Controlling Operating Results Variance Analysis

Budget “The budget is the instrument through which activities are quantified in financial terms.” (Baker & Baker, 2000, p. 80) Variance: the difference between standard and actual numbers Volume Quantity (use or efficiency) Spending These differ regarding business, but can be converted to health care terms. For example, volume could be related to ADC budgeted and actual difference. Quantity formula is difference between the budget and actual quantity of input needed per unit of output (patient care) : Calculate as the difference between actual units used per unit (nursing care hours per patient in $) X number of units (patients cared for in time period) budgeted price. Since this is quantity, could be reported in numbers and then converted to $ using the average wage or other – such as actual cost of nursing care (amount paid in time + overtime).

Variance A calculation of input and output Input = actual quantities used (direct cost of supplies and labor; variable overhead) Output = services delivered (may be recorded in standard quantity [materials] or in standard hours [such as labor hours]) Standard = what should have been used! Frequently used output data include: patients, patient days, visits, treatments, and procedures.

Using Budget to Control Motivate Reward for hard work Communicate Often (creates awareness) Monthly Timely reports Evaluate

Relative Value Unit Review A means to cost-out nursing service Because care is not linear (equal changes in work related to acuity), a measure is needed to allow determination of care related to Level 1 Level of care after Level 1 is assigned as a proportion of Level 1 Calculated by dividing hours of care by hours of care in Level 1

Flexible Budget This is the budget related to the fluctuation in the volume (or change in other parameters) Therefore, this budget “moves” in relation to the actual level of output (activity or volume) See example on page 127 of Baker and Baker

Budget Balancing Act! Discuss issues of providing bonuses!

Why Check Variance? Assist in future budget preparations Control results throughout the year Evaluate performance of units or departments (and their respective managers)

Variance Determine the type of variance Determine reason for variance Volume Price/rate Quantity/use Determine reason for variance External Internal Justify the variance Discuss In writing External: Changes in reimbursement, technology changes, change cost of supplies, increased census, illness Internal: efficiency of nurses, organization policies, REMEMBER: If you are comparing revenue, must remember that revenue

Caveats of Variance While the variance may be in favor of the organization, accountant may still “code” as not good Out of the two calculations on variance (flexible and volume), nurse managers are more concerned with flexible variance See page 302 of Finkler.

Caveats of Variance (cont.) In evaluating the flexible budget variance, it may be important to divide the flexible budget into categories: price variance quantity variance If the input (nursing hours) remains the same, but the price per hour or the volume of patients changes, then you have more information to determine where the variance occurred A budget JUST tells you there is a discrepancy in the budget. The nurse manager must explain the discrepancy!!!!! Very much like clinical (I know the BP is low, now why???)

Caveats of Variance (cont.) If you aggregate data (while convenient), you may lose information Remember, a variance in one area (such as volume) can affect another variance (such as revenue) So you must evaluate every single line of every unit (price, quantity, and volume) Use exception reports The evaluation of each line every month takes tremendous time and effort. Therefore, you may have exception reports. These reports basically state that you do not evaluate until the variance exceed a certain limit. This is determined by your place of employment.

Examine Variance Reports As a group, examine the variance reports from area health centers. What is clear? What is not clear? Determine 3 reasons for one of the variances Remember, that revenue is usually 3 months behind; so if you had high census in January, you will not see the revenue until April or May