Module 10 Written Assignment – Budget Preparations and Analysis

As the HIM department director, a typical task is completing a proposed budget for the next fiscal year, which runs from January to December, for your department. Tools provided include the budget from the current year (labeled as FY:A72), which contains three workbooks: Current Expenses, Salary Worksheet and Monthly Expenses. Please label the Proposed budget that you create as FY:B83. To complete the proposed budget for the upcoming year, you will use provided budget FY:A72 and the budget projections for future costs for FY:B83 which are detailed in Part A (see below).

This assignment is due in Module 11.

There are two parts to this budget assignment and the assignment will be completed over two modules – please put the necessary time into the assignment and expect to be challenged by it.

PART A
PART B

Use your course textbook to obtain a clear understanding of the budgeting process and know that this assignment asks that you ‘forecast’ a budget for the UPCOMING year – next year. This is a forecast of the money your department will spend in the upcoming year. Categories listed in the budget are referred to as ‘subaccounts’, for example you will note that there are subaccounts for salary, supplies and education.

SUBMISSION Create and include an Excel spreadsheet for your FY:B83 budget for the upcoming year. Include 4 worksheet tabs for your proposed budget. Worksheets include: Proposed Budget Expenses, Proposed Salary Worksheet and Proposed Monthly Expenses. Create and include the AAM worksheet described in PART:A Create and include a Variance Report table for FY:B83 using the Variance Report instructions found in PART:B of this assignment.

TheThe American Recovery and Reinvestment Act of 2009 (ARRA) defines a qualified electronic health record as “an electronic record of health-related information on an individual that: includes patient demographic and clinical health information, such as medical history and problem lists; and has the capacity to provide clinical decision support to support physician order entry to capture and query information relevant to health care quality; and to exchange electronic health information with, and integrate such information from, other sources

Electronic health records (EHRs) allow for the systematic collection and management of patient health information in a form that can be shared across multiple health care settings. By providing easier access to patients’ medical records, EHRs can help improve healthcare quality, efficiency and safety.

These systems can also promote use of preventive services, improve public health surveillance, and support research to improve population health. But despite these advantages, the expense of system implementation has slowed EHR adoption rates. Fortunately, there is substantial evidence to show that while initial costs remain a concern, converting from essay records to EHR systems will ultimately reduce health care expenses across the board.

Three compliance requirements may force change to achieve a greater response rate. Healthcare organizations are being required to comply with a series of adoption rates for electronic health records. These requirements are being driven by various incentives and penalties. The three compliance requirements are: Electronic health records ( initiated by the ARRA of 2009) ICD-10-CM and ICD-10-PCS codes Electronic prescribing for physicians and other prescribing professionals

Although there are incentive benefits for adopting the three compliance requirements, they do not come without costs to healthcare organizations. Healthcare management must make decisions about major costs including direct adoption costs and cash flow disruptions costs.

Cash flow disruption costs are related to the code set learning curve for all users. This learning curve will no doubt result in a greater proportion of claims being rejected for healthcare providers. Rejected claims lead to cash flow disruption, and should be considered when decisions are made about implementation costs and benefits.

Benefits of Electronic Health Record technology include: Reducing the incidence of medical error by improving the accuracy and clarity of medical records Making the health information available, reducing duplication of tests, reducing delays in treatment, and patients well informed to make better decisions Providing clinical tools such as: laboratory and radiology ordering and results viewing; electronic prescribing (e-prescribing); and clinical decision support systems Securing access to patient information remotely and from multiple practice locations Reporting events of clinical or public health significance quickly CHAPTER 16: Operating Budgets

© LFor/Shutterstock PROGRESS NOTE

After completing this chapter, you should be able to Understand the difference between operating budgets and capital expenditure budgets. Understand what budget expenses will most likely be identifiable versus allocated expenses. Understand how to build an operating budget. Understand the difference between static and flexible budgets. OVERVIEW

A budget is an organization-wide instrument. The organization’s objectives define the specific activities to be performed, how they will be assembled, and the particular levels of operation, whereas the organization’s performance standards or norms set out the anticipated levels of individual performance. The budget is the instrument through which activities are quantified in financial terms. OBJECTIVES FOR THE BUDGETING PROCESS

