KEYWORDS: FINANCE, ACCOUNTING

Finance and accounting for nurses Part 4This is the last in the series of four articles looking at finance and accounting for nurses. Robert Hankins, Timothy Brady and Bonnie Saucier suggest a teaching outline for in- service education in accounting and finance and describe the 1

basic tools that can be used to implement service training.

Box 1. A summary of tfie series: Finance

and accounting applications in nursing and

clinical services

Part 1 discussed the results ol a survey from clinical specialists, hospital administrators and clinic managers regarding financial management responsibilities of clinicians and their need to understand financial reports. There was a strong belief from clinical personnel that they should understand financial statements. Nurse managers felt that nurses at all levels should understand budgets and be involved in budgeting and cost control. In a somewhat contradictory mode, executive level respondents believed that nurses should focus on patient care and critical success factors. They telt that quantifiable critical success factors would lead to effective cost control. (Nursing Management 4,6,21- 23)

Part 2 emphasised the content, purpose, and use of the three primary financial statements...the income statement, balance sheet and cash flow statements. The article stressed why these reports are of limited value to personnel below the executive level and gave a concise explanation of the focus needed in accounting reports for nurse managers. The authors suggested that traditional financial statements had little impact on cost control and patient care issues.(Nursing Managements, 7,11-13)

Part 3 presented the background of common cost accounting procedures and discussed the importance knowing what activities drove costs. The article described how this cause and effect relationship is used to focus on patient care activities to both improve quality care and reduce costs. (Nursing Managements, 8,18-21)

All clinical personnel should have some training in basic finance and accounting practices (Box 1). Since financial concerns are a major force in today’s health

care industry, the role of the clinicians as well as the nurse managers include, not only the awareness of economic issues, but also, the need for education in financial management and the importance of accounting.

Even though not all nurse managers are responsible for budget development, an understanding of underlying dynamics is nec­essary to have any input to the budget and control processes (Grohar-Murray and DiCroce 1992).

No longer is it appropriate to assume that I knowledge of traditional accounting methods ■ of revenue/cost centres is adequate. Infor­

mation needed to determine what causes the costs is more relevant. Managers need to

I increase the accuracy of specific output costs. To do this, they must be able to trace the cost

of activities demanded by those outputs.Cost control measures should be based on

cost analysis and control processes, which in turn evolve from determining how the costs are generated. It is not reasonable to assume that all clinical managers will have the oppor­tunity for advanced business education. Thus, in-service education should be devel­oped to address the organisation’s needs for financial management activities within nurs­ing and other clinical areas.

Financial in-service coursesStep 1 The first step in a successful educa­tion program is to determine course partici­pants’ awareness of the importance of the organisation’s financial performance. The most effective method to ascertain the objec­tives and content of the early education ses­sions is to have the potential participants assess their beginning level of competence. This can be done through an introduction/review of financial management terms (Table 1).Step 2 Based on the results, learning tasks, subtasks and associated objectives can be developed. These indicate tire learning to be acquired during each future session (Dries- bach 1994). The introductory session can also outline the content of future presenta­tions. Sufficient time needs to be allowed -

six months to one year is appropriate to ensure that all financial management respon­sibilities are covered (Driesbach 1994).Step 3 lire next step should be an orienta- | tion to the organisation’s objectives with tire structure and flow of internal services and resources to the clinical (nursing) function. Costs tied to these flows are caused by the activities needed to create these services and the resources used to make them available | for patient care. 'Die interactions between nursing services and other departments must be understood before nursing’s effects on the I

organisation’s total costs and revenues can be understood.Step 4 An explanation of the organisation’s information system is appropriate. What data with financial implications is required from nursing services? What information should nursing services be providing to get a better understanding of costs and potential for | greater efficiency?

While providing this background, critical thinking exercises are valuable. For example, you can ask students to explain what infor­mation they believe they need to become more cost efficient and better care givers. Learning groups from different departments can help each other understand inter-depart­ment costs and the potential for increases in cost and care efficiency.

