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  1. 1. Chapter 14 Budget Concepts for Patient Care
  2. 2. Objectives <ul><li>Upon completion of this chapter, the reader should be able to: </li></ul><ul><ul><li>Identify the budget preparation process for health care organizations </li></ul></ul><ul><ul><li>Illustrate commonly used types of budgets for planning and management </li></ul></ul><ul><ul><li>Select key elements that influence budget preparation and monitoring </li></ul></ul><ul><ul><li>Illustrate a scope of service </li></ul></ul><ul><ul><li>Differentiate expenses associated with the delivery of service </li></ul></ul>
  3. 3. Types of Budgets <ul><li>Operational budget </li></ul><ul><ul><li>Account for the income and expenses associated with day-to-day activity within a department or organization </li></ul></ul><ul><li>Capital budget </li></ul><ul><ul><li>Account for the purchase of major new or replacement equipment </li></ul></ul><ul><li>Construction budget </li></ul><ul><ul><li>Developed when renovation or new structures are planned </li></ul></ul>
  4. 4. Budget Overview <ul><li>Operational budget </li></ul><ul><ul><li>A financial tool that outlines anticipated revenue and expenses over a specified period </li></ul></ul><ul><li>Accounting </li></ul><ul><ul><li>An activity that managers engage in to record and report financial transactions and data </li></ul></ul><ul><li>Profit </li></ul><ul><ul><li>Determined by the relationship of income to expenses </li></ul></ul>
  5. 5. Budget Overview <ul><li>Dashboard </li></ul><ul><ul><li>A documentation tool providing a snapshot image of pertinent information and activity reflecting a point in time </li></ul></ul><ul><li>Variance </li></ul><ul><ul><li>The difference between what was budgeted and the actual result </li></ul></ul>
  6. 6. Budget Preparation <ul><li>Budgets are generally developed for a 12-month period, or yearly cycle </li></ul><ul><li>The yearly cycle can be based on a fiscal year determined by the organization or a calendar year </li></ul><ul><li>Prior to the beginning of the budget year, most organizations devote approximately 6 months to preparing and developing an operational budget </li></ul>
  7. 7. Budget Preparation: Demographic Information <ul><li>Identifies unique market characteristics </li></ul><ul><li>Determines client characteristics and health care needs </li></ul><ul><li>Determines capture rate </li></ul>
  8. 8. Budget Preparation: Competitive Analysis <ul><li>Probes into how the competition is performing as compared to other health care organizations </li></ul><ul><li>Examines other hospitals or practices strengths or weaknesses </li></ul><ul><li>This information can influence decisions regarding implementation of new programs, hiring of specialty staff, and purchasing equipment </li></ul>
  9. 9. Budget Preparation: Regulatory Influences <ul><li>Centers for Medicare and Medicaid Services </li></ul><ul><ul><li>Federal control over quality assurance, and fraud and abuse prevention </li></ul></ul><ul><li>Department of Health and Human Services </li></ul><ul><ul><li>Coordinates health care policy and legislation </li></ul></ul><ul><li>Food and Drug Administration </li></ul><ul><ul><li>Regulates the use of drugs and medical devices </li></ul></ul><ul><li>The Joint Commission </li></ul><ul><ul><li>Ensures organizations meet specific standards </li></ul></ul>
  10. 10. Strategic Plans <ul><li>Maps out the direction for the organization over several years </li></ul><ul><li>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 </li></ul><ul><li>Each department develops unit-specific plans to help the organization follow its overall strategic plan </li></ul>
  11. 11. Scope of Service and Goals <ul><li>Hospital systems are frequently divided into subsections or units, commonly called cost centers  </li></ul><ul><ul><li>Each cost center defines its own scope of service </li></ul></ul><ul><ul><li>Departmental goals may include the introduction of new technology, facilities, or services </li></ul></ul><ul><ul><li>The manager is responsible for identifying the expenses associated with patient care up front so they will be covered by the charge </li></ul></ul><ul><li>Charge </li></ul><ul><ul><li>The dollar amount the patient is responsible for paying as a result of service </li></ul></ul>