A healthcare standard view of budgeting is illustrated by the American Hospital Association’s (AHA’s) objectives for the budgeting process: To provide a written expression, in quantitative terms, of a hospital’s policies and plans. To provide a basis for the evaluation of financial performance in accordance with a hospital’s policies and plans. To provide a useful tool for the control of costs. To create cost awareness throughout the organization.1 OPERATING BUDGETS VERSUS CAPITAL EXPENDITURE BUDGETS

Operating budgets generally deal with actual short-term revenues and expenses necessary to operate the facility. The usual period covered is the next year (a 12-month period). Capital expenditure budgets, on the other hand, may cover the next year as well, but are linked into a more futuristic view. Thus, capital expenditure budgets may cover a 5- or even a 10-year period. BUDGET VIEWPOINTS RESPONSIBILITY CENTERS

In a responsibility center the manager is responsible for a particular set of activities. (We have discussed responsibility centers in a previous chapter.) In the context of operating budgets there are two common types of responsibility centers: cost centers and profit centers. As shown in Figure 16–1, in cost centers the manager is responsible for controlling costs. In profit centers the manager is responsible for both costs and revenues. Thus, we expect that a cost center operating budget will show costs only, while a profit center budget should show both revenues and costs.

Figure 16–1 Two Common Budget Responsibility Centers. TRANSACTIONS OUTSIDE THE OPERATING BUDGET

Certain transactions are outside the operating budget, as shown in Figure 16–2. For example, many grants received by healthcare organizations are restricted funds. The monies in a restricted fund are not to be commingled with general operations monies. Also, a restricted fund generally requires altogether separate accounting and reporting.

Figure 16–2 Transactions Outside the Operating Budget.

Foundation transactions are also outside the operating budget. Foundations are legally separate organizations that require separate accounting and reporting of their funds. Therefore, we would not expect any of their costs to be included in operations. BUDGET BASICS: A REVIEW

A brief review of budget basics is advisable as we move into constructing an operating budget. IDENTIFIABLE VERSUS ALLOCATED BUDGET COSTS

Within a departmental budget, certain costs will be specifically identifiable while others will be allocated instead, as shown in Figure 16–3:

Figure 16–3 Identified Versus Allocated Costs. Direct patient care and supporting patient care should be mostly identifiable. General and administrative expense and patient-related expense will probably be mostly allocated costs. Financial-related expense, such as interest expense, may not be included at all in the manager’s budget. FIXED VERSUS VARIABLE COSTS

You will recall that fixed costs do not change in total, even though volume rises or falls (within a wide range). Variable costs, however, rise or fall in proportion to a change (a rise or fall) in volume. You will further recall that volume, in the case of healthcare orga-nizations, generally means number of procedures (outpatient services) or number of patient days (inpatient services) or perhaps, prescriptions filled (pharmacy services). Figure 16–4 illustrates this principle, while Exhibit 16–1 provides examples of fixed and variable cost categories that would typically be found within an operating budget.

Figure 16–4 Fixed Versus Variable Costs. EXHIBIT 16–1 FIXED AND VARIABLE COST EXAMPLES Operating Expenses Fixed Variable Labor Gross Salaries X Employers’ Payroll Taxes X Other Employee Benefits X Part-Time Temporary Contract Labor X Other Expenses Drugs and Medical Supplies X Rent X Insurance X Five-Year Equipment Lease X BUILDING AN OPERATING BUDGET: PREPARATION

Appropriate preparation is an important stage in building an operating budget. It is often difficult for the manager to allow adequate time for budget preparation, because this effort is above and beyond his or her daily responsibilities. Understanding the usual stages, or sequence, of budget construction as listed here assists in predicting how much time will be required. CONSTRUCTION STAGES

Operating budget construction stages include the following: Plan Gather information Prepare input Construct and submit draft version of budget Make required revisions to draft Present preliminary budget Make required revisions to preliminary budget Submit final budget

Input includes both assumptions and calculations; required revisions to the draft version would occur after upper-level management has reviewed the draft. Additional revisions will typically be required after the preliminary budget has been presented. (The preliminary budget almost never becomes the final version without some degree of revision.) CONSTRUCTION ELEMENTS

What will your budget look like? Will it follow guidelines from last year, or will it take on a new form? What will be expected of you, the manager? Understanding the budget construction elements will help you create a budget that is a useful tool.

