Question

Brian McGarrigle went to Les Arcs for his annual winter vacation. Unfortunately, he suffered a
broken ankle while skiing and had to spend two days at the Hôpital de Grasse. McGarrigle’s
insurance company received a €4800 bill for his two-day stay. One item that caught McGarrigle’s
eye was an €11.52 charge for a roll of cotton wool. McGarrigle was a salesman for Boots and
knew that the cost to the centre of the roll of cotton wool would be in the €2.20 to €3.00 range.
He asked for a breakdown of how the €11.52 charge was derived. The accounting office of the
centre sent him the following information:
a Invoiced cost of cotton wool roll €2.40
b Processing of paperwork for purchase 0.60
c Supplies room management fee 0.70
d Operating-room and patient-room handling charge 1.60
e Administrative centre costs 1.10
f University teaching-related recoupment 0.60
g Malpractice insurance costs 1.20
h Cost of treating uninsured patients 2.72
i Profit component 0.60
Total €11.52
McGarrigle believes the overhead charge is excessive. He comments, ‘There was nothing I could
do about it. When they come in and dab your stitches, it’s not as if you can say, “Keep your cotton
wool. I’ve brought my own.”’

Required
1 Calculate the overhead rate Hôpital de Grasse charged on the cotton wool.
2 What criteria might Hôpital de Grasse use to justify allocation of each of the overhead items
b to i in the preceding list? Examine each item separately and use the allocation criteria listed
in Exhibit5.2 in your answer.
3 What should McGarrigle do about the €11.52 charge for the cotton wool?

Answer 1

1.

2. The answers here are less than clear-cut in some cases.

3.

Assuming that McGarrigle’s insurance company is responsible for paying the €4,800 bill, McGarrigle probably can only express outrage at the amount of the bill. The point of this question is to note that even if McGarrigle objects strongly to one or more overhead items, it is his insurance company that is likely to have the greater incentive to challenge the bill. Individual patients have very little power in the medical arena. In contrast, insurance companies have considerable power and may decide that certain costs are not reimbursable – for example, the costs of treating uninsured patients.