Assuming that Mrs. Smith meets Medicare criteria for the services described here, how many days of SNF care is Mrs. Smith entitled to during her most recent stay (assume that she qualifies for the full 100 days)? How much in deductibles and copayments does Mrs. Smith have to pay (use 2014 figures given in the text)?

See Chapter 17 reading below

Effective Financial Management

What You Will Learn

Financial management is essential for making vital resources available to the organization. Budgeting and financial control are the two main functions of financial management.

Financial management begins by understanding the organizations profitability. Additionally, the nursing home administrator must have detailed reports to monitor the facilitys operations and make decisions.

Variances between what has actually happened and what was planned in the budget are useful for managing revenues and controlling costs.

Revenue management is based on two main factors: maintaining expected census levels and achieving the expected payer mix.

Cost control begins with an understanding of fixed, variable, and semifixed costs. These differences help identify controllable and noncontrollable costs.

The labor-hour report and the labor-cost report should use variance analysis for monitoring labor costs.

Three main techniquesvariance analysis, accounts payable report, and inventory managementare used to control nonlabor expenses.

Management of accounts receivable is critical for cash flow. Procedures are necessary to prevent lost revenues and to minimize write-offs. The collection cycle is a measure of efficiency in collecting the receivables.

Budgeting involves making projections for the next fiscal year on the basis of reasonable assumptions. Revenues, labor costs, and other expenses are budgeted in that order. Operating margin indicates the organizations profit goal.

Introduction

A good understanding of financial management is a necessary qualification for any health facility administrator. Financial management is a critical administrative function that is essential for ensuring an organizations success over the long run. An organizations financial strength gives it the resources to maintain patient care standards; deliver value; and carry out other vital functions such as marketing, staff development, and quality improvement. A nursing facilitys vital resources are controlled and conserved through effective financial management.

Financial management encompasses two classical functions of management: planning and controlling. Financial planning incorporates two types of decisions:

1. What future financial objectives are desirable and achievable?

2. What resources are needed and how will they be allocated so that the objectives are achieved?

Such a process of financial planning is called budgeting. The final budget becomes a financial plan and a tool for exercising financial control. Managers exercise financial control when they compare the actual operating results against the budget, identify unacceptable variances, evaluate reasons for the variances, and take appropriate corrective action. In addition to the planning and control functions just described, financial management also includes controlling cash and other assets such as food and supplies inventories.

The planning and control functions call for managerial decision making. Sound decisions require good information. Hence, effective financial management is driven by well-designed systems that not only report on the organizations performance but also facilitate financial analysis. One basic financial information system is the accounting system. Accounting is a professional field in its own right. The nursing home administrator (NHA) does not need to be an accountant, but he or she must be able to understand the basic accounting statements produced by the accounting system.

Accounting and Financial Statements

Accounting, more precisely called financial accounting, entails recording all financial transactions and preparing standard reports known as financial statements. Each financial transaction is recorded following the well-established double-entry system of debits and credits and a set of standards called generally accepted accounting principles (GAAP). Examples of common financial transactions include revenues derived from providing services; purchases of food, supplies, and other items; expense for salaries and wages; receipts of cash; and payments by cash or check. Most of these routine transactions are recorded by the nursing homes bookkeeping personnel. In addition to the recording of routine transactions, which a bookkeeper can generally handle, a professional accountant makes additional financial entries such as those pertaining to lease or rental agreements, loans, tax payments, depreciation of assets, and income from investments. Generally, at the end of a specified period, all the financial transactions for that period are summarized in three main types of financial statements: the income statement, the balance sheet, and the cash flow statement. As discussed in subsequent sections, these statements provide concise information on the facilitys profitability as well as its economic resources and obligations.

The Income Statement

The income statement is also sometimes called the operating statement, the profit and loss statement, or the P&L. Exhibit 171 provides an example of an income statement. The income statement furnishes a summary of revenues, expenses, and profitability for a given period, such as a month, a quarter, or a year. It has three main sections. The first section is a listing of the revenue derived from each payer source and the total revenue. The second section lists various expense line items such as salaries, supplies, raw food, utilities, and advertising. The third section consists of operating income, income taxes, and net income. For nonprofit and public facilities that do not pay income taxes, operating income equals net income. In general, net income, also called net profit, equals total revenue minus total expenses (although shown separately on the income statement, income tax is actually an expense). Thus, the income statement provides valuable information on the profitability of an organization. By identifying revenues by each payer source and by identifying expenses by each type, the income statement provides a summary of how the bottom-line profit was derived. On the other hand, if total expenses exceed total revenue the bottom-line result is a net loss.

