(Capital Expenditure Proposals). Please make sure to include a cash flow statement and for the strategic goals make sure to include the funding source (what are the funding sources that will be used to fund the project). The same information will be used for your final project. Key Strategic Goals: one page minimum, include specific funding sources for the capital investment. Your paper needs to be two to three pages in length (not including the title and reference pages) and formatted according to APA style as outlined in the Ashford Writing Center. You must use the textbook and at least one scholarly source per area. Cite and reference your sources in APA format as outlined in the Ashford Writing Center. The details in this paper can then be converted to your speaker notes on your PowerPoint presentation for the Final Project.
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Planning and Budgeting
7
. mtcurado/iStock/Thinkstock
Learning Outcomes
By the end of this chapter, you will be able to:
• Explain the importance of planning and budgeting
• Describe the planning process
• Describe decisions made in the budgeting process
• Develop volume forecasts, revenue forecasts, expense forecasts, and preliminary budgets
• Prepare a capital budget
• Conduct a budget variance analysis
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Section 7.1
Importance of Planning and Budgeting
Introduction
Bixby Hospital is a short-term acute care hospital that is part of a larger network of hospitals. They have 120 beds, 531 full-time equivalent employees providing more than 23,000
inpatient days of care, and more than 69,000 outpatient visits per year. Despite substantial
decreases in patient volume since 2008, a favorable and generous payer mix and aggressively
managed cost reductions have permitted Bixby to be highly profitable each of the past five
years. This is a good position for management. It is also a challenge for management to sustain or improve upon prior years’ results. As they plan for 2013 and beyond, the board of
directors has challenged management to earn an 8% operating margin and to avoid staff layoffs like the one that happened in 2010.
Planning and budgeting don’t just happen in an organization. Planning and budgeting require
a process that is designed to meet the organization’s needs and its capabilities for having
persons spend time on the process. A budget for a healthcare organization typically involves
preparing forecasts of the service that will be provided, how services will be paid, and how
expenses are incurred. These forecasts are followed by forecasts for the numbers of services
that will be provided and corresponding forecasts of the amounts of revenues and expenses
incurred. To both assess financial performance and refine the budget process, analyses of the
differences between budgeted and actual amounts are a final step in the budget process.
7.1 Importance of Planning and Budgeting
Planning and budgeting are among the most important forward-looking activities for managers of healthcare organizations. A common expression among managers is to “plan the work
and work the plan.” Planning the work involves making a careful assessment of current operations and making adjustments that will permit the organization to achieve future goals. For
healthcare organizations, planning means establishing which services will be offered, projecting how many patients are likely to require these services, and developing guidelines on
the number of employees and other resources necessary to provide these services in an effective and efficient manner. Working the plan involves adhering to the guidelines established
in the budget and making changes only when the projections included in the budget process
are found to need revision. Of course, no projections are perfect. Revisions are almost always
required.
Budgeting is the action of placing dollar values on the items in an organization’s operational
plan. Placing dollar values on the number of patients receiving services involves use of the
information developed for charges and payments, as discussed in Chapter 5. Preliminary
inpatient and outpatient payment amounts for Medicare are posted in the Federal Register
three to six months before the start of the government’s fiscal year on October 1, though final
amounts are posted only a few weeks in advance. For physician services, preliminary payment amounts for Medicare are also posted in advance of the start of the calendar year, and
last minute changes are common, leaving only a few days’ warning of annual adjustments in
payment amounts.
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Section 7.1
Importance of Planning and Budgeting
For private sector revenues, good budgeting goes hand in hand with insurance company and
managed care plan negotiations. For many payers, the negotiation process occurs three
months or more before the start of the contract year, permitting time to evaluate the management implications of changes in payments and the procedures required to receive appropriate payments. For some healthcare organizations, payment reductions may require curtailing
the availability of services or redrawing guidelines to provide services more efficiently. Payment increases and payments for new services may require planning for how the services are
to be provided to more patients.
