Case Study

You are the new Finance Manager. The Chief Financial Officer (CFO) has asked you to draft the General Medicine Division's budget for the next financial year using a blended approach of Activity Based Funding (ABF) and historical block funding. For effectively, you must engage with the Division's clinical manager sand seek their advice. This is the first time ABF has been used in the hospital.

A review of the Division's activity shows the following:

DRG	Description	ALOS	No. of pts last year	Benchmark ALOS	Expected no. of pts next year	NWAU (Inlier)
F74A	Chest Pain, Major Complexity	1	1808	1	1600	0.4142
E65B	Chronic Obstructive Airways Disease, Minor Complexity	4	761	3	750	0.6159
F73B	Syncope and Collapse, Minor Complexity	2	465	2	450	0.4403
F76B	Arrhythmia, Cardiac Arrest and Conduction Disorders, Minor Complexity	2	481	2	450	0.4713
E61B	Pulmonary Embolism, Minor Complexity	6	467	5	450	0.7313
F62B	Heart Failure and Shock, Minor Complexity	3	445	3	450	0.8099
L63A	Kidney and Urinary Tract Infections, Major Complexity	3	359	3	350	1.1555
F42B	Circulatory Dsrds, Not Adm for AMI W Invasive Cardiac Inves Proc, Minor Comp	3	303	3	300	1.1632
E62A	Respiratory Infections and Inflammations, Major Complexity	11	340	10	325	1.6382
E62B	Respiratory Infections and Inflammations, Minor Complexity	3	315	2	300	0.7332

Note: ALOS = average length of stay; NWAU = national weighted activity unit

An analysis shows the types of services and average number of services used for each DRG:

DRG	Description	No. of X-Rays	No. of Path. Tests	No. of Scripts
F74A	Chest Pain, Major Complexity	3	8	4
E65B	Chronic Obstructive Airways Disease, Minor Complexity	3	10	7
F73B	Syncope and Collapse, Minor Complexity	4	3	5
F76B	Arrhythmia, Cardiac Arrest and Conduction Disorders, Minor Complexity	1	5	5
E61B	Pulmonary Embolism, Minor Complexity	3	6	4
F62B	Heart Failure and Shock, Minor Complexity	4	4	2
L63A	Kidney and Urinary Tract Infections, Major Complexity	2	5	3
F42B	Circulatory Dsrds, Not Adm for AMI W Invasive Cardiac Inves Proc, Minor Comp	1	6	4
E62A	Respiratory Infections and Inflammations, Major Complexity	4	6	6
E62B	Respiratory Infections and Inflammations, Minor Complexity	3	3	5

An analysis shows the average cost for the daily stay and each type of service (different for each DRG):

DRG	Description	Daily Cost of Stay (ex. X-ray, Path., Scripts)	Cost of each X-ray	Cost of each Path. Test	Cost of each Script
F74A	Chest Pain, Major Complexity	$870	$220	$90	$75
E65B	Chronic Obstructive Airways Disease, Minor Complexity	$870	$150	$105	$150
F73B	Syncope and Collapse, Minor Complexity	$870	$100	$90	$80
F76B	Arrhythmia, Cardiac Arrest and Conduction Disorders, Minor Complexity	$870	$110	$90	$75
E61B	Pulmonary Embolism, Minor Complexity	$870	$150	$100	$150
F62B	Heart Failure and Shock, Minor Complexity	$870	$100	$90	$75
L63A	Kidney and Urinary Tract Infections, Major Complexity	$870	$100	$90	$95
F42B	Circulatory Dsrds, Not Adm for AMI W Invasive Cardiac Inves Proc, Minor Comp	$870	$1,400	$190	$75
E62A	Respiratory Infections and Inflammations, Major Complexity	$870	$160	$120	$85
E62B	Respiratory Infections and Inflammations, Minor Complexity	$870	$100	$85	$75

Assumptions and considerations are:

• The average costs can be applied for the next financial year's budget (i.e. do not increase for CPI).
• The daily cost of stay incorporates staffing costs.
• The National Efficient Price for the next financial year is $5,500.
• All activity is within the inlier NWAU (i.e. no need to consider any outlier adjustors).