Exhibit 171 XYZ Nursing Care Facility Income Statement for Year Ended 2013

Net patient revenues
Private pay	$1,395,540
Private insurance	132,030
Medicaid	1,858,490
Medicare	943,160
Veterans contract	74,600
Total net patient revenue	$4,403,820
Other service revenues	262,120
Rental income	8,040
Income from investments	43,620
Total revenue	$4,717,600
Operating expenses
Administrative salaries	$182,740
Advertising and promotion	14,400
Other administrative	12,240
Nursing salaries	$2,294,950
Medical supplies	511,910
Equipment rental	26,400
Dietary salaries	300,370
Raw food	147,020
Dietary supplies	26,400
Dietary chemicals	25,700
Environmental service salaries	274,460
Environmental supplies	38,160
Social services salaries	42,900
Activity salaries	75,220
Activity supplies	5,040
Contracted services	194,290
Fees	46,210
Utilities	53,670
Depreciation	93,650
Provision for bad debt	70,230
Other expenses	23,400
Total expenses	$4,459,360
Operating income	$258,240
Provision for income taxes	77,470
Net income (loss)	$180,770

The income statement is of primary importance to the NHA. The balance sheet and the cash flow statement are important to corporate officers and owners.

The Balance Sheet

A balance sheet summarizes the financial position of a business organization on a given date, such as the last day of a month or the last day of a year. A balance sheet has three sections:

1. A summary of all the assets or economic resources of the facility appears in the section on the left or at the top (based on the layout of the balance sheet). Total assets constitute the financial value of everything the facility owns.

2. The right-hand or bottom section of the balance sheet shows an organizations liabilities. Liabilities constitute the facilitys economic obligations or debts. Total liabilities constitute the financial value of everything the facility owes to other entities.

3. The third section, equity, appears just below the liabilities. It is also called owners equity or stockholders equity, and represents the interests or rights of the owners in a for-profit corporation. In a nonprofit organization, no ownership interest exists. Therefore, net assets is the term used by nonprofit organizations for the equity portion of the balance sheet.

According to the fundamental accounting equation, total assets equal the sum of total liabilities and equity (or net assets). Hence, equity equals assets minus liabilities. See Exhibit 172 for an illustration of the balance sheet.

The Cash Flow Statement

The cash flow statement is a summary of transactions that increase or decrease cash during a given period, such as a month, quarter, or a year. It identifies the sources of incoming cash and the uses of outgoing cash. Preparing a cash flow statement is necessary because businesses commonly use an accounting method called accrual-basis accounting, a method in which revenues and expenses do not match cash inflows and outflows. Revenue is recognized at the time services are rendered although the bulk of payments for those services is received at a later date from various payers. Similarly, expenses are booked as they are incurred, even though payments to vendors are generally made at a later date. Certain expenses, such as advertising and insurance, may be prepaid for a whole year. In such a case, a cash outflow would occur at the beginning of the year, but the expense would be spread out over the entire year.

Exhibit 172 XYZ Nursing Care Facility Balance Sheet on December 31, 2013

Assets

Current Assets
Cash	$62,350
Accounts receivable	981,260
Less allowance for bad debts	70,230
Inventories	57,600
Prepaid expenses	24,400
Land, buildings, and equipment	23,670,190
Less accumulated depreciation	8,521,260
Other assets	258,990
Total Assets	$16,463,300

Liabilities and Equity

Current Liabilities
Accounts payable	$44,170
Accrued salaries	32,140
Current maturities of long-term debt	41,330
Long-term debt	13,364,390
Less current maturities	41,330
Total Liabilities	13,440,700
Equity	3,022,600
Total Liabilities and Equity	$16,463,300

Note that cash flow is not an indicator of profitability. Cash flow is, however, an important measure of an organizations financial health. A positive cash flowin which inflows exceed outflowsmeans that the organization has the ability to meet its cash obligations in a timely manner. The facility must have cash to pay the employees on every payday, make payments to vendors according to the terms of credit, make lease payments for building and equipment, and pay loan installments to banksto give some examples. An organization can face serious financial trouble if it does not have adequate cash to meet such financial obligations when they become due.

Management Reports

The three types of financial statements just discussed do not provide all the information that managers need to control facility operations. The administrator and department managers need detailed reports that can help them monitor the facilitys operations and make decisions. Management accounting is the term used for the process of preparing reports considered useful for managerial control and decision making. Several types of routine management reports may be prepared for the NHA and department managers. In addition, certain nonroutine reports may be necessary from time to time. For example, a pro forma report that forecasts anticipated volume of patients, expected revenues, and anticipated expenses is often necessary before a facility launches a new service. Such a report can help management decide whether the facility should commit the resources to develop the new service that is being considered.

