What goes on behind those budget doors?
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Transcript of What goes on behind those budget doors?
HFMA Spring Conference
May 26, 2011
Presented by Nancy Drury, CPA & Deborah Sieradzki, PhD
AgendaWhat is a Budget? And Why we do it
The Planning Cycle
Budget Approaches
Components of the Budget / Reporting
Environmental Issues Impacting the Process
What is a Budget?Helps us understand where we’ve come from and where we’re going
The process of developing a financial plan with objectives and resources needed to support an operational or strategic plan
A management tool developed and driven by strategy, goals, and objectives.
The Planning CycleEvaluate impact of strategies on cost, quality,
& growth through:
Market Share Capture
Revenue Cycle
Master Facility Plan
Market Analysis
Demographics Market Share Use Rates
Length of StayChanging
technology
Shifting practice patterns
Shifts in site of service
Environmental scan
Scenario Analytics
Market Forces
Potential Strategies
-Payor Mix-Uninsured-Compensation-Coinsurance-Healthcare reform
-Cost Reductions-Increased Market Share-Revenue Cycle improvements
Scenario AnalyticsRapid market changes mean greater uncertainty
Need to quickly evaluate diverse strategies across multiple scenarios
Benefits:
Provide better information to decision makers
Promote better, more robust strategies
Types of BudgetsOperating – combination of revenue and expense budgets
Cash Flow – estimate future cash receipts and payments tabulated to show the forecasted cash balance
Capital – significant purchases: land, building, equipment; tied to product lines or services
Integrated Budgeting
Cash flow Budget
Operating Budget
Capital Budget
Operating Budget ApproachesHistorical – assumes historical data is updated with new facts and proposals. Trends are incorporated into projections
Zero Based – assumes all costs need to be justified; no historical data is used.
Flexible – allows changes during the budget period relative to volume.
Components of Operating BudgetsStatistical – volume / workload assumptions
Revenue – combines volume data with charges and reimbursement data assumptions
Expense – costs of providing services; divided into labor and non-labor components
Components of Operating BudgetStatistical
VolumeHow many patients?
What services will they need?
How long will they stay
PayorHow will services be paid
% of each patient type by category
AcuityCase Mix Index (CMI)
Average Length of Stay (ALOS)
Components of Operating BudgetRevenue
Patient Service Revenue
Gross patient service revenue (GPSR)
Net Patient service revenue (NPSR)
Payment Methodologies (IP and OP)
Other Operating Revenue
Such as Cafeteria
Investment Income
Research / Grant Revenue
Bad Debt and CharityBad debt consists of services for which providers anticipated but did not receive payment
Charity care consists of services for which providers do not expect to receive payment due to patient’s inability to pay.
Charity care is generally for people who do not have other financial resources available, such as insurance, government programs, or regular income
Community charity discounts is given for patients with no insurance
Currently charity care is a reduction to revenue and bad debt is recorded as an expense.
Key Steps in Developing Revenue Budget
Estimate volume by service type
Determine gross charges (volumes x sticker price)
Translate gross revenue into net revenue using either a top down or bottoms up approach
Top down uses historic average collection rate (net revenue as % of Gross). Works if payor and service mix is relatively constant
Bottom Up requires large modeling effort to flex net payment rates by payor and serivce mix if volatal
Inpatient Payment MethodologiesCase Rates (DRGs)
Prospectively determined
Per Diems
Little incentive to control LOS
Usually for rehab or psychiatric services
Percent of Charges
Little incentive to control utilization
Pay for Performance
Rewards for meeting certain performance targets
Outpatient MethodologiesPayment Methodologies
Fee for Service
Percentage of charges
APCs
Characterized by high volume, low revenue per unit; can be more challenging to estimate and analyze then inpatient
Other Operating RevenueCafeteria
Retail
Telephone
Television
Parking
Investment Income
Research RevenueDirect Research
Such as lab-tech salaries and cost of reagents are directly related to the cost of research being performed
Indirect Research
Overhead rates paid by sponsors to reimburse facility for indirect costs spent on research
Typically expressed as % of payment for ecery dollar of direct expense
Components of Operating BudgetStaffing Expenses
Salaries
consists with accounts used to pay employees
Costs associated with hours worked at regular pay, premium rates for overtime, shift differential, and vacation time.
