Chapter 8 UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT, 6th ed Problem 8.1 Consider the following 2015 data for Newark General Hospital (in millions of dollars): Static Budget Flexible Budget Actual Results Revenues $4.7 $4.8 $4.5 Costs $4.1 $4.1 $4.2 Profits $0.6 $0.7 $0.3 a. Calculate and interpret the profit variance. The profit variance is defined as the realized (actual) profit minus the profit forecasted in the static budget Profit Variance ($0.30) Interpretation: In 2015, the hospital fell $300,000 short of its profit goal. Note, however, that the total variance does not distinguish between differences due to revenue assumptions and differences due to cost assumptions. b. Calculate and interpret the revenue variance. The revenue variance is defined as the realized (actual) revenues minus the revenues forecasted in the static budget: Revenue Variance ($0.2) Interpretation: Of the $300,000 profit shortfall, $200,000 was due to a revenue shortfall of $200,000. c. Calculate and interpret the cost variance. The cost variance is defined as static costs minus actual (realized) costs. Note that the definition of cost variance is opposite of that for the profit and revenue variances because we want to show "bad" variances as a negative number. Thus, we want costs that are higher than expected to be negative. Cost Variance ($0.1) Interpretation: The cost variance tells us that realized costs were $100,000 higher than expected. In other words, there was a $100,000 cost overrun. Note that the profit variance is the sum of the revenue and cost variances: ?$300,000 = ?$200,000 + (?$100,000). d. Calculate and interpret the volume and price variances on the revenue side. The volume variance is defined as Flexible Revenue minus Static Revenue. Volume Variance $0.1 The price variance is defined as Actual revenues minus flexible revenues. Price Variance ($0.3) Check: ($0.2) Volume variance + Price variance = Revenue Variance Interpretation: These variances tell us that the $200,000 shortfall in revenues was due solely to pricing. Greater-than-expected volume created $100,000 in added revenues, but this was negated by prices (reimbursements) that were $300,000 lower than expected. e. Calculate and interpret the volume and management variances on the cost side. The volume variance is defined as static costs minus flexible costs. Volume Variance $0.0 The management variance is defined as flexible costs minus actual costs. Management Variance ($0.1) Check: ($0.1) Volume variance + Management variance = Cost Variance Interpretation: These variances tell us that the cost variance ($100,000 overrun) was due entirely to managerial factors as opposed to the inability to accurately forecast volume. f. How are the variances calculated above related? The following relationships apply to the variances calculated above: Profit variance = Revenue variance + Cost variance. Revenue variance = Volume variance + Price variance. Cost variance = Volume variance + Management variance.

Chapter 8 UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT, 6th ed Problem 8.4 Static Actual FFS Revenue per visit $25.00 $28.00 PMPM Revenue $3.00 $2.75

Number of Capitated Member months 360,000 360,000 Variable cost per visit $15.00 $17.72 Labor hours 48,000 46,000 Labor rate $25.00 $27.00 Supply usage 100,000 90,000 Supply cost per unit $1.50 $1.40 Static budget (from Exhibit 8.3) Flexible Budget Actual Results Assumptions: FFS visits 36,000 34,000 34,000 Capitated visits 54,000 43,200 43,200 Total 90,000 77,200 77,200 Revenues: Flexible Budget Calculations FFS $900,000 $850,000 $952,000 Actual total volume x Static revenue per visit Capitated $1,080,000 $1,080,000 $990,000 Actual covered lives x Static PMPM revenue Total $1,980,000 $1,930,000 $1,942,000 Costs: Variable: Labor $1,200,000 $1,029,333 $1,242,000 Actual total volume x (Static labor hours/Static volume) x Static labor rate Supplies $150,000 $128,667 $126,000 Actual total volume x (Static supply usage/Static volume) x Static supply cost Total Variable $1,350,000 $1,158,000 $1,368,000 Fixed Costs $500,000 $500,000 $525,000 Total Costs $1,850,000 $1,658,000 $1,893,000 Profit $130,000 $272,000 $49,000 b. Calculate the profit variance, revenue variance, and cost variances. The profit variance is defined as the realized (actual) profit minus the profit forecasted in the static budget Profit Variance The revenue variance is defined as the realized (actual) revenues minus