Financial accounting systems are standardized, and the format of financial statements varies little among different nursing home organizations. Management accounting systems, on the other hand, can have a great deal of variation regarding report formats and the level of detail contained in them. The number and types of management reports, as well as their usefulness, depend on the level of sophistication of the financial information systems.

The Technique of Variance Analysis

Variance analysis is an examination and interpretation of differences between what has actually happened and what was planned in the budget (Gapenski, 2002). A varianceis the difference between an actual (realized) numeric value and a budgeted (expected) value.

The technique is used for managing revenues and for controlling costs. Negative variances signify that the actual results are worse than what was projected in the budget. Large negative variations threaten the expected profitability. Negative variances require follow-up, particularly in areas in which costs are controllable. Such controllable areas are those areas of the operation in which management intervention to reduce costs would not jeopardize quality or violate regulations. For example, labor hours cannot be cut below the minimum staffing levels established by regulations or cut below the number of staff hours necessary for meeting patients needs, whichever is higher. Hence, negative variances require careful evaluation and judicious action. Variance analysis and other types of management reports are discussed later in greater detail.

Managing Revenues

Management of revenues is based on two factors:

Maintaining expected census levels. Census means the number of patients in a facility on a given day. Each day spent by a patient in the nursing facility is called a patient day or resident day. Hence, patient days over a period represent the cumulative number of days spent by all patients. Patient days, also referred to as days of care, amount to a cumulative census over a specified period. Average daily census is the average number of patients per day over a specific period of time such as a week, a month, or a year. It is calculated by dividing the total patient days over a period by the number of days in that period (see Table 171).

Achieving the expected payer mix of patients. Payer mix is also called census mix. It is the mix of patients by payer type, such as Medicaid, Medicare, and private pay. Table 172 illustrates the payer mix for a facility, which is also graphically illustrated in Figure 171.

Table 171 Days of Care and Average Daily Census for a 7-Day Period

Day	Daily census
Day 1	121
Day 2	119
Day 3	118
Day 4	117
Day 5	120
Day 6	118
Day 7	120
Patient days	833 (Total census for days 1 through 7)
Average daily census	119 (833 / 7)

Table 172 Payer Mix for the Year 2013

Pay type	Patient days	Payer mix
Private pay	10,998	25.6%
Medicare	5,370	12.5%
Medicaid	25,695	59.9%
Other	861	2.0%
TOTAL	42,924	100.0%
Average daily census	117.6

Figure 171 Payer Mix for 2013

Although the objective of census management is to keep the facilitys beds filled, simply having more patients is not always enough for achieving revenue targets. This is because of wide variations in the amount of reimbursement from the various sources of financing. Medicaid generally maintains the lowest reimbursement rates. Private-pay charges, which are established by the facility, are generally the highest. Exhibit 173 illustrates the effect of payer mix on revenues. Notice that the facility has actually met its budgeted patient days target of 3,472 and its budgeted 83% occupancy rate in the month of October. However, shortfalls (indicated by negative variance signs) in achieving targeted private-pay and private-insurance patient days have resulted in a revenue shortfall of $3,500 for the month. Notice that the actual payer mix produces an average reimbursement rate of $159.59, which is $1.01 lower than the average budgeted rate of $160.60 for each patient day, and is also a negative variance.

One way to eliminate the revenue shortfall in this case is to increase the overall census by 22 patient days for the month (99% occupancy). In that case, 22 patient days times the average reimbursement rate of $159.59 per patient day equals $3,511, which is sufficient to cover the revenue shortfall. Another way to achieve the revenue objective is to realize higher reimbursement rates than the rates projected in the budget. Higher reimbursement rates, however, are often difficult to achieve because the NHA has little or no control over third-party reimbursement rates. For a substantial number of patients, the rates are established by third parties such as Medicaid and Medicare. Private-pay rates are under managements control, but market factors such as competition from other facilities often limit the administrators ability to unilaterally raise private-pay rates.

Controlling Costs

Cost control requires an understanding of three main types of costs: fixed, variable, and semifixed (also called step-fixed or step-variable). The three types of costs behave differently within a certain census range, which is an anticipated range of patient census. Associating costs with a census range is central to controlling costs without jeopardizing quality of care or demoralizing the associates with staffing shortages. When census range is used in planning expenditures, cost expectations are established for an anticipated range of the facilitys patient census. A census range should be used because no one can exactly predict the census for a future time.