Benefits
Actual expense for benefit programs such as health insurance, pension plans, life insurance, etc.
Often allocated to departments/practices as percent of salaries known as fringe benefit allocation
Importance of Staffing BudgetNursing salary and wages are the majority of the nursing direct expense budget
Staffing costs are 40-50% of hospital’s direct expense budget
Nurse managers spend a lot of their time with staffing issues.
Schedules are a major reason nurses change jobs
Patient LoadVolume X HPPD (hours per patient day) = Required Patient Care Hours
Volume
usually based on past history and adjusted for knowledge of patient population and programs offered
Foundation in calculating staffing needs
Unit of service for most hospitals is patient days; includes distribution by month, day of week, etc
Average daily census (ADC) is calculated by dividing total volume by 365
Staffing BudgetDetermine total number of patient days expected
Determine staffing ratios needed for each classification of patient
Multiply the HPPD per classification X number of patient days budgeted = Total number of patient care hours needed
Adjust for non-productive time (CTO)
Required Patient Care HoursPatient
ClassificationNumber of
Patient Days HPPD Total Hours
1 1,500 2.5 3,750
2 3,700 4.7 17,390
3 2,400 8.0 19,200
4 900 12.2 10,980
5 500 19.0 9,500
TOTAL 9,000 60,820
How Many FTEs Will I Need?Total FTEs Needed =
Total Patient Care Hours
Productive Hours per FTE (a)
(a) Productive Hours per FTE =
Productive Hours / Paid Hours = Productive %
Productive % x 2080 = Productive Hrs per FTE
Budgeting Patient Service StaffDaily hours of care (per 8 hour or 12 hour shifts)
Skill Mix
Based on patient needs
ICUs usually 90-100% RN
General are units usually >60% RN
Rehab/Psych Units usually 50% RN
Support staff for caregivers
Secretaries / unit clerks
Nurse managers
Educators
Fluctuation PlanInternal float pools
Floating staff between units
On-call staff
Overtime
Peak demand:
Bonuses, agencies, use of other resources
Low demand:
Canceling most expensive staff first, voluntary leaves, lay-offs
Components of Operating BudgetNon-salary Expenses
Variable
Variable in nature; fluctuates based on volume
Historically based
Data from decision support / cost accounting
Adjusted for inflation / economics
Types:
Supply costs per unit x volume
Utilities per unit x volume
Provision for bad debt as % of gross patient revenue
Supply CostsAbout 90% of supply costs are directly related to patient care
Typical measured used to gauged supply chain effectiveness:
Supplies as % of Net Operating expense
Supplies as % of Net Revenue
Supplies per adjusted patient day (CMI adjusted)
Supplies per adjusted discharge (CMI adjusted)
Components of Operating BudgetNon-salary Expenses
FixedSomewhat fixed in nature; doesn’t vary with volume
Historically based
Data from decision support / cost accounting
Adjusted for inflation / economics
Types:Services & general purchased from vendors
Corporate costs
Depreciation & amortization
interest
Budgeted Income Statement
Net Revenue (What we expect to be paid)
Less: salaries, benefits, variable, fixed costs
= Net Operating Income (Loss)
Cash Flow BudgetingBased on Operating and Capital Results
In Flow: ReceiptsPatients, insurance companies, foundation, interest, investments, bonds, etc
Out Flow: Disbursements / PaymentsCapital, operating costs, accounts payable, pension funding, bond payments, etc
Budgeting Capital AlignmentScarce capital availability makes sophisticated analysis essential
Requires rapid consideration of impact of capital spending plans
Helps to align capital planning with budgeting
Understand critical factors:
Capital capacity
Debt capacity
Credit trends
CAPITAL BUDGETING
PROJECT 1
Balance Sheet
Operating Impact
Capital & Debt
Capacity
Financial ReportingDifferent audiences require different types of reporting
