedures that organizations use to manage their performance ensuring ... View the full answer