Exhibit 173 Payer Mix and Revenue Report for Month of October, 2013

Available beds: 135

Note: Occupancy rate = (Average daily census/Available beds) 100

Types of Costs

The nature of a particular type of cost can be evaluated on the basis of its relationship to a change in the facilitys census. Suppose that costs are being budgeted for a census range of 108 to 116 patients. Some costs would remain unchanged, regardless of whether the facility has 108 or 116 patients. Costs that do not vary with the number of patients within the census range are called fixed costs. Fixed costs are noncontrollable. For example, regardless of whether the facility has 108 or 116 patients, the facility must still have the same number of RN hours per day (Figure 172). Administrative costs, telephone and utilities, rent or lease costs for the building, and maintenance and repairs are other examples of fixed costs.

Variable costs, on the other hand, vary with the change in the number of patients within the census range. For example, if the cost of raw food is $8.00 per patient per day, the food cost would be $864 per day when the facility has 108 patients; it will be $928 per day when the census is 116. Other costs that are considered variable include medical and nursing supplies, dietary supplies, temporary labor, linens, and laundry chemicals. Note that for variable costs, the variable cost rate (also known as the cost per unit) remains constant. The variable cost rate is expressed as a per-patient-day cost (PPD cost), which is a constant amount per patient per day. In the food cost example, the PPD food cost remains constant at $8.00. To get the total food cost, the PPD cost is multiplied by the number of patients. The total variable costs are controllable. Suppose the facility has been operating with a daily census of 114, and the census drops to 110. The facility must reduce its spending on food from $912 per day to $880 (Figure 173), even as the PPD cost remains constant at $8.00. This cost control technique is not applicable to fixed costs discussed earlier.

Figure 172 RN Hours Within a Census Range of 108 and 116

The third category consists of semifixed or step-variable costs. Semifixed costs remain fixed within parts of the census range; they rise or fall for another part of the census range. Semifixed costs are generally encountered in paraprofessional labor hours, such as certified nursing assistant (CNA) hours. The example illustrated in Figure 174assumes that CNAs are scheduled in 8-hour increments. In this example, 360 hours of CNA time is scheduled even though the census may vary between 108 and 110; 368 hours are scheduled when the census increases to 111; an additional 8 hours are scheduled only when the census reaches 114. Like variable costs, semifixed costs are also controllable, but not for minor fluctuations in census. Depending on management policy, some facilities may treat semifixed costs as variable costs. Semifixed labor costs can be treated as variable costs if a facility is able to employ adequate part-time associates who may be called in as needed. Some facilities that do not have this flexibility still treat these costs as variable; thus, a CNA is sent home without completing a full shift if the census drops by as little as one patient. Such a practice can be demoralizing for the associates and contribute to problems such as absenteeism and turnover. In the long run, relatively small upfront cost savings may actually end up costing the facility much more.

Controlling Labor Costs

Labor costs have two components: hours of labor and dollars spent on labor. Labor dollars are affected by hours of laborboth regular and overtimeand average wages paid to the associates. Wages are governed by a facilitys wage policies. Competitive pressures may also influence how much a facility may have to pay to hire and retain qualified associates. Hence, the NHA may have more control over the hours of labor than over total dollars spent on wages and salaries.

Labor costs and other expenditures are controlled using the technique of variance analysis mentioned earlier. Cost control begins with the budgeted figures being adjusted to reflect changes in census. Exhibit 174 presents a labor hour report for a particular nursing unit within a facility. Similar reports would be prepared for other nursing units and departments such as food service, housekeeping, and laundry. A report will also be prepared for the entire facility. A labor hour report is generally produced every pay period. This report shows budgeted hours, actual hours, adjusted budget hours, and the variance between the adjusted budget and the actual hours. The budgeted hours in this example were based on 532 patient days for the pay period. However, the facilitys actual patient days were 504. Therefore, for determining the variances, the budgeted hours must be adjusted for the lower actual census. An adjusted budget, which is also called a flexible budget, is derived by applying budgeted PPD hours to the actual patient days. Hence, in a flexible budget, the budgeted costs are raised or lowered to reflect the actual census. For example, in Exhibit 174, the total labor hours under the adjusted budget column have been calculated by multiplying the budgeted 4.42 PPD total hours by the actual census of 504.

