Question

In the United States, organ procurement organizations (OPOs), transplant centres, and the medical professions coordinate the organ donation process. The US government pays for this treatment through its Medicare program. What price should the US government pay for these organs from the taxes it collects from all citizens? Often multiple organs are removed from a single donor, meaning that there are joint costs such as operating room time, surgeons’ fee, and medications to preserve the organs.

The OPO insist all costs be allocated to each organ, irrespective of whether the organ is actually collected for transplant. For example, lung and kidney donations may be planned, but the surgeon discovers post-mortem that the lungs are not viable. A portion of joint costs will still be assigned to the lungs; otherwise, total costs of the donation would be assigned to the kidneys.

The payer, the US government, does not want to pay the joint costs assigned to the lungs. The Medicare program pays only for transplanted organs. Over 62% of all kidney transplant are paid for by Medicare. Six years ago, a government audit revealed that, of the total of $80 million in organ acquisition costs, $47 million were unallowed and unsupported.

Some organs, such as one kidney, part of a liver, part of a lung, bone marrow, and stem cells, can be recovered from live donors. The recovery of these organs requires major surgery and patients are anaesthetized. The surgeon ensures the donor’s organa are suffused with a protective chemical and removes the organ. The donated organ is preserved in a chemical and placed in a refrigerated container for immediate transport. The donor often recovers after two to five days in hospital.

In contrast, stem cells are recovered from live donors who receive medication to increase the number of stem cells in the blood for four to five days prior to the transplant. The process is similar to a blood donation. The stem cells are extracted from whole blood removed intravenously from the donor’s arm. The rest of the blood is returned to the donor while the stem cells are sealed in plastic packs, placed in a special container, and transported to the recipient. The donor usually returns home to rest for the remainder of the day before resuming normal life. The stem cells are injected intravenously into the recipient’s arm.

Required:

1. Of the reasons to use acceptable methods to allocate joint costs, which ones are relevant in this case?

2. What costs are incurred beyond the split-off point that differ between these two types of donations?

3. What would the separable costs be?

4. In Canada, where all medically necessary care is paid for from tax revenue, of what relevance is joint cost allocation?

Answer 1

The US government should pay a price that will be equal to the joint cost that incurred for procuring those organs .

The acceptable method for allocating the joint cost would be the Quantitative or Physical unit method , as under quantitative unit method the joint cost is allocated among joint products on the basis of measurement units . The organs can be classified as physical units so cost can be allocated properly.

Since , under the organ donation and transplantation the cost that may incur subsequently would be like the donated organ is medicated and preserved with chemicals and the donor needs rest for 4-5 days .This leads to staying cost and such miscellaneous cost

But whereas in stem cells extraction the patient can be moved to his home so this staying cost can be saved.

Whether or not the the medically necessary care is paid from tax revenue or through something else , there must be a track on the expenses that are going to be incurred . Joint cost allocation is very much relevant to keep track on the cost that is incurred on different things.