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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