As part of the preparation process, you should determine the following: Format to be used Budget scope Available resources Levels of review Time frame

As to format, will templates be available for use? And if so, will they be required? As to budget scope, will your budget become a segment only, to be combined and consolidated in a later stage? If this is so, you may lose some of your line items as you lose control of the final product. Necessary resources made available to you could include, for example, special data processing runs or extra staff assistance to locate required information. The levels of review, along with how many versions of the budget will be required, depend upon the structure and expectations of the particular healthcare organization. And the time frame should be adequate. BUILDING AN OPERATING BUDGET: CONSTRUCTION

Budget information sources, assumptions, and computations are all vital to proper operating budget construction. BUDGET INFORMATION SOURCES

Three primary sources of operating budget information are illustrated in Figure 16–5. They include the Operating Revenue Forecast and the Staffing Plan or Forecast, along with a plan or forecast of other operating expenses. As Figure 16–1 illustrated earlier in this chapter, the manager who is responsible for both costs and revenues would require the revenue forecast. If, however, the manager is responsible only for costs (and not for revenues), the revenue forecast would not become part of his or her responsibility.

Figure 16–5 Operating Budget Inputs.

When the preliminary operating budget is under construction, the capacity-level checkpoints (discussed in a previous chapter) should also be taken into consideration. (This step may be undertaken at a different level and thus may not be your own responsibility.) BUDGET ASSUMPTIONS AND COMPUTATIONS

Budget assumptions and computations are somewhat intertwined. Assumptions

Building a budget means making a series of assumptions. The budget process should begin with a review of strategy and objectives.

Forecasting workload is a critical part of building a budget. The workload should tie into expected volume for the new budget period. Good information is necessary to forecast workload. For example, Table 16–1 presents total nursing hours by unit. But there is not enough detail in this report to use because it does not indicate, among other things, hours by type of staff and/or staff level. Sufficient information at the proper level of detail is essential in creating a budget.

Table 16–1 Nursing Hours Report Unit Nursing Hours No. Description Regular Overtime 620 S-MED-SURG DIV 5 72,509 6,042 630 N-MED-SURG DIV B 40,248 3,354 640 N-MED SURG DIV D 42,182 3,515 645 N-INTENSIVE CARE UNIT 55,952 4,663 655 S-INTENSIVE CARE UNIT 52,000 4,333 660 S-SURG ICU 21,840 1,820 665 S-STEPDOWN 52,208 4,351

Another critical assumption in building a budget is whether special projects are going to use resources during the new budget period. Still another factor to consider is whether operations are going to be placed under some type of unusual or inconvenient circumstances during the new budget period. A good example would be renovation of the work area. Computations

Computations should be supported by their assumptions and should be replicable; that is, another individual should be able to reproduce your computations when using the same assumptions. Computations must also be comparable; that is, the same type of computation must be used by each unit or each department. Thus, when the departmental budgets are combined, they will all be stated on the same basis.

An example of computations that must be comparable is contained in Figure 16–6 . Recall information about preparation of the Staffing Forecast (an input to the operating budget), which has been described in the preceding chapter about staffing. Now costs must be attached to the forecast for budget purposes. As shown in Figure 16–6, the forecast should first contain annual FTEs and Total Paid Days Required. When cost is attached to the cost of Annual Paid Days Required, that cost should include Gross Salaries and Employee Benefit Costs. If one department defines total employee benefit cost one way and another department defines it more broadly, then the resulting combined budget’s staffing dollars will not have been computed on a comparable basis. That budget will be flawed.

Figure 16–6 Staffing Money in the Operating Budget. FINALIZE AND IMPLEMENT THE BUDGET

The final budget is approved for use after multiple reviews and adjustments of the preliminary budget drafts. The final step is then to implement the new budget. It is important to explain the contents to all involved personnel. It may also be necessary to provide training for new report formats or similar issues. WORKING WITH STATIC BUDGETS AND FLEXIBLE BUDGETS

Both static budgets and flexible budgets can be useful tools if wielded by a manager who understands both their strengths and their weaknesses. DEFINITIONS AND USES

Definitions and uses of the static budget and the flexible budget are included in this section. Static Budget