Requirements

1. Produce an ABF budget using the:

a. expected number of patients next year

b. NWAU (inlier)

c. National Efficient Price.

2. To educate the clinical staff on how ABF works you must draft a one-page flyer on:

a. what is ABF

b. why is ABF used as a funding model

c. how the ABF budget (in Question 1) was calculated

Your flyer should be visually-engaging and simple enough for a non-finance audience to understand. You may consider using tables, graphs or infographics.

3. Produce a block-funded budget using the:

a. current ALOS

b. expected number of patients next year

c. daily cost of stay

d. total cost of each service type (i.e. expected number of patients next year, average number of services (x-ray, path, scripts), average cost of services).

What is the effect if the benchmark ALOS was used to calculate the block-funded budget? (Show your calculations).

4. The General Medicine Division's clinical managers advise you that the expected number of patients next year should be 4% higher, for the following DRGs: F74A, F76B, E61B, E62B. Calculate:

a. the change to these DRGs under the ABF budget (calculated in Question 1)

b. the effect to the overall ABF budget, as a result of the change.

5. The CFO has asked you to draft scenarios where there is a 5% and 10% reduction to the National Efficient Price. Using the expected number of patients next year, as advised by the clinical managers (i.e. with the 4% increase applied to the relevant DRGs), calculate:

a. the impact to the ABF budget for both scenarios (5% and 10% reduction to the National Efficient Price).

6. The CFO has asked that you make scenarios for the block-funded budget (calculated in Question 3) that shows a 1% to 10% (i.e. 1%, 2%, 3%... 10%) reduction in the daily cost of stay. This must be drafted using:

a. the benchmark ALOS

b. the expected number of patients next year, as advised by the clinical managers (i.e. with the 4% increase applied to the relevant DRGs)

Present the overall budget outcome for each scenario (i.e. 1% to 10% reduction in the daily cost of stay) on a single graph.

7. You have been requested by the Board to draft a paper on ABF, which includes:

a. the advantages and disadvantages of ABF

b. the risks of drafting an ABF budget

c. potential strategies to mitigate the risks of an ABF budget

d. what might be the opportunities to engage clinical managers across the hospital to participate in the ABF budget drafting process and ongoing ABF governance throughout the financial year.

8. Draft a short Reflective Thinking piece (no longer than one page) on what insights you have gained from the Major Assignment and the Financial Management and Economics in Health Care topic overall. Your reflection should consider what new skills and knowledge you may have acquired; or alternatively, what existing skills and knowledge you may have extended. It would be interesting to understand what some opportunities at your workplace might be where you can apply your skills and knowledge.

Some tools to guide you in this reflective learning exercise are listed in the Resources section below; particularly, the '4Rs of Reflective Thinking' model.

Critical Success Factors

The following points are intended to provide you with some further considerations that may be useful to strengthen your response to the Major Assignment.

List any assumptions that you make when making your budget and calculations.

Please draft one Word document that includes: a summary of calculations, flyer, report for the Board, and reflection. Attach Excel spreadsheet that contains your detailed calculations and formulas.

Show a breakdown for each DRG and the overall total in your calculations (i.e. ideally displayed in an itemized table in your spreadsheet).

Use discretion when copying and pasting findings from spreadsheet into report (i.e. word document). A graph may be a nice 'fit'; however, a long table may be too much information for the report. In the latter's instance, draft a very short 'interpretive' commentary (where appropriate) and refer to the relevant section of the spreadsheet.

For example:

The results indicate a 20% increase of the overall budget as a result of the changes to the relevant DRGs. The calculations and formulas used in relation to these findings are shown in the 'Calculations - DRGs' sheet of the accompanying spreadsheet.

Make sure to label any tables, diagrams, or graphs. Use this label carefully to ensure it focuses on what the key message is. If appropriate, highlight sections with colors, text or arrows to help convey message.

Please use references to the peer-reviewed and grey literature, as required. It is expected that references will particularly apply to Question 7. Support any statements made with citation to the appropriate literature.

Please note, the number and costs of tests, length of stay and other variables outlined above for each DRG are fictitious and are for illustrative purposes only. However, the DRG code, name and NWAU (inlier) weight are direct from the 19-20 IHPA data.