Chapter14

Copyright © 2008 Thomson Delmar Learning

Chapter 14Chapter 14

Budget Concepts for Patient Care


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ObjectivesObjectives

Upon completion of this chapter, the reader should be able to: Identify the budget preparation process for health care

organizations Illustrate commonly used types of budgets for planning

and management Select key elements that influence budget preparation

and monitoring Illustrate a scope of service Differentiate expenses associated with the delivery of

service


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Types of BudgetsTypes of Budgets

Operational budget Account for the income and expenses associated with

day-to-day activity within a department or organization

Capital budget Account for the purchase of major new or replacement

equipment

Construction budget Developed when renovation or new structures are

planned


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Budget OverviewBudget Overview

Operational budget A financial tool that outlines anticipated

revenue and expenses over a specified period Accounting

An activity that managers engage in to record and report financial transactions and data

Profit Determined by the relationship of income to

expenses


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Budget OverviewBudget Overview

Dashboard A documentation tool providing a snapshot

image of pertinent information and activity reflecting a point in time

Variance The difference between what was budgeted and

the actual result


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Budget PreparationBudget Preparation

Budgets are generally developed for a 12-month period, or yearly cycle

The yearly cycle can be based on a fiscal year determined by the organization or a calendar year

Prior to the beginning of the budget year, most organizations devote approximately 6 months to preparing and developing an operational budget


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Budget Preparation: Budget Preparation: Demographic InformationDemographic Information

Identifies unique market characteristics Determines client characteristics and health

care needs Determines capture rate


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Budget Preparation: Budget Preparation: Competitive AnalysisCompetitive Analysis

Probes into how the competition is performing as compared to other health care organizations

Examines other hospitals or practices strengths or weaknesses

This information can influence decisions regarding implementation of new programs, hiring of specialty staff, and purchasing equipment


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Budget Preparation: Budget Preparation: Regulatory InfluencesRegulatory Influences

Centers for Medicare and Medicaid Services Federal control over quality assurance, and fraud and

abuse prevention

Department of Health and Human Services Coordinates health care policy and legislation

Food and Drug Administration Regulates the use of drugs and medical devices

The Joint Commission Ensures organizations meet specific standards


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Strategic PlansStrategic Plans

Maps out the direction for the organization over several years

Guides the staff at all levels so that the entire organization can have a shared mission and vision with clearly defined steps to meet the goals

Each department develops unit-specific plans to help the organization follow its overall strategic plan


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Scope of Service and Goals Scope of Service and Goals

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 The manager is responsible for identifying the expenses

associated with patient care up front so they will be covered by the charge

Charge The dollar amount the patient is responsible for paying

as a result of service


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Budget HistoryBudget History

History or past performance is typically used as a baseline of experience and data to better understand activity in a department or unit

Buying contracts are negotiated so that predetermined reduced rates can be realized when organizations purchase large quantities of supplies

Knowledge about historical volume provides a perspective as to how a department has grown or declined over time


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RevenueRevenue

Income generated through a variety of means Billable patient services Investments Donations to the organization

Reimbursement rates of third-party payers affect revenue and continue to change from year to year

The reimbursement rates or payments received by hospitals often do not equal the actual unit charges for the services rendered


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Revenue Revenue

Payer mix Third-party payer reimbursement rates Diagnosis-related groups (DRGs) Partial or nonpayment from uninsured


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ExpensesExpenses

Determined by identifying the cost associated with the delivery of service

Expenditures are resources used by an organization to deliver services Labor Supplies Equipment Space Utilities


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SuppliesSupplies

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


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LaborLabor

Health care services are very labor intensive Salaries and benefits account for

approximately 50% to 60% of operational costs


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Staffing ModelsStaffing 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


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Direct and Indirect ExpensesDirect and Indirect Expenses

Direct expenses Those expenses that are directly associated with

the patient (medical and surgical supplies and drugs)

Indirect expenses Items such as utilities (gas, electric, phones)

that are not directly related to patient care


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Fixed and Variable CostsFixed and Variable Costs

Fixed costs Those expenses that are constant and are not

related to productivity or volume (building and equipment depreciation, utilities, fringe benefits, and administrative salaries)

Variable costs Fluctuate depending upon the volume or census

and types of care required


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Budget Approval and Monitoring Budget Approval and Monitoring

Approval process Budgets are submitted to administration for review

and final approval May take several months

Control of budget Responsibility of unit or department manager 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


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Variance ReportsVariance 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

Some institutions request that budget dashboards be developed reflecting departmental activity at a glance

Chapter14

Health & Medicine

budget year

budget concepts

budget preparation budgets

budget preparation process

budget history history

budget overview dashboard

health care organizations

patient care