  12. 12. Budget History <ul><li>History or past performance is typically used as a baseline of experience and data to better understand activity in a department or unit </li></ul><ul><li>Buying contracts are negotiated so that predetermined reduced rates can be realized when organizations purchase large quantities of supplies </li></ul><ul><li>Knowledge about historical volume provides a perspective as to how a department has grown or declined over time </li></ul>
  13. 13. Revenue <ul><li>Income generated through a variety of means </li></ul><ul><ul><li>Billable patient services </li></ul></ul><ul><ul><li>Investments </li></ul></ul><ul><ul><li>Donations to the organization </li></ul></ul><ul><li>Reimbursement rates of third-party payers affect revenue and continue to change from year to year </li></ul><ul><li>The reimbursement rates or payments received by hospitals often do not equal the actual unit charges for the services rendered </li></ul>
  14. 14. Revenue <ul><li>Payer mix </li></ul><ul><ul><li>Third-party payer reimbursement rates </li></ul></ul><ul><ul><li>Diagnosis-related groups (DRGs) </li></ul></ul><ul><ul><li>Partial or nonpayment from uninsured </li></ul></ul>
  15. 15. Expenses <ul><li>Determined by identifying the cost associated with the delivery of service   </li></ul><ul><li>Expenditures are resources used by an organization to deliver services </li></ul><ul><ul><li>Labor </li></ul></ul><ul><ul><li>Supplies </li></ul></ul><ul><ul><li>Equipment </li></ul></ul><ul><ul><li>Space </li></ul></ul><ul><ul><li>Utilities </li></ul></ul>
  16. 16. Supplies <ul><li>Expenses are commonly broken down into line items   </li></ul><ul><li>Line items </li></ul><ul><ul><li>Represent specific categories that contribute to the cost of the procedure or activity, e.g., paper supplies, medical supplies, drugs, etc. </li></ul></ul><ul><li>Zero-based budgeting </li></ul><ul><ul><li>Details every supply item and quantity of items typically used </li></ul></ul>
  17. 17. Labor <ul><li>Health care services are very labor intensive </li></ul><ul><li>Salaries and benefits account for approximately 50% to 60% of operational costs </li></ul>
  18. 18. Staffing Models <ul><li>The amount and types of staff are often accounted for in a staffing model  </li></ul><ul><ul><li>Market wages and benefit costs </li></ul></ul><ul><ul><li>Types of staff (RN, LPN, CAN, etc.) </li></ul></ul><ul><ul><li>Staff-to-patient ratio </li></ul></ul><ul><ul><li>Recruitment and training costs </li></ul></ul><ul><li>Unproductive time usually includes sick, vacation, personal, holiday, and education time </li></ul>
  19. 19. Direct and Indirect Expenses <ul><li>Direct expenses </li></ul><ul><ul><li>Those expenses that are directly associated with the patient (medical and surgical supplies and drugs) </li></ul></ul><ul><li>Indirect expenses </li></ul><ul><ul><li>Items such as utilities (gas, electric, phones) that are not directly related to patient care </li></ul></ul>
  20. 20. Fixed and Variable Costs <ul><li>Fixed costs </li></ul><ul><ul><li>Those expenses that are constant and are not related to productivity or volume (building and equipment depreciation, utilities, fringe benefits, and administrative salaries) </li></ul></ul><ul><li>Variable costs </li></ul><ul><ul><li>Fluctuate depending upon the volume or census and types of care required </li></ul></ul>
  21. 21. Budget Approval and Monitoring <ul><li>Approval process </li></ul><ul><ul><ul><li>Budgets are submitted to administration for review and final approval </li></ul></ul></ul><ul><ul><ul><li>May take several months </li></ul></ul></ul><ul><li>Control of budget </li></ul><ul><ul><ul><li>Responsibility of unit or department manager </li></ul></ul></ul><ul><ul><ul><li>Budget monitoring is generally carried out on a monthly basis </li></ul></ul></ul><ul><ul><ul><li>Budget analysis is conducted to determine if expenses are kept within the budget allotted amount </li></ul></ul></ul>
  22. 22. Variance Reports <ul><li>A budget variance report is a tool used to identify when budget categories are out of line and what corrective action can be taken </li></ul><ul><li>Some institutions request that budget dashboards be developed reflecting departmental activity at a glance </li></ul>
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