I___22 Nursing Management Vol 5 No 1 April 1998

'Hie initial focus should be on activities that support nursing interventions and which cre­ate costs. From an organisational perspective, minimising the aggregate cost of interacting with patients is a primary financial objective. If prices are set in the marketplace, these become the financial objectives. However, the requirement for good quality of care that meets acceptable standards can never be relaxed.

Principles of cost analysisResner and Anderson (1994) identify numer­ous areas of nursing competence. Nursing requires integration of clinical skills while

1 being influenced by financial, environmental,| and organisational factors.

A nurse manager must thoroughly under- , stand clinical nursing processes in order to

flfcapply financial management to enhance both

tlie quality and the efficiency of nursing care. Though this understanding is not part of financial management training, its relevance

1 is worth emphasising early in this training.Competitive pricing requires setting a price

within the range being charged by other providers in the same service area. Thus, financial management is related to costs through sales, with die requirement that rev­enue be greater than costs. In order to main­tain competitive charge rates, operating management needs to reduce costs to a com­petitive level.

Nursing managers, therefore, need to understand the various perspectives from which costs can be viewed and analysed. Dif­ferent perspectives for describing costs (dis­cussed in Part 3 of this series) should be introduced early in the training and then

fsed in discussion of cost control and bud- eting.

To understand the cost of nursing services,

Table 1. Accounting and financialmanagement terms

Financial accounting Relevant costsIncome statement Variable costs

Revenue Fixed costsExpense Department costsSurplus Activity costsProfit Marginal costsAccounting period Increment costs

Balance sheetAsset Cost analysis

Liability techniques

Debt Traditional

Equity Activity based

Fund balance Cost control methods(Net Assets) Budgeting

Management accounting BenchmarksFull costs Variance analysisSunk costs Ratio analysisResources Trend analysis

nurse managers must identify the activities that make up nursing work. These activities arise from interventions ordered by doctors and these interventions cause costs. As well as involving actions by nurses, these activi­ties may require precursor actions both in nursing services and in other departments. The nursing activities are specified in nurs­ing protocols associated with the physician orders. The other inputs to nursing inter­ventions are the activities outside nursing needed to produce the resources and ser­vices required for quality care. These costs flow across department boundaries and are aggregated as billable patient charges.

Cost analysis therefore has two levels:■ Level one is understanding the cost of

resources obtained from outside nursing ser­vices. Managing this is not simply a matter of accepting established prices, especially for inputs from other departments of the organ­isation. Quite often efforts to minimise the costs in one department increase costs in another and, in so doing, increase total costs in the organisation.The solution is cross<lepartmenta] analysis

of the sequence of activities necessary to treat all categories of patients in order to find tlie lowest overall cost approach. Once these activities have been identified, each should be performed in tlie most appropriate depart­ment, promoting cost efficiency and improved quality of care.

Interdisciplinary group analysis and nego­tiating skills are therefore important financial management skills and should be pail of cost

analysis training.■ Level two comprises those activities that are performed completely within nursing ser­vices. For these, it is necessary to trace the costs of the resources used to complete tlie activity and add them. The nursing cost of a specific order is then defined as the sum of the costs of all tlie nursing activities needed to fulfill that order. 'Ihe total cost of the order is the sum of all the nursing activity plus external input costs demanded by the order providing IV therapy. An example of total cost would be adding the costs of a nursing

resource plus respiratory care, an external input

Cost controlUnderstanding the activity content of proto­cols is basic to managing clinical costs. Understanding tlie differences between tlie effects of variable and fixed costs on total costs and the effects of fixed cost utilisation on costs per intervention as well as total costs are critical to cost control. These concepts must be intuitively understood and applied before competent operations budgeting is possible.

Traditionally the cost of specific interven­tions has been analysed by tracking costs through various departments. Some depart­

ments were considered service centres. The plant engineering department furnishes heat­ing and air conditioning, the personnel department furnishes certain administrative services, the purchasing department fur­nishes acquisition and inspection services, and so on.

