Transcript WHAT GOES ON BEHIND THOSE BUDGET DOORS?

HFMA Spring Conference
May 26, 2011
Presented by
Nancy Drury, CPA & Deborah Sieradzki, PhD
Agenda
 What is a Budget? And Why we do it
 The Planning Cycle
 Budget Approaches
 Components of the Budget / Reporting
 Environmental Issues Impacting the Process
What is a Budget?
 Helps us understand where we’ve come from
and where we’re going
 The process of developing a financial plan
with objectives and resources needed to
support an operational or strategic plan
 A management tool developed and driven
by strategy, goals, and objectives.
The Planning Cycle
Evaluate impact of strategies on cost, quality,
& growth through:
 Market Share Capture
 Revenue Cycle
 Master Facility Plan
Market Analysis
Demographics
Market Share
Use Rates
Length of Stay
Changing
technology
Shifting
practice
patterns
Shifts in site of
service
Environmental
scan
Scenario Analytics
Market
Forces
-Cost Reductions
-Increased Market Share
-Revenue Cycle improvements
-Payor Mix
-Uninsured
-Compensation
-Coinsurance
-Healthcare reform
Potential
Strategies
Scenario Analytics
 Rapid market changes mean greater uncertainty
 Need to quickly evaluate diverse strategies across
multiple scenarios
 Benefits:
 Provide better information to decision makers
 Promote better, more robust strategies
Types of Budgets
 Operating – combination of revenue and expense
budgets
 Cash Flow – estimate future cash receipts and
payments tabulated to show the forecasted cash
balance
 Capital – significant purchases: land, building,
equipment; tied to product lines or services
Integrated Budgeting
Operating
Budget
Cash flow
Budget
Capital
Budget
Operating Budget Approaches
 Historical – assumes historical data is
updated with new facts and proposals.
Trends are incorporated into projections
 Zero Based – assumes all costs need to be
justified; no historical data is used.
 Flexible – allows changes during the budget
period relative to volume.
Components of Operating Budgets
 Statistical – volume / workload assumptions
 Revenue – combines volume data with
charges and reimbursement data
assumptions
 Expense – costs of providing services;
divided into labor and non-labor
components
Components of Operating Budget
Statistical
 Volume
 How many patients?
 What services will they need?
 How long will they stay
 Payor
 How will services be paid
 % of each patient type by category
 Acuity
 Case Mix Index (CMI)
 Average Length of Stay (ALOS)
Components of Operating Budget
Revenue
 Patient Service Revenue
 Gross patient service revenue (GPSR)
 Net Patient service revenue (NPSR)
 Payment Methodologies (IP and OP)
 Other Operating Revenue
 Such as Cafeteria
 Investment Income
 Research / Grant Revenue
Bad Debt and Charity
 Bad debt consists of services for which providers