Figure 173 Food Cost Within a Census Range of 108 and 116

Figure 174 Nursing Assistant Hours Within a Census Range of 108 and 116

Most accounting and finance software programs treat labor hours as variable costs rather than fixed or semivariable cost. Nevertheless, computer-generated labor hour reports are useful in pointing out the variances. In Exhibit 174, the negative variance of 16 hours for RNs indicates overstaffing, but if RN hours are treated as a fixed cost, the variance can be ignored. On the other hand, RNs have incurred 4 hours of overtime that was not budgeted, and this overage calls for follow-up to determine whether this overtime was avoidable. It can be seen that 4 hours of overtime budgeted for LPNs was not used. There was likely a trade-off between LPN and RN overtime, but RN wages are higher than those for LPNs, so this difference would negatively affect the labor dollars, as is apparent from Exhibit 175. The budgeted overtime costs for LPNs was $136 for 4 hours of overtime. For the same 4 hours of overtime, the actual costs for RNs amounted to $167. In such a case, the NHA should decide whether circumstances warranted swapping overtime hours.

In Exhibit 175, the labor-hours shown in Exhibit 174 have been converted to dollar costs using the hourly wage rates. For variance analysis, a flexible budget (adjusted budget) is formulated to reflect budgeted dollar costs adjusted for the actual patient day total of 504. Notice in Exhibit 175 that even though RN costs are considered fixed, the negative cost variance of $601 is excessive because the hourly rate has been exceeded by $0.74 per hour. The nonbudgeted overtime is partially responsible for the overage. However, the NHA can evaluate the portion of overage attributable to the overtime incurred and the portion attributable to other causes. The portion attributable to other causes is $0.50 per hour (the $27.81 hourly rate under Actual Regular Costs minus the $27.31 hourly rate under Budgeted Regular Costs). This variance could be the result of market competition that may have become more intense since the budget was finalized. To hire or retain qualified RNs, the facility may have had no choice but to pay higher wages. The remaining $0.24 of the $0.74 variance in hourly rate is attributable to overtime (the $28.05 hourly rate under Actual Total Costs minus the $27.81 hourly rate under Actual Regular Costs).

In Exhibit 175, the LPN costs are better than the budgeted costs by $69, a positive cost variance. Even though there is zero variance for LPN hours (see Exhibit 174), cost savings have been realized because of a positive variance of $0.19 in the hourly ratemainly because no overtime was incurred even though it was budgeted. CNA costs appear to be problematic; these costs have a negative variance of $476, even though the variance for hourly rate is positive by $0.06. As shown in Exhibit 174, CNA hours have been exceeded by 40, which amounts to an average of 2.9 hours per day during the pay period. The administrator should investigate this variance further. What must be determined is whether managers in the nursing department had the flexibility to schedule part-time staff or whether the excess staffing was the result of a policy of assuring a full shift to the CNAs who come to work as scheduled. In spite of the influence of such factors, the fact remains that Nursing Unit B has exceeded its labor budget by $1,008 during the given pay period. To prevent ongoing budget shortfalls, the facility must build census or reduce costs.

Exhibit 174

Labor Hour Report

Pay period: October 13, 2013October 26, 2013

Department: Nursing (Unit B)

Patient days
Budget	Actual
532	504

Exhibit 175

Labor Cost Report

Pay period: October 13, 2013October 26, 2013

Department: Nursing (Unit B)

Patient days
Budget	Actual
532	504

Controlling Nonlabor Expenses

A facilitys basic approach to controlling expensessuch as food, supplies, and linensis also based on variance analysis. However, other types of monitoring and control methods are also used, and these methods are discussed in this section. The variance analysis for expenses is very similar to what was discussed earlier. Exhibit 176 presents the expense summary for the food service department. This summary contains variances for the month of October and for the year-to-date totals for 10 months of the year. Although the flexible budget is not shown, the variances are derived from a comparison of the actual expenditures against a flexible budget. As usual, the flexible budget is calculated by multiplying the budgeted PPD costs by the actual patient days. Labor costs for supervisory personnel are considered fixed costs, so a negative variance is produced when the actual patient days are below budget. Similarly, the negative variances for labor cost for operational staff may be ignored if these costs are considered fixed. Details of labor hours and labor costs for the food service department will appear very similarly to nursing labor hours and costs shown earlier. In Exhibit 176 the variance for the year-to-date raw food cost is small and can be ignored, but the variance for the month of October should be investigated. Expenditures for chemicals and small equipment are better than budget; food service supplies, however, require further investigation.

Exhibit 176 Expense SummaryFood Service Department Month of October, 2013

Accounts Payable Report

Expenses should also be monitored by looking at an accounts payable report. This report is generally produced weekly, and it lists all the accounts payablemoney owed to vendors from whom goods, supplies, and services have been purchased on creditprocessed by the facilitys bookkeeper. The report shows the date when an invoice was processed, the name of the vendor, and the amount paid. Reviewing this report each week may bring to attention anything that may appear out of place.