Board of directors
Senior leadership
Bond insurers
Rating agencies
Key requirementsQuick generation of multiple report formats
Rapid and easy report distribution
Ability to provide reports that range from high-level to highly detailed
LOCAL / STATEWIDE CHALLENGESDMC Acquisition by VANGUARD
Medicaid CHAMPS implementation
BCBSM
Unemployment rate = growing uninsured, bad debt, charity market
Commercial / managed care contracting
State Budget
Executive Order
Employment Market / Insured
New Insurance Products
Regulatory changes
Life expectancy utilization of services
Political changes
Michigan 2011New governor and lieutenant governorNew attorney generalNew Secretary of stateElect all 110 members of the state House of Representatives – currently led by a Democratic majority; 34 of the 110 state Representatives are term-limitedElect all 38 members of the state - currently controlled by a Republican majority; 29 of the 38 state Senators are term-limitedElect 2 out of 7 justices on Michigan Supreme Court – both seats contested are held by Republicans; Democratic win would gain 5-2 majority; expect “reapportionment” of congressional district borders to be challenged and decided here.
NATIONAL CHALLENGESFFY2011 Medicare cuts to hospitals & post-acute services
RAC Recoveries
Federal Budget
Extension of Federal Medical Assistance Percentage - 6 month extension saving $500M in state Medicaid support
CMS leadership change
Looming Medicare Insolvency
Quality indicators / measurements – proposal to add two new indicators: elective total hip/knee; and 30 day all-cause readmission following elective total hip/knee
National health insurance
The New Health Care System
National Health InsuranceReduce federal deficits by $1.3T 2020-2029
Extend insurance coverage to 32M Americans by 2019
Build healthcare delivery system reform
Goal: increase healthcare “value”
Prerequisite: electronic health records
Tactics: value-based purchasing; reduce preventable readmissions; reduce hospital acquired conditions; bundled payment; accountable care organizations (ACO)
Key Legislative ProvisionsCost Cutting – market basket update adjustments for productivity will reduce reimbursement over 10 years starting in FFY 2010; reduction to Medicare & Medicaid DSH; reduction to Medicare Advantage; home care and SNF cuts; revamp physician payments
Delivery System Reforms – implements “Tactics” over 10 years that is expected to save $13.5B
Independent Payment Advisory Board – Starting in 2015, creates a MedPAC-like commission that has Medicare rate setting authority. Effective for hospitals after 2019; expected to save almost $15B over 10 years
Key Legislative Provisions (con’t)Tax Exempt Status – includes four new criteria providers must satisfy to retain tax-exempt status; $50k penalty for those who don’t.
1. Conduct community needs assessment every two years
2. Develop, implement and communicate a charity care policy
3. Limit charges for emergency or other medically necessary care to eligible individuals for charity
4. Use aggressive collection efforts only after attempts to determine eligibility for charity care have been exhausted
Mandates for individuals and businesses begin in 2014
Budget Challenges from New HealthCare System
Further cost reductions
Where can efficiencies be gained?
Determine new contract negotiation strategies since payers will have less pricing flexibility under new law.
What will be the cost of additional reporting burdens?
How to model impact of coverage extension of uninsured to Medicaid, shifting of rates, bundled payments, ACOs?
lubaway, masten & company, ltd.Healthcare regulatory, financial, revenue cycle and managed care
consulting services
Nancy Drury (248) 766-1485
Debby Sieradzki (586) 292-6446
510 Highland Avenue #311 Milford, MI 48381
www.lubawaymasten.com