These service departments served each other and departments that produced things sold them. Laboratories sold tests: diagnos­tic radiology sold tests; physical therapy sold treatment sessions and so on. These depart­ments were called revenue, or profit, centres. Their products were the line items that appeared on patient bills.Tlie cost of producing a given line item was

computed by allocating service centre costs to tlie revenue centre, adding costs that were traceable directly to a revenue centre to form that centre’s cost pool, and then dividing each revenue centre’s cost pool among its

outputs.Tlie most common approach to this last

step was to divide file revenue centre’s total cost for a period by its total billings. This resulted in a ‘cost-to-charge’ ratio. Multiply­ing tlie billed price of any output by that ratio produced the computed cost of that output. This process contained so much averaging that the cost data for specific outputs com­puted in this way were grossly inaccurate. Additionally, department cost tracing sys-

A nurse manager must thoroughly understand clinical

nursing processes in order to apply financial management to

enhance both the quality and the efficiency of nursing care

Nursing Management Vol 5 No 1 April 1998 23

KEYWORDS: FINANCE, ACCOUNTING

ate action plans, implement accepted plans and adjust processes depending on feedback

information.'Hie amount of managers’ participation in

the budget process depends on their philos­ophy. The current trend is for managers near the point of service to play a more active role in quantifying the demand for

resources.The budgeting process is an important pan

of the organisation’s planning and control functions. It starts with the organisation’s strategic objectives. 'Ihe operating budget for a specific time period derives from the mar­keting plan for that period. 'Ihe concepts of fixed and variable cost and capital expendi­tures explained in previous pails of tliis series are critical to effective budgeting.

For nursing, the budgeting process begins with the expected case load and mix that the marketing plan indicates it must serve. 'Hie standard quantities and prices of the resources that should be used to serve this case load are determined in the clinical set­ting. These are based on standards defined in the care protocols of the forecast quantity and mix of cases.

Perhaps the most valuable contribution the nursing seiwice can make is in applying its knowledge of effective nursing practice to determining the resources, and, hence the costs, that will be needed to give acceptable care to patients. Pail of this responsibility

Box 2. In-service training guidelines

■ Have a basic understanding of why surplusprofit is essential to the viability of a health care organisation.

■ Understand why clinical personnel and managers should be more concerned about cost control techniques rather than revenue production.

■ Understand why measurement of costs should focus on aggregating the costs of activities as opposed to allocating the costs of departments.

■ Be able to identify and trace the sequences of activities demanded by clinical interventions associated with specified patients or case categories.

■ Be able to work in cross-departmental groups in order to identify appropriate cost suboptimisation and minimise organisation costs.

■ Understand the allocation of fixed-cost resources needed to produce the array and quantity of direct patient care services demanded in an accounting period.

■ Be able to apply activity cost techniques to compile operating budgets for the department, unit, or service.

■ Be able to quantify critical success factors and identify critical cost factors within the department, unit, or service.

■ Understand the concepts of variance, ratio, and trend analysis and apply the principles in decision making about patient services and quality of care.

Note:These objectives differ from those the survey respondents imply in that the authors recommend greatly reducing emphasis on revenue and income computations and increasing emphasis on more accurate measurement and control of costs.This is because:

■ Health care organisations are increasingly being paid at the organisation level as opposed to fees for service from specific departments and these joint revenues cannot be logically divided among departments.

■ Research in other industries has established that measuring the cost of specific outputs by tracing costs through departments and allocating department costs to outputs incorporates so much averaging that the results are frequently erroneous.

■ Nurse managers can and do affect efficiency and costs of operations. They have only a very indirect effect on revenue.

terns did not provide information about the level of utilisation of fixed cost resources. ITiey therefore gave no assistance in deci­sions about ‘right sizing’ at the nursing ser­vices level.

In order to control costs, nurses need more accurate information on the costs of the dif­ferent resources they use and interventions they perform. They should receive ’activity based costing’ data, as described in Pail 3 of this series. However, that information will be of no value until they understand the defi­ciencies in traditional department cost allo­cation systems and the difference in the information provided by activity based cost data.