Inventory Management

Inventory management is an important tool for controlling expenses. Receiving and inventory control procedures similar to those for food items must be adopted for other inventoried items. As an example, a linen inventory control system is presented in Exhibit 177. Such a system serves two main purposes: (1) it ensures that the facility always has adequate linens available to serve patients, and (2) it provides a mechanism for linen cost control.

The first of these objectives is achieved by establishing adequate par levels. The second objective of linen cost control is achieved by instituting inventory control systems. In the perpetual inventory system for linens, the closing inventory at the end of a month is calculated as follows:

Exhibit 177 Linen Inventory on October 31, 2013

The system requires that the person in charge of linens maintain a record of items discarded because of thinning, fading, and tearing. Periodically, a physical inventory should be taken by counting each linen item. Because linens are constantly in circulation, the facility should develop a procedure for counting all linens throughout the facility. A suitable time for taking a physical inventory is when patient care activities have slowed down, generally in late afternoon or during the night. At a given time, the nursing staff should count all linen items in patient rooms, bathrooms, linen carts, and storage closets on nursing units. At the same time, all soiled linens should be removed to the laundry for washing. These soiled items are counted as they come out of the laundry processing area for folding and storage. Before this count, all items that were processed in the laundry and linens in the main storage room should have been counted. Following this method should produce a fairly accurate count, although there will always be some minor discrepancies. The over/(short) column in Exhibit 177 shows such discrepancies. For example, the overage of 11 bath towels and shortage of 16 hand towels may be attributed to a miscount, such as counting some hand towels as bath towels. On the other hand, a shortage of washcloths is more significant if the counting was accurate. Such variances in a given month should not cause any alarm, but shortages occurring month after month indicate pilferage or other misuse. The column to replenish is the difference between physical count and par levels, and shows the number of additional linens the facility must purchase to bring the counts up to par levels. According to Exhibit 177, the greatest need is to purchase additional blankets and washcloths. The last column in Exhibit 177 provides the total cost of bringing current inventory to par levels.

Managing Receivables

Accounts receivable are amounts due from patients and from third-party payers for services that the facility has already provided. Receivables are revenues that have yet to be collected. The income statement, discussed earlier, records all revenues regardless of whether the facility has actually received payment for the services it has performed. A facility that may be profitable on paper may experience serious financial difficulty if the booked revenues remain uncollected. Collecting receivables is critical for maintaining adequate cash flow. Therefore, managing accounts receivable is one of the critical elements of cash management, which is vitally important for the long-term survival of the facility.

Accounts receivable management has three objectives (Cleverley & Cameron, 2002):

Minimize lost charges and reimbursement

Minimize write-offs for uncollectible accounts

Minimize the accounts receivable collection cycle

Minimizing Lost Charges and Reimbursement

The term charge means a fee that is established by the nursing facility for a particular service or product. The key phrase in this definition is established by the facility. In contrast, reimbursement is the fee established by a third-party payer, such as Medicaid, Medicare, or a managed care organization.

To minimize lost charges and lost reimbursement, the nursing facility must have a census tallying system to accurately account for all patients in the facility at midnight each day. The midnight census report is prepared by the night charge nurse and forwarded to the facilitys business office, where this report is used for calculating daily revenues for all patients by their respective payer types. Such daily revenue accounting forms the basis for producing monthly bills for each payer. Without adequate controls over daily census accounting, some revenues would be lost.

Charges other than room and board include ancillaries, such as rehabilitation therapies and medical supplies. Most third-party reimbursement rates are now all inclusive. An all-inclusive rate is a bundled fee that includes, in a single rate, all services and supplies furnished to a patient. For private-pay patients, however, ancillary items are billed in addition to the basic room-and-board fee. To capture ancillary charges for private-pay patients, the facility must maintain adequate procedures to record all ancillary services and supplies used by each patient. For example, each time a supply item such as a catheter is used, a voucher should be filled out.

Minimizing Write-Offs

The accounting term for write-offs is bad debts. Bad debts represent legitimate revenues, and the facility is entitled to get paid for the services it has already provided. For various reasons, however, the facility is not able to collect all the monies it is owed. After several attempts to collect them the outstanding accounts are declared uncollectible and are called bad debts. So, a bad debt is an amount that is legitimately owed to the facility but is deemed uncollectible.

