Exercise 151: Budgeting

Select an organization: either from the Case Studies inChapters 2728or from one of the Mini-Case Studies inChapters 2931.

Required

• 1.Using the organization selected, create a budget for the next fiscal year. Set out the details of all assumptions you needed in order to build this budget.
• 2.Use the Checklist for Building a Budget (Exhibit 152) and critique your own budget.

Assignment Exercise 152: Budgeting

Find an existing budget from a published source. Detail should be extensive enough to present a challenge.

Required

• 1.Using the existing budget, create a new budget for the next fiscal year. Set out the details of all the assumptions you needed in order to build this budget.
• 2.Use the Checklist for Building a Budget (Exhibit 152) and critique your own effort.
• 3.Use the Checklist for Reviewing a Budget (Exhibit 153) and critique the existing budget.

Assignment Exercise 153: Transactions Outside the Operating Budget

ReviewFigure 152and the accompanying text.

Metropolis Health System (MHS) has received a wellness grant from the charitable arm of an area electronics company. The grant will run for 24 months, beginning at the first of the next fiscal year. Two therapists and two registered nurses will each be spending half of their time working on the wellness grant. All four individuals are full-time employees of MHS. The electronics company has only recently begun to operate the charitable organization that awarded the grant. While they have gained all the legal approvals necessary, they have not yet provided the manuals and instructions for grant transactions that MHS usually receives when grants are awarded. Consequently, guidance about separate accounting is not yet forthcoming from the grantor.

Required

How would you handle this issue on the MHS operating budget for next year?

Exhibit 152Checklist for Building a Budget

• 1.What is the proposed volume for the new budget period?
• 2.What is the appropriate inflow (revenues) and outflow (cost of services delivered) relationship?
• 3.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.
• 4.Will additional resources be available?
• 5.Will this budget accomplish the appropriate managerial objectives for the organization?

Exhibit 153Checklist for Reviewing a Budget

• 1.Is this budget static (not adjusted for volume) or flexible (adjusted for volume during the year)?
• 2.Are the figures designated as fixed or variable?
• 3.Is the budget for a defined unit of authority?
• 4.Are the line items within the budget all expenses (and revenues, if applicable) that are controllable by the manager?
• 5.Is the format of the budget comparable with that of previous periods so that several reports over time can be compared if so desired?
• 6.Are actual and budget for the same period?
• 7.Are the figures annualized?
• 8.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.

Assignment Exercise 154: Identified Versus Allocated Costs in Budgeting

ReviewFigure 153and the accompanying text.

Metropolis Health System is preparing for a significant upgrade in both hardware and software for its information systems. As part of the project, the Chief of Information Operations (CIO) has indicated that the Information Systems (IS) department can change the format of the MHS operating budgets and related reports before the operating budget is constructed for the coming fiscal year. The Chief Financial Officer (CFO) has long wanted to modify what costs are identified and what costs are allocated (along with the method of allocation). This is a golden opportunity to do so. To gain ammunition for the change, the CFO is preparing to conduct a survey. The survey will obtain a variety of suggestions for potential changes in allocation methods for the new operating budget report formats. You have been selected as one of the employees who will be surveyed.

Required

You may choose your role for this assignment, as follows:

Refer to the MHS Executive-Level Organization Chart (Figure 282in the MHS Case Study). (1) Either (a) choose any type of patient service that would be under thedirection of the Senior Vice President of Service Delivery Operations or (b) choose any other function shown on the organization chart. (Your function could be a whole department or a division or unit of that department. For example, you might choose Community Outreach or Human Resources Operations or the Emergency department, etc.) (2) Make up your own organization chart for other employee levels within the function you have chosen. (3) Now make up another chart that indicates the operating budget costs you think would be mostly identifiable for the department or unit or division you have chosen and what other operating budget costs you think would be mostly allocated to it. (You may useFigure 153as a rough guide, but do not let it limit your imagination. Model the detail on your identifiable versus allocated costs chart after a real department if you so choose.) Use MHS hospital statistics shown inExhibit 288of the MHS Case Study as a basis for allocation if these statistics are helpful. If they are not, make a note of what other statistics you would like to have.

Note: As an alternative approach, you may choose a function from the Nursing Practice and Administration Organization Chart as shown inFigure 281of the MHS Case Study instead of choosing from the Executive-Level Organization Chart.

CHAPTER 27Case Study: Strategic Financial Planning in Long-Term Care Neil R. Dworkin, PhDBACKGROUND

John Maxwell, CEO of Seabury Nursing Center, a not-for-profit long-term care organization located in suburban Connecticut, had just emerged from a board of directors meeting. He was contemplating the instructions he had received from the boards executive committee to assess the financial feasibility of adding a home care program to the Centers array of services.

Seaburys current services consist of two levels of inpatient care, chronic care, and subacute units, and a senior citizens apartment complex financed in part by the Federal Department of Housing and Urban Development. In keeping with its mission, Seabury has a reputation of providing personalized, high-quality, and compassionate care across all levels of its continuum.

The CEO and his executive team agreed to meet the following week to plan the next steps.

FRAMEWORK OF THE BOARDS MANDATE

At its last retreat, the board made clear that, reimbursement and payment systems notwithstanding, Seabury must establish realistic and achievable financial plans that are consistent with their strategic plans. Accordingly, three points relative to integrating strategic planning and financial planning should hold sway:

• 1.Both are the primary responsibility of the board
• 2.Strategic planning should precede financial planning
• 3.The board should play an active role in the financial planning process

Ultimately, every important investment decision involves three general principles:

• 1.Does it make sense financially?
• 2.Does it make sense operationally?
• 3.Does it make sense politically?