A static budget is essentially based on a single level of operations. After a static budget has been approved and finalized, that single level of operations (volume) is never adjusted. Budgets are measured by how they differ from actual results. Thus, a variance is the difference between an actual result and a budgeted amount when the budgeted amount is a financial variable reported by the accounting system. The variance may or may not be a standard amount, and it may or may not be a benchmark amount.2

The computation of a static budget variance only requires one calculation, as follows:

The basic thing to understand is that static budgeted expense amounts never change, when volume actually changes during the year. In the case of health care, we can use patient days as an example of level of volume, or output. Assume that the budget anticipated 400,000 patient days this year (patient days equating to output of service delivery; thus, 400,000 output units). Further assume that the revenue was budgeted for the expected 400,000 patient days and that the expenses were also budgeted at an appropriate level for the expected 400,000 patient days. Now assume that only 360,000, or 90%, of the patient days are going to actually be achieved for the year. The budgeted revenues and expenses still reflect the original expectation of 400,000 patient days. This example is a static budget; it is geared toward only one level of activity, and the original level of activity remains constant or static.

Static budgets may be used to plan. When utilized in this way, these budget figures represent a goal for the budget period. Table 16–2 illustrates this concept. The table shows a goal of 100 procedures to be performed during the budget period, along with the revenues and expenses that support that goal.

Table 16–2 Static Budget: Can Be Used to Plan (a Goal) Static Budget Assumptions per Procedure Static Budget Totals # Procedures Performed 100 Net Revenue ($200 @) $200 per procedure =[various] $20,000 Expenses 15,000 Operating Income $5,000

Note: Dollar amounts shown for illustration only. Flexible Budget

A flexible budget is one that is created using budgeted revenue and/or budgeted cost amounts. A flexible budget is adjusted, or flexed, to the actual level of output achieved (or perhaps expected to be achieved) during the budget period.3A flexible budget thus looks toward a range of activity or volume (versus only one level in the static budget).

Flexible budgets became important to health care when diagnosis-related groups (DRGs) were established in hospitals in the 1980s. The development of a flexible budget requires more time and effort than does the development of a static budget. If the organization is budgeting with workload standards, for example, the static budget projects expenses at a single normative level of workload activity, whereas the flexible budget projects expenses at various levels of workload activity.4 The concept of the flexible budget addresses workloads, control, and planning. The budget checklists contained in Appendix 16 –A are especially applicable to the flexible budget approach.

To build a flexible budget that looks toward a range of volume, or activity, instead of a single static amount, one must first determine the relevant range of volume, or activity: Thus, the outer limits of fluctuations are determined by defining the relevant range. Next, one must analyze the patterns of the costs expected to occur during the budget period. Third, one must separate the costs by behavior (fixed or variable).

Finally, one can prepare the flexible budget—a budget capable of projecting what costs will be incurred at different levels of volume, or activity.

Flexible budgets can readily be used to review the prior performance of the unit, the department, or the organization. When utilized for this purpose, these budget figures will typically include the volume range (for example, a range of number of procedures or number of patient days) discussed above. Table 16–3 illustrates this concept. The table shows a volume range of  50, 100, and 150 procedures to be performed during the budget period, along with the per-procedure assumptions for revenues and variable expense plus the total fixed expenses that would accompany these procedures.

Table 16–3 Flexible Budget—Used to Review Prior Performance (1) (2) (3) (4) Flexible Budget Assumptions per Procedure Range of #s of Procedures (Volume Range) # Procedures Performed 50 100 150 Net Revenue $200 per procedure = $10,000 $20,000 $30,000 Variable Expense $150 per procedure = 7,500 15,000 22,500 Fixed Expense [fixed total amount] 1,500 1,500 1,500  Total Expense $9,000 $17,500 $24,000 Operating Income $1,000 $3,500 $6,000

Note: Dollar amounts shown for illustration only. EXAMPLES

Examples of both static budgets and flexible budgets appear in this section. Static Budget Example

A static budget example for an open imaging center appears in Table 16–4. The net revenue is computed using a dollar amount per procedure ($400) multiplied by the budgeted total number of procedures performed (1,000 procedures). The total expenses are derived from a variety of sources.