Note that three different years have been mentioned:
calendar year, fiscal year, and contract year. The calendar From the Front Lines
year is January 1 through December 31. The fiscal year of “No arguments are needed these days to
an organization can be any 12-month period. It is com- convince business of the advantages of
mon to select a fiscal year starting on January 1, March 1,
the budget and its application to business
June 1, or October 1, with January 1 being the most common. Contract years with insurance companies can also problems. A budget is a common sense
be any 12-month period. Medicare uses the federal gov- forecast or an advance statement of operernment fiscal year of October 1 for hospital payments ations for a specified period of time.”
and January 1 for physician payments. Contract years Source: Manager, Hinsdale Hospital (Rice, 1926).
with private sector insurance companies typically start
January 1. For healthcare organizations, the selection of
a fiscal year that corresponds to major contract years will make interpretation and analysis of
financial results easier but make for very busy periods of time for finance professionals.
Placing dollar values on costs associated with treating a given number of patients receiving
services involves use of the information developed for fixed and variable costs, as discussed
in Chapter 6. Even though the two processes are generally kept separate, the development of
practice guidelines and changes in service delivery are closely related to the budget process.
Once an organization has adopted a practice guideline, it has also implicitly adopted use of the
personnel and other resources required to implement and follow the guideline. Developing
practice guidelines without recognizing the cost implications may be wasted time and effort.
This chapter will present a planning process of delivery of healthcare services. Organizations
must make a number of decisions, implicitly or explicitly, about the planning process, a few
of which are highlighted in the following section. Planning contains budgeting, which has a
forecasting component for the number of services, revenues, and expenses, and a mechanical
component of placing forecasted dollar values on forecasted services. One of the products of
a budget process is a projected income statement for the coming year. The finance term for
a projected income statement is a pro forma income statement (alternatively termed a pro
forma profit and loss statement or a pro forma statement of operations). In addition to the pro
forma income statement, budgets also include cash budgets. A cash budget is a document
that provides a projection of the timing of cash receipts and cash expenditures. The goal of a
cash budget is to have a clear plan for borrowing and other actions to be taken in the event of
cash shortfalls, below some level greater than zero days’ cash on hand. Another goal of a cash
budget is to have a clear plan for investing and other actions to be taken in the event of cash
excesses, above some level.
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Section 7.2
The Planning Process
Budgeting also has communication and enforcement actions during the budget year, and
evaluation actions after the budget period is over. A good budget is widely disseminated,
involving managers for developing projections and permitting staff throughout the organization to understand the plans for service delivery, the financial implications of the organization’s plan, and the constraints placed on actions in order to accomplish the plan’s objectives.
Budgets are often tied to management actions, such as in the area of human resources. The
budget may permit the posting of open positions for new employees, or not permit additional persons to be hired. For many organizations, the managerial reach of budget administration makes some components of it not just forecasts, but a clear plan of what will happen
in the organization.
Total budgets are comprised of two components, the operating budget concerning the income
statement and the capital budget concerning the balance sheet.
The final step in the budget process is the evaluation of results. The finance term for analyses of budgeted and actual values is variance analysis. A variance analysis seeks to provide mathematical explanations regarding why actual results were above or below budgeted
amounts. A good variance analysis is followed by verbal or written explanations to accompany the numbers, as well as enforcement actions by management. The results of the past
year may have implications for salary changes and promotions of managers, as well as for the
budgets established for future years.
For Review:
1. What are planning and budgeting and why are they important in healthcare
organizations?
Planning means establishing which services will be offered, projecting how many
patients are likely to require these services, and developing guidelines on the number of employees and other resources necessary to provide these services in an
effective and efficient manner. Budgeting is the action of placing dollar values on the
items in an organization’s operational plan. Planning and budgeting are important in
that they require decision making on the part of managers and statements of goals.
Plans and budgets permit clear communication about goals and a means for enforcing decisions.
