I’ve just finished reviewing Gastroenterology’s business plan and I’m concerned that it's too optimistic and doesn’t reflect reality. Whether we like it or not, competition has hit and we can no longer afford to continue with business as usual. By my calculations the plan submitted just doesn’t seem feasible. I’m actually beginning to think we need to completely revise the planning and budgeting process in this department.

The speaker was Jonathan Wilson, MD, Chair of the Department of Medicine at Southern State University School of Medicine. Dr. Wilson had recently asked his 12 division heads to submit business plans (BPs) for the upcoming fiscal year. The BPs were to include the goals of the division, with specific attention to the balance that the division hoped to achieve among research, teaching and clinical practice. He had also asked for the financial implications of these activities. In addition, he had asked for new proposals for upcoming years. Upon receipt of Gastroenterology’s BP from Robert Clark, MD, he had responded with the above comments. He continued:

If we were operating in the same environment we were 2 or 3 years ago, the plan would be fine, but we’re not. I just don’t see how these five doctors are going to generate over $1 million in clinical revenue given the realities of increased competition and managed care. Even though almost 95% of our revenue remains discounted fee for service, these discounts are becoming increasingly deep. If gastroenterology falls short of its revenue goals, the other divisions in the department, or other departments, will have to cover the shortfall.

Another concern I have is maintaining the level of patient visits. Bill Olden, who has excellent community relationships, is leaving this year. I wonder what this will do to the number of referrals and whether the other physicians in the group will be able to maintain those relationships and make up for Bill’s lost revenue.

We’ve also lost a major researcher in Joe Lucille and I don’t see any effort to replace him. There’s only one researcher left in the division right now. What happens if he leaves? We have to be careful that we maintain our research expertise for the long run . . .

Assignment

1. Considering the different kinds of responsibility centers that can exist in a management control system, what kind of responsibility center is the Department of Medicine? The Gastroenterology Division? An individual physician within gastroenterology? Are these responsibility centers well-designed according to the criterion of aligning responsibility with control?
2. How would you define the "lines of business" in the Gastroenterology Division? For example, is the satellite clinic under consideration a line of business? Are flexible sigmoidoscopy procedures a line of business? How should Dr. Clark incorporate lines of business into his budget?
3. Assuming fee-for-service (outpatient and inpatient) is a line of business, how much of the budgeted surplus does Dr. Clark anticipate it will generate? Please be specific, using the data in Exhibit 4 to compute its contribution to the division’s surplus. Is this realistic?
4. More generally, what has Dr. Clark assumed will change this year, such that he can increase his division's surplus from last year’s level to the one has budgeted for this year? Do you think he can achieve this increase?
5. Is the budget process in the DOM designed so as to achieve an appropriate balance among research, teaching, and clinical care? If not, how would you change it? How, would your proposed changes help Dr. Wilson to deal with the issues he discusses in the last two paragraphs of the case?