Problem:
Suppose you just found out that the $3,215 monthly malpractice insurance charge is based on an accounting allocation scheme that divides the hospital's total annual malpractice insurance costs by the total annual number of inpatient days and outpatient visits to obtain a per-episode charge. Then, the per-episode value is multiplied by each department's projected number of patient days or outpatient visits to obtain each department's malpractice cost allocation.
Required:
Question: What impact does this allocation scheme have on the clinic's true (cash)profitability?
Note: Provide support for your underlying principle.