Case $13\mathrm{.}4$: Westside Hospital

Key concept: Preparing a departmental budget when given volume estimates

T he Westside Hospital radiology department is preparing a budget for the following year. A major budget category is hand, foot, and forearm imaging. Currentyear admissions for these imaging categories totaled $2,000,$ which breaks down

as follows:

Procedure Time Required Volume Proportion Rate

Hand imaging $10$ minutes $60\%$ $$100$

Foot imaging $20$ minutes $30\%$ $$300$

Forearm imaging $30$ minutes $10\%$ $$400$

The radiology department head thinks there will be a $10$ percent increase in volume for next year. This additional volume is expected to have the same procedure mix as

the current year. Rates are not expected to change.

The controller projects the payer analysis to be $50$ percent Medicare $($reimbursement rate $=70$ percent of charges$),20$ percent Medicaid $($reimbursement rate $=60$

percent of charges$),20$ percent managed care $($reimbursement $=70$ percent of charges$),$

and $10$ percent self$-$pay $($full charges, but $20$ percent of self$-$pay results in charity care$).$

These three procedures account for $20$ percent of the radiology department$$s current $$1,225,000$ labor, imaging materials, and overhead expenses, which can be broken

down in the following manner:

Labor $$425,000$

Imaging materials $$300,000$

Overhead $$500,000$

Total $$1,225,000$

The department$$s labor expenses are expected to increase $5$ percent next year due

to an anticipated across$-$the$-$board pay raise. Imaging materials expenses are expected to

increase $6$ percent, primarily due to increases in precious metals costs. The department$$s

overhead expenses are forecasted to remain constant for the next year.

In addition to their individual cost increases, all three expenses are expected to

increase by $10$ percent due to the overall volume increase. $.$ Prepare a budget for the next year by completing the following steps:

a$.$ Calculate the current volume for each imaging procedure by multiplying the

total volume of $2,000$ by the proportion for each procedure.

b$.$ Increase the current volumes by $10$ percent to get the projected volume for

each procedure.

c$.$ Multiply the projected volume for each procedure by the rates to get gross

projected revenues.

d$.$ Use the reimbursement rates to convert gross projected revenue to net projected revenue e$.$ Divide current expenses in each category by current volume in that category

to calculate current expense per procedure.

f$.$ Forecast expenses per procedure using individual expense increase information.

g$.$ Multiply the forecasted per$-$procedure expenses by the projected volume to

get total expenses for the procedure.

h$.$ Prepare a summary income statement for overall revenues and expenses $2.$ Assume time required per procedure is an appropriate RVU proxy, and calculate

cost per RVU. Then use cost per RVU to calculate cost per procedure, compare

this number to rate per procedure, and then comment on areas of the budget that

might be of most concern to management. Assume that the Westside Hospital has hired your team as financial consultants. Your task is to prepare a budget for the next year by completing the steps, identified in the case, and to present your findings and recommendations to the hospital board of directors.

This case contains budgeting and profit planning. power point presentation of this