To maximize payment from third parties, the facilitys personnel must thoroughly understand the rules established by each third-party payer. The facility must maintain updated Medicare and Medicaid manuals for reference purposes, and all new personnel must be adequately trained to comply with all rules that pertain to payment. Compliance with rules and regulations and maintenance of appropriate documentation in the medical records are critical to billing and collections.

Although third-party payments constitute the largest component of accounts receivable, the facility must also institute procedures for billing and collecting accounts due from private sources. Deductibles and coinsurance are to be paid privately by the patient. Most nursing home patients have a responsible party handling the patients private financial affairs. Complete information on each patients designated responsible party, such as a spouse or relative, must be obtained at the time of admission. When the patient is admitted, the responsible party is also asked to sign a statement that he or she, as the responsible party, assumes the responsibility to pay all amounts that the patient must pay privately. At the time of admission, the facility should also furnish a copy of the facilitys credit and collection policy to the responsible party.

Timely billing and follow up are critical for collecting private monies. The facility must institute collection policy and procedures to be followed by its administrative personnel. The collection policy should outline at what point a collection call should be made, at what point a letter should be sent to demand payment, and at what point an account should be turned over to a collection agency. The policy should also outline at what point and under what circumstances the organization writes off accounts as bad debts (Nowicki, 2001). The decision to write off uncollectible amounts is made jointly by the administrator and corporate officers (for facilities affiliated with hospitals or multifacility chains) after evaluating each account that falls within the policy criteria for a bad debt. As a rule of thumb, after various collection efforts have been made and an account still remains uncollected for a year, it should be written off as a bad debt.

Minimizing the Collection Cycle

An essential tool for monitoring receivables and evaluating performance is called an aging schedule, also known as an aging report. An aging schedule provides a breakdown of each patients account by showing the length of time that various amounts within the account have been outstanding. Exhibit 178 provides an illustration of an aging schedule. Notice that this exhibit shows for each patient the amounts due from each payer type and the age of each amount due. This exhibit also provides totals for the entire facility, and it shows the percentage of the total receivables that have been outstanding in each age category.

The collection cycle for accounts receivable is measured in terms of the collection period, which is also called days revenue outstanding or days in accounts receivable. This measure indicates the number of days worth of revenue that is in accounts receivable, which also indicates the average number of days it takes to collect patient revenues. Hence, the collection period evaluates how quickly a facility is able to bill and collect its revenues. This measure should be calculated at the end of each month using year-to-date data. The calculation is as follows:

Exhibit 178 shows that the receivables constitute 63.2 days worth of patient revenues. This result is derived by plugging the year-to-date patient revenue of $5,205,696 (not shown) and the 304 days in the period from January through October into the preceding formula. The NHA and governing board should decide whether 63.2 days is an acceptable collection period or whether a shorter period ought to be the standard.

Budgeting

An operating budget specifies how revenues will be generated and what resources will be used during a specified period (Gapenski, 2002). It combines forecasts for revenues and expenses. Its format is like that of an income statement. The operating budget is generally prepared for an entire fiscal year, and the planning process for this budget often begins 3 to 4 months before the current fiscal year ends. The fiscal year is established by the governing board. The fiscal year may or may not coincide with the calendar year, but generally it does.

Exhibit 178 Aging Schedule on October 31, 2013

Projections for the next fiscal year are made on the basis of some reasonable assumptions. Throughout the budgeting process, this question must be asked: What can we reasonably expect to achieve? Answers to this question should incorporate all known variables, such as any foreseeable changes in market competition; trends in the local economy; anticipated Medicare and Medicaid reimbursement rates based on economic and political factors; local labor market conditions for nursing and other personnel; general inflation for consumer products; and results expected from implementing any new strategies, such as a refocused marketing plan or major renovations. Using such assumptions, the NHA must first forecast anticipated census volume by pay type. Next, projections are made for private-pay charges and reimbursement rates from third parties. Finally, expenses are projected.

The assumptions just mentioned are applied to some base of reference. A reasonable base to use is what the facility has accomplished in the current fiscal year so far. Current data are often compared with the previous years performance data. Using all this information, managerial judgments are made regarding reasonable projections for the next fiscal year. The budgeting process is greatly facilitated by developing budget worksheets. The worksheets include all major pieces of information on which the budget projections are based.

