Operating Budget Case Study

Background

The Major Health System is located in a major metropolitan area where there is significant competition in both the inpatient and outpatient settings.Physicians are dedicated to the health system and includes a residency program in multiple specialties.The market share of the organization has been stagnant at best in the past three years, hovering around 35%, with significant pressures by managed care payors on the ambulatory or outpatient rates.The system is looking at several projects and would like to implement at least one of these over the next fiscal year with more upcoming: trauma program, skilled nursing facility, ambulatory surgery center, community wellness center with rehab and open heart program.

The health system employs approximately 20,000 people including 1,000 employed physicians in various inpatient and outpatient specialties.The statistics are included in the below table with market growth of 1% in the overall statistics for next year:

Statistics

FY 2016

Admissions

35,453

ER Visits

243,719

Outpatient Surgeries

7,659

Cardiac Catheterizations

14,963

Patient Days

159,539

Case mix index

1.61

Financial Statements

The health system has endured some tough years financially in the past three years with reimbursement challenges and outmigration of its more profitable services to physician-owned surgery and imaging centers.Below is the balance sheet and income statement for the organization:

September 30, 2016($ in000s)

Assets

Cash and Equivalents

$54,651

Patient Accounts Receivable

124,589

Other Current Assets

79,154

Total Current Assets

258,394

Property, Plant & Equipment

225,632

Long Term Investments

120,000

Other Assets

86,686

Total Assets

690,712

Liabilities and Net Assets

Current Maturities of Long-Term Debt

18,651

Accounts Payable and Accrued Expenses

65,498

Other Current Liabilities

12,484

Total Current Liabilities

96,633

Long-term Debt

223,812

Total Liabilities

320,445

Net Assets

370,267

Total Liabilities and Net Assets

690,712

12 Months Ended 9/30/16 ($ in 000s)

Net Patient Revenue

$385,251

Other Revenue

14,781

Total Revenues

400,032

Expenses

Salaries, Wages & Benefits

225,585

Supplies

81,687

Purchased Services

51,698

Depreciation and Amortization

21,898

Interest

11,191

Total Expenses

392,059

Income from Operations

7,973

Nonoperating Gains/(Losses)

4,329

Excess Revenues over Expenses

12,302

Assumptions

Net revenue for the organization is based on the following payor mix:

Medicare49%

Managed Care31%

Medicaid12%

Self Pay8%

Supply inflation is estimated at 2% over the next year with rate increases for Medicare and Medicaid at the same.Managed care rate increases are challenging with early estimates at 3% but could go to 5% with better negotiations.Personnel cost increases for salaries and wages are estimated to increase 4% next year with more competition for labor resources.

Capital requests include $18 million of routine replacement with $30 million available in project capital for the following key projects:

Trauma Center- $25 million plus $10 million in operational expenses each year with $4 million in revenues for year 1

Skilled nursing facility- $30 million plus $5 million in operational expenses each year with $3 million in revenues for year 1

Ambulatory surgery center- $12 million plus $8 million in operational expenses and $12 million in revenues for year 1

Wellness center with rehab services- $8 million plus $3 million in operational expenses and $2 million in revenues for year 1

Open heart program- $12 million plus $5 million in operational expenses and $4 million in revenues for year 1

Assumptions

The goal is to put together a budget for both operations and capital for the following year that will improve the operations and gain market share for the organization, utilizing the resources most efficiently and setting the course for the organization's long-term objectives of improving market share by 5% over the next 3 years and improving its outcomes for its community.