Table 16–4 Static Budget Example for an Open Imaging Center Static Budget Assumptions per Procedure Static Budget Totals # Procedures Performed 1,000 Net Revenue Expenses $400 per procedure = $400,000 Salaries & Employee Benefits [various] $150,000 Supplies [various] 25,000 Insurance—General [various] 5,000 Insurance—Malpractice [various] 10,000 Depreciation—Building [various] 50,000 Depreciation—Equipment [various] 100,000 Total Expenses $340,000 Operating Income $60,000

Note: Dollar amounts shown for illustration only. Flexible Budget Example

A flexible budget example for an infusion center located within a physician practice appears in Table 16–5. The table shows a volume range of 64, 80, and 96 procedures to be performed during the budget period, along with the per-procedure assumptions for revenues and variable expense, plus the total fixed expenses that would accompany these procedures.

Table 16–5 Flexible Budget Example for Infusion Center Within a Physician Practice (1) (2) (3) (4) Flexible Budget
Assumptions per Procedure Range of #s of Infusions(Volume Range) # Procedures Performed 64 80 96 Net Revenue $2,250 per infusion = $144,000 $180,000 $216,000 Variable Expense $1,500 per infusion = 96,000 120,000 144,000 Fixed Expense [fixed total amount] 40,000 40,000 40,000  Total Expense $136,000 $160,000 $184,000 Operating Income $8,000 $20,000 $32,000

Note: Dollar amounts shown for illustration only. BUDGET CONSTRUCTION SUMMARY

There is no one right way to prepare an operating budget. The budget construction depends on factors such as the organizational structure, the reporting system, the manager’s scope of responsibility and controllable costs, and so on. Exhibit 16–2 sets out a series of questions and steps to undertake when commencing to build a budget.

It is also important to note that the budget for operations is usually part of an overall, or comprehensive, financial budget. Responsibility for the comprehensive financial budget always rests with upper-level financial officers of the organization and is beyond the scope of this chapter. BUDGET REVIEW

The questions discussed in constructing a budget also serve to evaluate an existing budget. Issues of valid and replicable assumptions and comparability are especially essential. Comparative analysis, as examined in the preceding chapter, is an important skill to acquire. Exhibit 16–3 sets out a series of questions and steps to undertake when commencing to review and evaluate a budget. EXHIBIT 16–2 CHECKLIST FOR BUILDING A BUDGET What is the proposed volume for the new budget period? What is the appropriate inflow (revenues) and outflow (cost of services delivered) relationship? What will the appropriate dollar cost be?(Note: this question requires a series of assumptions about the nature of the operation for the new budget period.) 3a. Forecast service-related workload. 3b. Forecast non-service-related workload. 3c. Forecast special project workload if applicable. 3d. Coordinate assumptions for proportionate share of interdepartmental projects. Will additional resources be available? Will this budget accomplish the appropriate managerial objectives for the organization? EXHIBIT 16–3 CHECKLIST FOR REVIEWING A BUDGET Is this budget static (not adjusted for volume) or flexible (adjusted for volume during the year)? Are the figures designated as fixed or variable? Is the budget for a defined unit of authority? Are the line items within the budget all expenses (and revenues, if applicable) that are controllable by the manager? Is the format of the budget comparable with that of previous periods so that several reports over time can be compared if so desired? Are actual and budget for the same period? Are the figures annualized? Test one line-item calculation. Is the math for the dollar difference computed correctly? Is the percentage properly computed based on a percentage of the budget figure? INFORMATION CHECKPOINT What is needed? Example of variance analysis performed on a budget. Where is it found? Probably with the supervisor who is responsible for the budget. How is it used? To see what type of budget it is and to see how it is constructed. KEY TERMS Capital Expenditures Budget Flexible Budget Operating Budget Responsibility Center Static Budget DISCUSSION QUESTIONS Do you believe your organization uses one or more operating budgets? Why do you think so? Do you believe your organization uses a flexible or a static budget? Why do you think so? If you reviewed a budget at your workplace, do you think the major increases and decreases could be explained? If so, why? If not, why not? NOTES

1. W. O. Cleverly, Essentials of Health Care Finance, 4th ed. (Gaithersburg, MD: Aspen Publishers, Inc., 1997).

2. C. Horngren et al., Cost Accounting: A Managerial Emphasis, 9th ed. (Englewood Cliffs, NJ: Prentice Hall, 1998), 227.

3. Ibid., 228.

4. J. R. Pearson et al., “The Flexible Budget Process—A Tool for Cost Containment,” A. J. C. P., 84, no. 2 (1985): 202–208.

 

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