Budgeting Revenues

The basic equation for a facilitys revenue is R = Q P, where R is revenue, Q is quantity (patient days), and P is price (charge or reimbursement rate). A sample of a worksheet for census forecast is presented in Exhibit 179. The first two sections of this exhibit contain historical and current data for 2012 and 2013. Note that at the time the budget projections for 2014 were made, the census data for 2013 were available only for the period until and including the month of October. The assumptions made for the 2014 projections have been noted on the worksheet. A similar worksheet (not shown) is used for projecting per-diem rates, and patient revenues are calculated using the revenue formula just presented. Budgeting software programs calculate the revenues automatically as the census and per-diem rates are entered into the computer. Finally, estimates for ancillary revenue and other revenues, such as income from investments or rental fees, should be added to the budget to arrive at the total revenue figure.

Budgeting Expenses

Expenses are budgeted for each department separately and then consolidated into a single budget for the entire facility. Separate departmental budgets allow the departmental managers to give their inputs into the budgets that they would be responsible for controlling. Projecting nursing labor costs is the most challenging aspect of the expense budget. This task can be simplified if the facility already has preestablished labor hour standards for different census ranges as illustrated in Figures 172 and 174. For example, labor hours for maintenance, business office, social services, and activity departments are generally fixed. Housekeeping, laundry, and dietary department hours are also fixed for the most part. They may be adjusted if the census varies substantially. To facilitate labor-hour projections, budget worksheets should be developed to record historical data and assumptions used in forecasting.

Exhibit 179 Census Projection Worksheet for 2014 Budget

Assumptions:

1. The previous administrator resigned in November 2012. The facility was without a permanent administrator for 2 months. It is assumed that a temporary drop in census occurred in early 2013 due to this change.

2. A new marketing strategy aimed at private-pay clients was implemented in September 2013. It is assumed that private-pay census will be slightly higher in 2014.

3. The VA contract will not be renewed once the existing VA patients are discharged.

4. Contract with a new rehab company is expected to increase Medicare census.

The NHA and corporate officers should also determine budgetary allowances for overtime, training, and orientation, all of which are legitimate costs incurred in operating a facility. Overtime and orientation costs are partly a function of employee turnover and absenteeism, but these costs may also be incurred for other workload and training needs. The budget should incorporate any funds required for implementing programs that may effectively reduce turnover and absenteeism. However, when funds are committed, the budget should also anticipate future cost savings. For example, projected labor costs associated with turnover and absenteeism could be reduced in the budget for the latter part of that year.

Once labor hours have been determined, the next step is to project average hourly wages for each category of employees. The starting point for hourly rate projections is the actual hourly rates that appear in the current labor cost reports (see Exhibit 175 for an example of these rates). Projections for the next year will be based on the facilitys wage increase policies and the labor market conditions in the local area. Once projections for hours and wage rates have been made, labor cost can be determined by C = H W, where C is the labor cost, H is hours of labor, and W is average hourly wage rate. As in the case of revenue, budget software programs calculate labor costs automatically as the hours and wage rates are entered.

Finally, all other anticipated expenses should be included in the budget. Fixed costs such as telephone, postage, and insurance are generally entered as a constant amount for each month. Costs such as utilities would vary according to hot and cold months and should be spread out accordingly. Variable expenses are generally projected on the basis of cost per-patient-day (PPD). For example, if the projected cost for housekeeping chemicals for the 2014 budget is $0.58 PPD, according to the census projected in Exhibit 179, the budgeted expense would be $1,899 for January (average daily census of 105.6 31 days in the month 0.58 PPD expense) and $1,731 for February.

The administrator should also budget for any activities associated with marketing and public relations discussed in earlier chapters. In the example presented in Exhibit 179, one of the assumptions made for an increased private-pay census is the effect of a new marketing strategy. Any expenses associated with implementing this strategy should be budgeted, but an increase in census should also be anticipated.

Budgeted Margin

Once all revenues and expenses have been budgeted, the operating income (profit or loss before taxes) is calculated as

Operating margintotal profit (or loss) as a percent of total revenueindicates the organizations profit goal:

Suppose the 2014 budget projected total revenues of $6,658,000 and total expenses of $5,835,000. These projections result in an operating margin of 12.4%. The NHA and the governing board must decide whether this projection is reasonable. Suppose the expectation is 13%. The budget would then require some further tweaking, perhaps both on the revenue and expense sides. In most instances, reasonable modifications are necessary before the budget is finalized and approved by the governing board.

Terminology for Review

accounts payable

accounts receivable

accrual-basis accounting

aging schedule

all-inclusive rate

assets

average daily census

bad debt

balance sheet

budget

budgeting

cash flow statement

census

census range

charge

collection period

days of care

equity

financial accounting

fixed costs

flexible budget

income statement

liabilities

management accounting

midnight census report

net assets

operating margin

patient days

payer mix

responsible party

semifixed costs

variable costs

variance

variance analysis