BudgetingBudgeting is like the nursing process. It entails assessment, diagnosis, planning, implementation and evaluation. Incorporation of clinical competence and process under­standing with the techniques of cost analysis provides nurse managers the tools to assess cost problems and b ends.

In financial, as well as clinical, management a well managed unit is one in which the man­agers identify problems, explore and evalu­

involves keeping abreast of changes in nurs­ing practice that allow cost reduction without compromising the quality of care. Accurate ’bottom-up’ resource use and cost estimates to ‘top-down’ projections of case loads is the essence of budgeting.

Infonnation on the standard protocols, that is the nursing activities and inputs needed to meet doctors’ orders, is critical to controlling nursing costs. Tire aim is for each activity to cost no more than it should and for no more resources to be used than required. Financial reports of use to nursing administration should provide this infonnation.

VariancesManagement reports should categorise interventions done, indicate the standard cost of filling these orders, show the actual cost and indicate the difference betweer^

those two amounts. These differences are called ‘variances’. Cost variances can be shown in money or in quantities of the more expensive resources used. For staff nurses, variances in quantities of resources are often more meaningful than money. Training in measuring the costs of activities and using cost variance analysis is basic to budget man­

agement.

Critical success factorsHie concept of ‘critical success factors’ was raised by senior managers and explored in part 1 of this series. 'ITese are activities in which unacceptable results or inefficient work cause costs to rise significantly above their standard amounts ie large cost vari­ances. Identifying these success factors demands nursing knowledge and cost mea­surement skill. j

Once identified, tracking the frequency an™

location of these factors indicates where the

Table 2. Examples of handouts

■ Organisation s mission statement

■ Departmental statement of objectives

■ Organisation's organisation chart

■ Example of a medical protocol

■ Example of a medical protocol inten/ention flow diagram

■ Clinical services' protocol guide

■ Organisation's budgeting guide

■ Representative extract from organisation's budget

■ Clinical services' budget

■ Organisation's annual report, to include the income statement and balance sheet

■ Variance analysis worksheet

■ Ratio analysis worksheet

■ Trend analysis worksheet

■ Glossary of accounting terms

24 Nursing Management Vol 5 No 1 April 1998

Table 3. Sample course outline

Course time: this course can be conducted in approximately 15 contact hours.The exact allocation of time to subject will be dependent on the level and background ot the participants.

A Financial management knowledge self evaluation

B Organisation mission, objectives and structure - discussion-lecture1 Executive - departmental management interaction2. Cross department interactions and mutual

responsibilities3. Nursing services internal actions and cross position

responsibilities

C Cross departmental communication, cost analysis and negotiating skills - exercise

D Cost concepts - discussion/lecture Direct costs vs indirect costs Variable costs vs fixed costs Full costs vs marginal costs Sunk costs Relevant costsDepartmental costs vs activity costs

E Revenue source implications - lecture Fee-for-service Fee for discharge or episode Capitated care coverage

F Activity tracing and cost determination - exercise

G Budgeting - discussion/exercise Estimating service demand Costing service estimates

H Cost control tools and uses - discussion/exercise Cost variance analysis and follow-up Ratio analysis and interpretation Trend analysis and interpretation

I Cost based decisions - lecture/discussion Choices among protocols Choices among technologies (capital equipment) Out source vs make or do internally

J Internal management report content and format - discussiorVexercise

Penodic reports On-demand reports

K External financial reports - lectureIncome statement as an indicator of performance of organisationBalance sheet as an indicator of the financialposition of the organisationImportance of financial position and relation

problems lie. In our original survey, execu­tive managers said that tliis was the most pro­ductive cost control activity nursing management could undertake.

Nursing management also needs informa­tion on general trends in performance. This is done by routinely reporting meaningful performance ratios, as discussed in Part 3 of this series. 'Hie ratios chosen should be the ones that give the most information about performance that can be controlled.