the revenues forecasted in the static budget: Revenue Variance The cost variance is defined as static costs minus actual (realized) costs. Note that the definition of cost variance is opposite of that for the profit and revenue variances because we want to show "bad" variances as a negative number. Thus, we want costs that are higher than expected to be negative. Cost Variance c. Calculate the volume and price variances on the revenue side. The volume variance is defined as Flexible Revenue minus Static Revenue. Volume Variance The price variance is defined as Actual revenues minus flexible revenues. Price Variance Check: $0 Volume variance + Price variance = Revenue Variance d. Calculate the volume and management variances on the cost side. The volume variance is defined as static costs minus flexible costs. Volume Variance The management variance is defined as flexible costs minus actual costs. Management Variance Check: $0.0 Volume variance + Management variance = Cost Variance e. Break down the management variance into labor, supplies, and fixed costs variances. The labor variance is defined as flexible labor costs minus actual labor costs. Labor Variance The supplies variance is defined as flexible supply costs minus actual supply costs. Supplies Variance The fixed cost variance is defined as flexible fixed costs minus actual fixed costs. Fixed Cost Variance Check: $0.0 Labor Variance + Supplies Variance + Fixed Costs Variance = Management Variance

Chapter 8 UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT, 6th ed Problem 8.6 and 8.7 Chelsea Clinic had the following forecasted (static) and actual results for the year. Static Actual Total FFS Visit Volume 90,000 100,000 visits Payer Mix: Blue Cross 40% 40% Highmark 60% 60% Reimbursement rates: Blue Cross $25 $28 per visit Highmark $20 $18 per visit Variable costs: Resource Inputs: Labor 48,000 50,000 total hours Supplies 100,000 150,000 units Resourse Input Price: Labor $25.00 $28.00 per hour Supplies $1.50 $1.50 per unit Fixed costs $500,000 $500,000 a. Prepare the static, flexible, and actual budget for Chelsea Clinic Static budget Flexible Budget Actual Results Volume Blue Cross FFS Highark FFS Total Revenues Blue Cross FFS Highmark FFS Total Costs Variable: Labor Supplies Total Variable Fixed Costs Total Costs Profit b. Calculate the profit variance, revenue variance, and cost variances. The profit variance is defined as the realized (actual) profit minus the profit forecasted in the static budget Profit Variance The revenue variance is defined as the realized (actual) revenues minus the revenues forecasted in the static budget: Revenue Variance The cost variance is defined as static costs minus actual (realized) costs. Note that the definition of cost variance is opposite of that for the profit and revenue variances because we want to show "bad" variances as a negative number. Thus, we want costs that are higher than expected to be negative. Cost Variance c. Calculate the volume and price variances on the revenue side. The volume variance is defined as Flexible Revenue minus Static Revenue. Volume Variance The price variance is defined as Actual revenues minus flexible revenues. Price Variance Check: Volume variance + Price variance = Revenue Variance d. Calculate the volume and management variances on the cost side. The volume variance is defined as static costs minus flexible costs. Volume Variance The management variance is defined as flexible costs minus actual costs. Management Variance Check: Volume variance + Management variance = Cost Variance e. Break down the management variance into labor, supplies, and fixed costs variances. The labor variance is defined as flexible labor costs minus actual labor costs. Labor Variance The supplies variance is defined as flexible supply costs minus actual supply costs. Supplies Variance The fixed cost variance is defined as flexible fixed costs minus actual fixed costs. Fixed Cost Variance Check: Labor Variance + Supplies Variance + Fixed Costs Variance = Management Variance

