1. Delmar Learning Copyright © 2003 Delmar Learning, a Thomson Learning company Nursing Leadership & Management Patricia Kelly-Heidenthal 0-7668-2508-6

2. Delmar Learning Copyright © 2003 Delmar Learning, a Thomson Learning company Chapter 11 Budget Concepts for Patient Care

3. Chapter 11Copyright © 2003 Delmar Learning, a Thomson Learning company3 Objectives  Upon completion of this chapter, the reader should be able to: Describe the budget preparation process for health care organizations. Define commonly used budgets for planning and management. Describe key elements that influence budget preparation. Identify services and products that generate revenue. Identify expenses associated with the delivery of service. Explore ways to evaluate the impact upon budget performance.

4. Chapter 11Copyright © 2003 Delmar Learning, a Thomson Learning company4 Types of Budgets  Operational budgets account for the income and expenses associated with day-to-day activity within a department or organization  Capital budgets account for the purchase of major new or replacement equipment  Construction budgets are developed when renovation or new structures are planned

5. Chapter 11Copyright © 2003 Delmar Learning, a Thomson Learning company5 Budget Overview: Fundamentals  An operational budget is a financial tool that outlines anticipated revenue and expenses over a specified period.  Accounting is an activity that managers engage in to record and report financial transactions and data.  Profit is determined by the relationship of income to expenses.

6. Chapter 11Copyright © 2003 Delmar Learning, a Thomson Learning company6 Budget Overview: Fundamentals  A dashboard is a documentation tool providing a snapshot image of pertinent information and activity reflecting a point in time.  Variance is the difference between what was budgeted and the actual result.

7. Chapter 11Copyright © 2003 Delmar Learning, a Thomson Learning company7 Budget Preparation  Budgets are generally developed for a 12-month period, or yearly cycle.  Fiscal year is determined by the organization, e.g., September 1 through August 31.  Calendar year is the regular year on the calendar, January 1 through December 31.  Shorter- or longer-term budgets also may be developed.

8. Chapter 11Copyright © 2003 Delmar Learning, a Thomson Learning company8 The Budget Preparation Phase  Gather information about elements that can influence the organization’s future spending and income. Demographic information: determine client characteristics and health care needs. Competitive analysis: examine characteristics of other health care providers. Regulatory influences: determine financial impact of regulatory requirements and reimbursement rates. Strategic initiatives: develop strategic plans to map out the direction for the organization over several years.

9. Chapter 11Copyright © 2003 Delmar Learning, a Thomson Learning company9 Scope of Service, Goals and History  Hospital systems are frequently divided into subsections or units, commonly called cost centers. Each cost center defines its own scope of service. Departmental goals may include the introduction of new technology, facilities, or services, which may result in additional expenses for staff, equipment, and supplies. The manager is responsible for identifying the expenses associated with patient care up front so they will be covered by the charges. A charge is the dollar amount the patient is responsible for paying as a result of service.

10. Chapter 11Copyright © 2003 Delmar Learning, a Thomson Learning company10 History  Organizations look at past budget information to: Establish a baseline for a department or unit Establish patterns of a department’s growth or decline over time. This information may predict future demand and capacity.

11. Chapter 11Copyright © 2003 Delmar Learning, a Thomson Learning company11 Budget Development  Establish projections of services, patients, and revenue.  Revenue is income generated through a variety of means, e.g., billable patient services, and investments in and donations to the organization.  Payer mix Third-party payer reimbursement rates Diagnosis-related groups (DRGs) Partial or nonpayment from uninsured

12. Chapter 11Copyright © 2003 Delmar Learning, a Thomson Learning company12 Expenses  Expenses are determined by identifying the cost associated with the delivery of service.  Expenditures are resources used by an organization to deliver services that may include labor, supplies, equipment, space, utilities, and miscellaneous items.

13. Chapter 11Copyright © 2003 Delmar Learning, a Thomson Learning company13 Supplies  Expenses are commonly broken down into line items.  Line items represent specific categories that contribute to the cost of the procedure or activity, e.g., paper supplies, medical supplies, drugs, etc.  Zero-based budgeting details every supply item and quantity of items typically used.

14. Chapter 11Copyright © 2003 Delmar Learning, a Thomson Learning company14 Labor  Health care services are very labor-intensive.  Estimates are that salaries and benefits account for 50% to 60% of operational costs.

15. Chapter 11Copyright © 2003 Delmar Learning, a Thomson Learning company15 Staffing Models  The amount and types of staff are often accounted for in a staffing model. Market wages and benefit costs Types of staff (RN, LPN, CAN, etc.) Staff-to-patient ratio Recruitment and training costs  Unproductive time usually includes sick, vacation, personal, holiday, and education time

16. Chapter 11Copyright © 2003 Delmar Learning, a Thomson Learning company16 Direct and Indirect Expenses  Direct expenses are those expenses that are directly associated with the patient, e.g., medical and surgical supplies and drugs.  Indirect expenses are items such as utilities (gas, electric, phones) that are not directly related to patient care.

17. Chapter 11Copyright © 2003 Delmar Learning, a Thomson Learning company17 Fixed and Variable Costs  Fixed costs are those expenses that are constant and are not related to productivity or volume; e.g., building and equipment depreciation, utilities, fringe benefits, and administrative salaries.  Variable costs fluctuate depending upon the volume or census and types of care required.

18. Chapter 11Copyright © 2003 Delmar Learning, a Thomson Learning company18 Implementation and Performance Evaluation  Approval process Budgets are submitted to administration for review and final approval.  Control of budget The unit or department manager is responsible for controlling the budget. Budget monitoring is generally carried out on a monthly basis. Budget analysis is conducted to determine if expenses are kept within the budget allotted amount.

19. Chapter 11Copyright © 2003 Delmar Learning, a Thomson Learning company19 Variance Reports  A budget variance report is a tool used to identify when budget categories are out of line and what corrective action can be taken.