Nursing's performance can be compared to national benchmarks and trade association averages such as those published by the American Hospital Association (AHA) and American Nurses’Association (ANA). Note that these figures may not be in units of mon­ey, though they monitor factors that affect

costs.

In-service guidelinesIn tire first article of this scries, 80 per cent of the respondents indicated that budgeting and finance should be part of every health pro­fession curriculum. The in-service outline proposed in Box 2 balances the findings from

I the initial survey and the focus groups togeth­

er with current literature reviews. These sug­gest that clinical staff need a better

| understanding of finance and budgeting to contribute to the long term viability of the organisation.

Corporate financial statementsA shoit segment of training to reinforce the importance of cost management can be done

by introducing the purpose of financial state­ments for outside users and to raise capital for modernisation and expansion.

Course participants need to be familiar with the organisation’s income statement and the balance sheet. Emphasis should be placed on the large percentage of total costs (especial­ly in hospitals) that is influenced by nursing and clinical activities. They also need to understand the impact of cost on surpluses, and the importance of surpluses to credit rat­ing and the ability to borrow money (as well as the ability' to raise additional equity in for- profit organisations).

Tire instructor should make a special effort to explain that increasing numbers of health care organisations have revenue paid direct­ly to the organisation in lump sums for a dis­charge or a capitated per member per month fee, as opposed to fees for individually billable services. As a result, producing income state­ments for departments within health care organisations provides very little usable infor­

mation.In addition, the instructor should point out

that clinical activities such as nursing con­tribute to the financial strength of tire organ­isation by controlling related costs while maintaining the quality of care. However, there is no legitimate way to attribute organ­isation revenue to these clinical services.

Instructional aidsInservice educators need to offer a wide vari­ety of instructional aids. Visual aids such as patient flow diagrams and handouts of bud­

gets should be included to help understand the organisation’s operation and demystify financial management processes (Table 2).

The use of available information systems support should be illustrated with examples of tlie information they contain and pertinent reports. Course participants should be given documentation on requirements and proce­dures for collecting and entering data from their respective services (Table 3).

ConclusionTliis series of articles has discussed survey responses relating to financial management responsibilities of clinicians. Emphasis has been placed on content, purpose and the use of primary financial statements. Background of common cost accounting procedures and the importance of cost factors in nursing management and reporting have been included. Finally, an overview of training needs in accounting and finance has been presented with samples of basic tools for in- service education and course content lesson plans.

Nurses should seize the opportunity to learn about finance, cost containment and all other aspects of business management (Crawford 1993). The long term viability and success of the health care organisation depends on the integration of cost control and quality care ■

ReferencesCrawford DL (1993) The glass ceiling in nursing

management Nursing Economics. 11,6,335-341.

Driesbach AM (1994) A structured approach to export financial management a financial development plan for

nurse managers. Nursing Economics. 12,3,131-37

Grohar-Murray ME, DiCroce HR (1992) leadership and Management in Nursing. California, Appleton &

I-ange.

Resner PB, Anderson ML (1991) ftoject nurse manager: an entrepreneurial role. Nursing Economics. 12, i

5,261-265.

Further readingSpitzer-Lehmann R (1994) Nursing Management Desk Reference Concepts. Skills & Strategies. Philadelphia PA.

WB Saunders Co.

Sanford K (1994) Future education: what do nurse

executives need? Nursing Economics. 12,3.127-130.

West DA, Hicks LL, Balas EA, West TD (1996) Profitable capitation requires accurate costing. Nutsing

Economics. 14,3,162-170.

Robert Hankins PhD, is Assistant Professor, Health Services

Administration, Xavier University, Cincinnati, Ohio

Timothy Brady PhD, is Assistant Professor, Health Administration,

Southwest Texas State University, San Marcos, Texas

Bonnie Saucier PhD, RN, is Associate Dean, Undergraduate Nursing Program,

University of Texas Health Science Center, San Antonio, Texas

Nursing Management Vol 5 No 1 April 1998 25