Chapter 8 UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT, 6th ed Problem 8.1 Consider the following 2015 data for Newark General Hospital (in millions of dollars): Revenues Costs Profits Static Budget $4.7 $ 4.1 $ 0.6 Flexible Budget $4.8 $ 4.1 $ 0.7 Actual Results $4.5 $ 4.2 $ 0.3 This exercise is presented as an e interpret variances. Take some tim completing your homework and C a. Calculate and interpret the profit variance. The profit variance is defined as the realized (actual) profit minus the profit forecasted in the static budget Profit Variance ($0.30) Interpretation: In 2015, the hospital fell $300,000 short of its profit goal. Note, however, that the total variance does not distinguish between differences due to revenue assumptions and differences due to cost assumptions. b. Calculate and interpret the revenue variance. The revenue variance is defined as the realized (actual) revenues minus the revenues forecasted in the static budget: Revenue Variance ($0.2) Interpretation: Of the $300,000 profit shortfall, $200,000 was due to a revenue shortfall of $200,000. c. Calculate and interpret the cost variance. The cost variance is defined as static costs minus actual (realized) costs. Note that the definition of cost variance is opposite of that for the profit and revenue variances because we want to show \"bad\" variances as a negative number. Thus, we want costs that are higher than expected to be negative. Cost Variance ($0.1) Interpretation: The cost variance tells us that realized costs were $100,000 higher than expected. In other words, there was a $100,000 cost overrun. Note that the profit variance is the sum of the revenue and cost variances: $300,000 = $200,000 + ($100,000). d. Calculate and interpret the volume and price variances on the revenue side. The volume variance is defined as Flexible Revenue minus Static Revenue. Volume Variance $0.1 The price variance is defined as Actual revenues minus flexible revenues. Price Variance Check: ($0.3) ($0.2) Volume variance + Price variance = Revenue Variance Interpretation: These variances tell us that the $200,000 shortfall in revenues was due solely to pricing. Greater-than-expected volume created $100,000 in added revenues, but this was negated by prices (reimbursements) that were $300,000 lower than expected. e. Calculate and interpret the volume and management variances on the cost side. The volume variance is defined as static costs minus flexible costs. Volume Variance $0.0 The management variance is defined as flexible costs minus actual costs. Management Variance Check: ($0.1) ($0.1) Volume variance + Management variance = Cost Variance Interpretation: These variances tell us that the cost variance ($100,000 overrun) was due entirely to managerial factors as opposed to the inability to accurately forecast volume. f. How are the variances calculated above related? The following relationships apply to the variances calculated above: Profit variance = Revenue variance + Cost variance. Revenue variance = Volume variance + Price variance. Cost variance = Volume variance + Management variance. MANAGEMENT, 6th ed his exercise is presented as an example of how to calculate and terpret variances. Take some time to review, it will assist you in ompleting your homework and Case 7. budget Chapter 8 UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT, 6th ed Problem 8.4 Static FFS Revenue per visit PMPM Revenue Number of Capitated Member months Variable cost per visit Labor hours Labor rate Supply usage Supply cost per unit $ $ $ $ $ 25.00 3.00 360,000 15.00 48,000 25.00 100,000 1.50 $ $ $ $ $ Actual 28.00 2.75 ### 17.72 46,000 27.00 90,000 1.40 This is the example that I walked you thro complete the variance analysis. Static budget (from Exhibit 8.3) Flexible Budget Actual Results Assumptions: FFS visits Capitated visits Total 36,000 54,000 90,000 34,000 43,200 77,200 34,000 43,200 77,200 Revenues: FFS Capitated Total $ $ $ 900,000 1,080,000 1,980,000 $ $ $ 850,000 1,080,000 1,930,000 $ $ $ 952,000 990,000 1,942,000 Variable: Labor Supplies Total Variable Fixed Costs Total Costs $ $ $ $ $ 1,200,000 150,000 1,350,000 500,000 1,850,000 $ $ $ $ 1,029,333 128,667 1,158,000 ### 1,658,000 $ $ $ $ $ 1,242,000 126,000 1,368,000 525,000 1,893,000 Profit $ 130,000 $ 272,000 $ 49,000 Flexible Budget Calculat Actual total volume x Static revenue per visit Actual covered lives x Static PMPM revenue Costs: Actual total volume x (Static labor hours/Static v Actual total volume x (Static supply usage/Static b. Calculate the profit variance, revenue variance, and cost variances. The profit variance is defined as the realized (actual) profit minus the profit forecasted in the static budget Profit Variance The revenue variance is defined as the realized (actual) revenues minus the revenues forecasted in the static budget: Revenue Variance The cost variance is