The boards interest in a possible home initiative was guided by these stipulations, particularly as they relate to Seaburys growth rate in assets and profitability objectives. As a result of the financial downturn, the organization is experiencing declining inpatient volumes, a deteriorating payer mix, and a higher cost of capital, all of which have the potential to weaken its liquidity position.

Taking the strategic service line path to a home care program would be less capital intensive and should appeal broadly to the significant baby boomer population residing in its service area, whose preference would undoubtedly be to be treated in their homes.

INDUSTRY PROFILE

When John Maxwell convened his executive team the following week, he had already decided to present an overview of the home health industry as gleaned by Seaburys Planning Department. He prefaced his comments by drawing on recent research by the federal Agency for Healthcare Research and Quality that detailed why home health care in the 21st century is different from that which has existed in the past. He cited four reasons:

• 1.Were living longer and more of us want to age in place with dignity.
• 2.We have more chronic, complex conditions.
• 3.Were leaving the hospital earlier and thus need more intensive care.
• 4.Sophisticated medical technology has moved into our homes. Devices that were used only in medical offices are now in our living rooms and bedrooms. For example, home caregivers regularly manage dialysis treatments, infuse strong medications via central lines, and use computer-based equipment to monitor the health of loved ones.¹

The CEO presented a profile of national home care data as compiled by the National Association for Home Care and Hospice as follows:

• Approximately 12 million people in the United States require some form of home health care.
• More than 33,000 home healthcare providers exist today.
• Almost two-thirds (63.8%) of home healthcare recipients are women.
• More than two-thirds (69.1%) of home healthcare recipients are over age 65.
• Conditions requiring home health care most frequently include diabetes, heart failure, chronic ulcer of the skin, osteoarthritis, and hypertension.
• Medicare is the largest single payer of home care services. In 2009, Medicare spending was approximately 41% of the total home healthcare and hospice expenditure.²

According to the U.S. Census Bureau, he continued, in 2010 Connecticuts population was 3,574,097 of which 14.4% were age 65 or older.³A Visiting Nurse Association (VNA) analysis of revenue by payer source in the state indicated that 60% of revenue was derived from Medicare.⁴

FEASIBILITY DETERMINATION

The CEO went on to explain that the feasibility determination would be based on initially setting the home care programs capacity at 50 clients because that was the minimumrequired for Certificate-of-Need (CON) approval in Connecticut. He distributed a model developed by healthcare finance expert William O. Cleverly (Figure 271), which presents thelogicbehind the integration of strategic and financial planning.

In essence, he said, financial planning is influenced by the definition of programs and services in consort with the mission and goals. The next step entails financial feasibility of the proposed homecare program. Among the components that should be considered in determining financial feasibility are the following:

• The configuration and cost of staff
• The prevailing Medicare and Medicaid reimbursement ratesFigure 271Integration of Strategic and Financial Planning.Reproduced from W.O. Cleverley,Essentials of Health Care Finance, 7th ed. (Sudbury, MA: Jones & Bartlett), 289.
• A projection of visit frequency by provider category based on the most prevalent clinical conditions
• The physical location of the program and its attendant costs (e.g., rent, new construction)
• A projection of cash flows

Direct care staff associated with the home care program includes:

• Medical Social Worker (MSW)
• Physical Therapist (PT)
• Home Health Aide (HHA)
• Registered Nurse (RN)
• Registered Dietitian (RD)

Maxwell indicated that it would be useful to create a scenario depicting a home health visit abstract incorporating prevailing Medicare and Medicaid reimbursement rates for a 70-year-old male with heart failure and no comorbidities in order to gain traction and project potential cash flow. As previously noted, heart failure is a condition frequently requiring home healthcare services. Productivity in the home is typically based on the average number of visits per day by provider category. The visit scenario is depicted inTable 271.

Table 271A Home Health Visit Scenario

Services

Visit Frequency

Payer

Rate

Rate 4.2*

Medicare Cost

Medicaid Cost

Nursing (RN)

2x/month, every other week

Mc

$166.83

$700.69

$700.69

Medical Social Worker (MSW)

Visits wkly for 4 wks

MA

$119.51

$501.94

$501.94

Physical Therapist (PT)

3x wkly for 2 wks

Mc

$103.22

$433.52

$433.52

Home Health Aide (HHA)

Visits 4hrs MWF wkly for 60 days

Mc

$25.00

$1,260.00

$1,260.00

Registered Dietitian (RD)

3x wkly for 1 wk

MA

$103.16

$309.48

Mc = Medicare

MA = Medicaid

^*4.2 = The states formula for the #wks/per month

Total monthly Medicaid budget = $826.95

Total monthly Medicare budget = $2,394.21

Figure 272Seabury Nursing Centers Home Healthcare-Related Organization Chart.

Once the board decides to move ahead with the home care program and it is approved by the state, implementation and ongoing operations becomes a management control issue (see the Cleverly model inFigure 271). The CEO refers to a proposed table of organization as illustrated inFigure 272.

Given the paucity of other home care programs in its service area, Maxwell knows that Seabury is likely to be accorded a green light.

As he and his team reflect on this, the looming question will be where will the clients come from? He knows that likely referral sources will include Seaburys subacute inpatient population and residents from its senior citizens apartment complex who are

aging in place. Other likely sources will be recently discharged patients from the regions two community hospitals, both bereft of home care programs. A premium will be placed on effective case management, and direct marketing to the community will also be necessary.

NOTES

1.

U.S. Department of Health and Human Services, Human Factors Challenges in Home Health Care,Research Activities, no. 376 (December 2011).

2.

National Association for Home Care and Hospice,Basic Statistics about Home Care(Updated 2010).

3.

Department of Commerce, U.S. Census Bureau,2010 Demographic Profile.

4.

Visiting Nurse Association,VNA Healthcare Annual Report(Hartford, CT: Hartford Healthcare, 2012).