7.2 The Planning Process
The planning process for a healthcare organization starts with strategy. A strategy is a plan
of action to achieve a specific aim. For many healthcare organizations, the aim is to achieve
the mission statement. Recall the mission statement of Jersey Shore Hospital from Chapter 1:
The mission is to provide “quality health services with an efficient balance of outpatient care,
acute and sub-acute inpatient care, primary care and outreach services.” This is a noble and
broad mission that requires additional work to transform it into specific aims. Senior management and the board of directors are charged with transforming the mission statement into
specific aims that can be measured, monitored, and achieved.
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Section 7.2
The Planning Process
Striving to provide “quality healthcare services” requires a definition of quality and a strategy
to achieve results. For hospitals, Hospital Compare (http://www.medicare.gov/hospitalcompare/) was created by the Centers for Medicare & Medicaid Services and the Hospital Quality
Alliance, a public-private collaboration established to promote reporting on the quality of
care. Selected quality measures from Hospital Compare are presented in Exhibit 7.1 for Bixby
Hospital. For most of the selected measures, Bixby is providing services in a manner resulting
in scores that are better than the national average.
The strategy for achieving good quality measures involves (1) policies for assuring quality,
(2) training on quality initiatives, (3) leadership on quality initiatives, (4) measurement and
reporting of quality outcomes, and (5) appropriate staffing for the number and medical needs
of patients. The planning process and strategy are connected because the five components
of the quality strategy require staff support and other resources. The plan must be specific
about the inputs (staff and other resources) and output (quality measures) if it is to achieve
its aims.
Exhibit 7.1 Selected quality measures, Bixby Hospital, 2012
Quality Measure
Timely emergency department care
Average time patients spent in the emergency department
before they were seen by a healthcare professional
Average time patients who came to the emergency
department with broken bones had to wait before receiving
pain medication
Timely surgical care
Prophylactic antibiotic received within 1 hour prior to
surgical incision
Effective surgical care
Patients having surgery who were actively warmed in the
operating room or whose body temperature was near
normal by the end of surgery
Hospital acquired conditions
Falls and trauma (rate per 1,000)
Vascular catheter-associated infection (rate per 1,000)
Serious complications and deaths
Death from serious treatable complications after surgery
Accidental cuts and tears from medical treatment
Hospital Score National Average
14 minutes
28 minutes
32 minutes
60 minutes
100%
98%
100%
100%
0.00%
2.68%
11.34%
2.05%
0.580
0.000
Source: Author’s calculations based on Hospital Compare data (http://www.medicare.gov/hospitalcompare/).
0.527
0.372
Analyze This
Are the hospital scores for Bixby adequate? Are there any areas in which Bixby needs to improve?
Please explain your reasoning.
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Section 7.2
The Planning Process
Going back to our mission statement, providing an efficient balance of “outpatient care, acute
and sub-acute inpatient care, primary care and outreach services” requires a measure for
each service and a strategy to achieve results. Selected operating statistics for Bixby Hospital
are presented in Exhibit 7.2. The number of nonemergency outpatient visits and emergency
room visits are common measures for use of outpatient services. Counting the number of
outpatient surgeries provides more specification to the use of outpatient services. Similarly,
inpatient total discharges (the number of patients using inpatient services) and inpatient
days are common measures for use of inpatient services. Counts of the numbers of inpatient
surgeries and births provide more specification to the use of inpatient services. Further, the
case-mix index is a measure of the severity of the conditions for which patients are being
treated. A healthcare organization may implement its mission by specifying the availability of
services that treat specific conditions or a combination of conditions.
The strategy for providing outpatient and inpatient services involves (1) making hospital support for the services available, (2) having relationships with residents in the community who
elect to use the hospital’s services, (3) having relationships with physicians in the community
who refer patients to the hospital outpatient services and/or have privileges to admit patients
to the hospital’s inpatient services, (4) measuring and reporting patient services, and (5) having appropriate staffing for the number and medical needs of patients. The connection to the
planning process is that each of the five components of the patient services strategy requires
staff support and other resources. The plan must be specific about the inputs (staff and other
resources) and output (number of episodes of patient care) if it is to achieve its aims.