defined as static costs minus actual (realized) costs. Note that the definition of cost variance is opposite of that for the profit and revenue variances because we want to show \"bad\" variances as a negative number. Thus, we want costs that are higher than expected to be negative. Cost Variance c. Calculate the volume and price variances on the revenue side. The volume variance is defined as Flexible Revenue minus Static Revenue. Volume Variance The price variance is defined as Actual revenues minus flexible revenues. Price Variance Check: $0 Volume variance + Price variance = Revenue Variance d. Calculate the volume and management variances on the cost side. The volume variance is defined as static costs minus flexible costs. Volume Variance The management variance is defined as flexible costs minus actual costs. Management Variance Check: $0.0 Volume variance + Management variance = Cost Variance e. Break down the management variance into labor, supplies, and fixed costs variances. The labor variance is defined as flexible labor costs minus actual labor costs. Labor Variance The supplies variance is defined as flexible supply costs minus actual supply costs. Supplies Variance The fixed cost variance is defined as flexible fixed costs minus actual fixed costs. Fixed Cost Variance Check: $0.0 Labor Variance + Supplies Variance + Fixed Costs Variance = Management Variance INANCIAL MANAGEMENT, 6th ed ample that I walked you through. You are to now e variance analysis. Flexible Budget Calculations volume x Static revenue per visit red lives x Static PMPM revenue volume x (Static labor hours/Static volume) x Static labor rate volume x (Static supply usage/Static volume) x Static supply cost udget: ce is opposite of that for the costs that are higher than agement Variance Chapter 8 UNDERSTANDING HEALTHCARE FINANCIAL MANAGEMENT, 6th ed Problem 8.6 and 8.7 Chelsea Clinic had the following forecasted (static) and actual results for the year. Static Total FFS Visit Volume Payer Mix: Blue Cross Highmark Reimbursement rates: Blue Cross Highmark Variable costs: Resource Inputs: Labor Supplies Resourse Input Price: Labor Supplies Fixed costs Actual 100,000 visits 90,000 40% 60% 40% 60% $25 $20 $28 per visit $18 per visit 48,000 100,000 $ $ $ 25.00 1.50 500,000 50,000 total hours 150,000 units $ 28.00 per hour ### per unit ### a. Prepare the static, flexible, and actual budget for Chelsea Clinic Static budget Flexible Budget Actual Results Volume Blue Cross FFS Highark FFS Total Revenues Blue Cross FFS Highmark FFS Total Costs Variable: Labor Supplies Total Variable Fixed Costs Total Costs Profit b. Calculate the profit variance, revenue variance, and cost variances. The profit variance is defined as the realized (actual) profit minus the profit forecasted in the static budget Profit Variance The revenue variance is defined as the realized (actual) revenues minus the revenues forecasted in the static budget: Revenue Variance The cost variance is defined as static costs minus actual (realized) costs. Note that the definition of cost variance is opposite of that for the profit and revenue variances because we want to show \"bad\" variances as a negative number. Thus, we want costs that are higher than expected to be negative. Cost Variance c. Calculate the volume and price variances on the revenue side. The volume variance is defined as Flexible Revenue minus Static Revenue. Volume Variance The price variance is defined as Actual revenues minus flexible revenues. Price Variance Check: Volume variance + Price variance = Revenue Variance d. Calculate the volume and management variances on the cost side. The volume variance is defined as static costs minus flexible costs. Volume Variance The management variance is defined as flexible costs minus actual costs. Management Variance Check: Volume variance + Management variance = Cost Variance e. Break down the management variance into labor, supplies, and fixed costs variances. The labor variance is defined as flexible labor costs minus actual labor costs. Labor Variance The supplies variance is defined as flexible supply costs minus actual supply costs. Supplies Variance The fixed cost variance is defined as flexible fixed costs minus actual fixed costs. Fixed Cost Variance Check: Labor Variance + Supplies Variance + Fixed Costs Variance = Management Variance INANCIAL MANAGEMENT, 6th ed udget: ce is opposite of that for the costs that are higher than agement Variance