Memorandum

To: CEO, Asante Hospital

From: Team Consultants

Date: 2/1/2021

Subject: Natural Birth Pricing - Three Levels

Situation Overview:

Today, when Asante produces invoices for new birth patients, the current process is

inundated with details. The process is inefficient and creates stress for staff and new parents.

Asante sets itself apart from the competition by the level of service that occurs during the

childbirth process. The hospital’s maternity ward is facing fierce competition with bundling

pricing for natural births. Team E074 Consultants were hired to review and recommend a new

activity-based costing (ABC) system method for Asante’s natural birth maternity ward. After

review, Asante’s median costs are more significant than the competition. Still, they often can be

justified by the added amenities of private rooms and excellent patient treatment. However, as

noted in the documentation, average birth prices ranged from R13,000 to R31,000. The ABC

system collects, analyzes, and organizes a pricing model that characterizes the cost drivers and

applies to the hospital's natural birth portion's overhead costs.

Alternative Approaches:

There are implications that must be considered when evaluating a new pricing strategy.

The first is the suggestions of the patients and insurance companies. Asante’s patients and third-

party payors demand a simplified payment method that is both accurate and less time

consuming but also take into consideration all expenses to allow for a clear accounting visibility.

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 As an alternative to the existing approach, we’re considering the ABC system to assign indirect

costs and overheads which will provide us with a more accurate costing for each level by

grouping overheads by activity pools and assigning cost drivers to each pool which provide us

with an overview about the options that Asante can provide in order to stay competitive.

We have come up with an approximative utilization rate for each resource in order to

determine the cost associated to it based on the activity pool (appendix 1) and then used the

information about direct costing based on the three levels (appendix 2) in order to have a global

cost estimate (appendix 3). It is also important to take a strategic look at competitive positioning

and patient expectation in order to improve and reinforce customer service relationships.

Competitive prices may not be the only determinant in setting Asante apart from the

competition, but it is a critical piece that influences the final value of Asante’s products and

services.

The Team E074 Consultants realize that Asante would like to be more competitive

among other hospitals by providing bundled pricing while also increases efficiencies. Asante

may wish to consider the pricing bundle that our team has presented and recognize that it is still

at a higher price than other competing hospitals and, even though Asante provides a premium

level of care, will continue to put financial strain on the growing middle class in Johannesburg

undermining their commitment to the best patient experience.

Though the recommendation as it has been provided was produced through strenuous

analysis, Asante might consider a strategy to either continue cutting costs to the natural birthing

process or find other funding options through the not-for-profit status they maintain. Increased

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 funding through the foundation used to offset the recommended pricing for natural births

would both create a more competitive edge for the Asante maternity ward and ensure patient

experience for those in Johannesburg that would otherwise not be able to afford the premium

care.

Our analysis indicates that allocation of overheads in activity pools (Appendix 2) and

assigning drivers to those pools (Appendix 3) would reflect the Operating Income at R28.36 M

for Level 1 (no complications during birth process) tier, however other tiers would drastically be

reduced to R1.62 M for Level 2 and negative R1.37 M for Level 3 (most complications during

birth process) tiers for this accounting period (sales minus expenses are detailed in Appendix 4).

The costs per child varies in every level tier (Appendix 5) and the cost of birth care for each child

of Level 3 exceeds the other two levels. In order to offset the potential losses in sales, Team

Consultants recommend to bundle the Level 1 and Level 2 pricings and increase the price

margins on level 3. Our pricing recommendation is calculated after applying 20% markup

(Appendix 5).

Fortunately, patients who are paying these prices at Asante receive more services such

as Obstetrician and Pediatrician services offered by the hospital versus some of the competitors

like Johannesburg Hospital do not offer them. Similarly, St. Luke’s hospital does not offer

Obstetrician and Postnatal Care services in their tiers pricing. All these additional services come

with cost and Asante patients receive this extra value and care for the price they are paying.

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 Appendices

Activity Pools
Resources Total Child Labor/Delivery Post Delivery Patient Care Patient Hospital Stay Billing/Discharge
Utilization Utilization Utilization Utilization
Equipment Depreciation R400,039 50% 50% - -
General and Administrative R386,985 - - - 100%
Insurance R266,750 50% 33% - 17%
Utilities R8,199,429 - - 100% -
Rent R16,681,322 - - 100% -
Housekeeping R226,865 - - 100% -
Laundry R426,919 - - 100% -
Information Technology R6,914,864 - - 100% -
Dining Hall R933,786 - - 100% -
Security R332,284 25% 25% 25% 25%
Groundskeeping R1,006,813 25% 25% 25% 25%
Marketing R109,628 25% 25% 25% 25%
TOTAL R35,885,684

Appendix 1: Activity Pools and Resource Utilization

Activity Pools
Resources Total ChildLabor/Delivery Post Delivery Patient Care Patient Hospital Stay Billing/Discharge
Cost Cost Cost Cost
Equipment Depreciation R400,039.00 R200,019.50 R200,019.50 - -
General and Administrative R386,985.00 - - - R386,985.00
Insurance R266,750.00 R133,375.00 R88,027.50 - R45,347.50
Utilities R8,199,429.00 - - R8,199,429.00 -
Rent R16,681,322.00 - - R16,681,322.00 -
Housekeeping R226,865.00 - - R226,865.00 -
Laundry R426,919.00 - - R426,919.00 -
Information Technology R6,914,864.00 - - R6,914,864.00 -
Dining Hall R933,786.00 - - R933,786.00 -
Security R332,284.00 R83,071.00 R83,071.00 R83,071.00 R83,071.00
Groundskeeping R1,006,813.00 R251,703.25 R251,703.25 R251,703.25 R251,703.25
Marketing R109,628.00 R27,407.00 R27,407.00 R27,407.00 R27,407.00
TOTAL R35,885,684.00 R695,575.75 R650,228.25 R33,745,366.25 R794,513.75

Appendix 2: Resource Cost by Activity Pool

Activity Pools
Total Expense Child Labor/Delivery Post Delivery Patient Care Patient Hospital Stay Billing/Discharge
Activity Pool Amount R35,885,684.00 R695,575.75 R650,228.25 R33,745,366.25 R794,513.75

Labor Hours
(Midwives + OB/GYN Labor Hours (Pediatricians
Driver + Residents) + Practical Nurses) Length of Stay Labor Hours (Clerk)
Driver Volume 123613 11840 17746 4673
Rate R5.63 R54.92 R1,901.58 R170.01

Appendix 3: Drivers and Overhead Rates

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 Level 1 Level 2 Level 3 Total
Sales R99,241,571 R7,384,355 R12,314,192 R118,940,118

Expenses
Labor R41,999,926 R3,589,561 R8,862,658 R54,452,145

Child Labor/Delivery R557,965 R42,283 R95,328 R695,576

Post Delivery Patient Care R502,213 R46,142 R101,873 R650,228
Patient Hospital Stay R27,217,256 R2,025,178 R4,502,932 R33,745,366
Billing/Discharge R608,349 R60,355 R125,810 R794,514

Total Expenses R70,885,709 R5,763,519 R13,688,601 R90,337,829

OperatingIncome R28,355,862 R1,620,836 -R1,374,409 R28,602,289

Appendix 4: Income Statement

Level 1 Level 2 Level 3 Total

Cost Per Child R14,857.62 R16,235.26 R23,122.64 R15,798.85
20% Markup R17,829.15 R19,482.32 R27,747.16 R18,958.62

Appendix 5: Cost Per Child

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