Exhibit 7.2 Selected operating statistics, Bixby Hospital, 2012
Operating Statistics
Outpatient
Outpatient visits
Emergency room visits
Outpatient surgeries
Inpatient
Total discharges
Inpatient days
Inpatient surgeries
Births
Inpatient revenues (%)
Case mix index
Average length of stay
Staffing
Full-time equivalent positions
FTE 4Inpatient daily census
FTE 4 Total daily census
Source: Author’s calculations.
2008
2009
2010
2011
2012
64,600
19,500
13,449
65,100
20,400
12,305
66,300
21,600
10,245
67,400
22,700
11,115
69,200
23,100
11,700
625
6.10
3.21
615
6.91
3.37
537
7.21
3.14
535
7.85
3.21
531
8.22
3.20
6,921
37,373
2,245
2,067
48.1%
1.3443
5.40
6,248
32,490
2,078
2,003
46.9%
1.3085
5.20
5,666
27,197
1,889
1,945
45.1%
1.2642
4.80
4,875
24,863
1,615
1,842
41.4%
1.3829
5.10
4,963
23,591
1,700
1,912
41.2%
1.3428
4.75
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Section 7.2
The Planning Process
Analyze This
Providing outreach services is a part of the mission of Bixby Hospital. Counts of outreach services
are not routinely collected. How can Bixby measure fulfillment of its mission to provide outreach
services?
With a strategy in hand and specific aims for the quality, types of services, and quantity of
services to be provided, the planning process continues on to forecast the quantity of services
that might be provided in the future and the staff and other resources required for this quantity of services. The application of dollar amounts to the forecasts is the budgeting process.
Once a budget has been adopted, the organization moves toward implementing plans, as displayed in Figure 7.1, the planning, managing, and controlling cycle.
It is important to have plans
established before the start of
the accounting period. Once a
plan is created, the organization can implement it, knowing
that it is being provided with
the expected set of services and
managing operations to assure
compliance to the plan. Organizations that do not have plans
available and communicated
prior to the start of an accounting period cannot readily expect
results that follow the plan.
Without a map, it is difficult to
know which way to travel.
Figure 7.1: The planning, managing, and
controlling cycle
Planning
Revise
Plans
Implement
Plans
During the accounting period,
Controlling
Managing
finance and information systems are developed to collect
Collect Data
data on services being provided
to patients, revenues associated with these services, and
expenses associated with the staff employed and other resources used to deliver services and
manage the organization. The data collected by the healthcare organization links the planning, managing, and controlling cycle. It is the job of general managers to establish practices
for collecting the data that are not routinely captured in financial accounting, such as patient
satisfaction measures and quality measures. As noted in Chapter 2, it is the job of financial
accountants to accurately capture relevant financial information, assure its accuracy, and
report results. It is the job of general managers, and perhaps personnel in the finance office,
to monitor revenues and expenses and to intervene if results are not following plans. The
policies and procedures for intervention are part of the control function.
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Section 7.3
Decisions in the Budgeting Process
Based upon analysis of the data being collected and the interventions by managers, the plans
may require revisions. For some healthcare organizations, revisions may occur during the
year. For other healthcare organizations, plans remain in place for the entire year and analyses only influence future plans. For all organizations, the planning process is continuous, with
one plan leading into the next.
Analyze This
Bixby Hospital has been working on making its birthing center more attractive. If during the middle of 2013 a local, competing hospital implemented a plan that made its own birthing center even
more convenient and attractive, should Bixby alter its budget forecast for births during the year?
For Review:
1. How are planning, managing, and controlling linked in healthcare organizations?
Can financial accounting manage the planning process alone?
Data on financial accounting and data on patient satisfaction and quality link planning, managing, and controlling. Data on patient satisfaction, quality, and perhaps
other measures included in plans come from outside financial accounting, meaning
that financial accounting cannot manage the planning process alone.
7.3 Decisions in the Budgeting Process
The budgeting process for an organization is, simply, the application …
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