anticipated but did not receive payment
Charity care consists of services for which providers do not
expect to receive payment due to patient’s inability to pay.
Charity care is generally for people who do not have other
financial resources available, such as insurance,
government programs, or regular income
Community charity discounts is given for patients with no
insurance
Currently charity care is a reduction to revenue and bad
debt is recorded as an expense.
Key Steps in Developing
Revenue Budget
 Estimate volume by service type
 Determine gross charges (volumes x sticker price)
 Translate gross revenue into net revenue using either a
top down or bottoms up approach
 Top down uses historic average collection rate (net
revenue as % of Gross). Works if payor and service mix
is relatively constant
 Bottom Up requires large modeling effort to flex net
payment rates by payor and serivce mix if volatal
Inpatient Payment Methodologies
 Case Rates (DRGs)
 Prospectively determined
 Per Diems
 Little incentive to control LOS
 Usually for rehab or psychiatric services
 Percent of Charges
 Little incentive to control utilization
 Pay for Performance
 Rewards for meeting certain performance targets
Outpatient Methodologies
 Payment Methodologies
 Fee for Service
 Percentage of charges
 APCs
 Characterized by high volume, low revenue per unit;
can be more challenging to estimate and analyze then
inpatient
Other Operating Revenue
 Cafeteria
 Retail
 Telephone
 Television
 Parking
 Investment Income
Research Revenue
 Direct Research
 Such as lab-tech salaries and cost of reagents are directly
related to the cost of research being performed
 Indirect Research
 Overhead rates paid by sponsors to reimburse facility for
indirect costs spent on research
 Typically expressed as % of payment for ecery dollar of
direct expense
Components of Operating Budget
Staffing Expenses
 Salaries
 consists with accounts used to pay employees
 Costs associated with hours worked at regular pay,
premium rates for overtime, shift differential, and
vacation time.
 Benefits
 Actual expense for benefit programs such as health
insurance, pension plans, life insurance, etc.
 Often allocated to departments/practices as percent of
salaries known as fringe benefit allocation
Importance of Staffing Budget
 Nursing salary and wages are the majority of the
nursing direct expense budget
 Staffing costs are 40-50% of hospital’s direct expense
budget
 Nurse managers spend a lot of their time with staffing
issues.
 Schedules are a major reason nurses change jobs
Patient Load
 Volume X HPPD (hours per patient day) = Required
Patient Care Hours
 Volume
 usually based on past history and adjusted for
knowledge of patient population and programs offered
 Foundation in calculating staffing needs
 Unit of service for most hospitals is patient days;
includes distribution by month, day of week, etc
 Average daily census (ADC) is calculated by dividing
total volume by 365
Staffing Budget
 Determine total number of patient days expected
 Determine staffing ratios needed for each
classification of patient
 Multiply the HPPD per classification X number of
patient days budgeted = Total number of patient care
hours needed
 Adjust for non-productive time (CTO)
Required Patient Care Hours
Patient
Classification
Number of
Patient Days
HPPD
Total Hours
1
1,500
2.5
3,750
2
3,700
4.7
17,390
3
2,400
8.0
19,200
4
900
12.2
10,980
5
500
19.0
9,500
TOTAL
9,000
60,820
How Many FTEs Will I Need?
 Total FTEs Needed =
Total Patient Care Hours
Productive Hours per FTE (a)
(a) Productive Hours per FTE =
Productive Hours / Paid Hours = Productive %
Productive % x 2080 = Productive Hrs per FTE
Budgeting Patient Service Staff
 Daily hours of care (per 8 hour or 12 hour shifts)
 Skill Mix
 Based on patient needs



ICUs usually 90-100% RN
General are units usually >60% RN
Rehab/Psych Units usually 50% RN
 Support staff for caregivers
 Secretaries / unit clerks
 Nurse managers
 Educators
Fluctuation Plan
 Internal float pools
 Floating staff between units
 On-call staff
 Overtime
 Peak demand:
 Bonuses, agencies, use of other resources
 Low demand:
 Canceling most expensive staff first, voluntary leaves,
lay-offs
Components of Operating Budget
Non-salary Expenses
 Variable
 Variable in nature; fluctuates based on volume
 Historically based
 Data from decision support / cost accounting
 Adjusted for inflation / economics
 Types:
 Supply costs per unit x volume
 Utilities per unit x volume
 Provision for bad debt as % of gross patient revenue
Supply Costs
 About 90% of supply costs are directly related to
patient care
 Typical measured used to gauged supply chain
effectiveness:
 Supplies as % of Net Operating expense
 Supplies as % of Net Revenue
 Supplies per adjusted patient day (CMI adjusted)
 Supplies per adjusted discharge (CMI adjusted)
Components of Operating Budget
Non-salary Expenses
 Fixed
 Somewhat fixed in nature; doesn’t vary with volume
 Historically based
 Data from decision support / cost accounting
 Adjusted for inflation / economics
 Types:
 Services & general purchased from vendors
 Corporate costs
 Depreciation & amortization
 interest
Budgeted Income Statement
Net Revenue (What we expect to be paid)
Less: salaries, benefits, variable, fixed costs
= Net Operating Income (Loss)
Cash Flow Budgeting
 Based on Operating and Capital Results
 In Flow: Receipts
 Patients, insurance companies, foundation, interest,
investments, bonds, etc
 Out Flow: Disbursements / Payments
 Capital, operating costs, accounts payable, pension funding,
bond payments, etc
Budgeting Capital Alignment
 Scarce capital availability makes sophisticated analysis
essential
 Requires rapid consideration of impact of capital
spending plans
 Helps to align capital planning with budgeting
 Understand critical factors:
 Capital capacity
 Debt capacity
 Credit trends
CAPITAL BUDGETING
Operating
Impact
Capital &
Debt
Capacity
Balance
Sheet
PROJECT
1
Financial Reporting
 Different audiences require different types of reporting
 Board of directors
 Senior leadership
 Bond insurers
 Rating agencies
 Key requirements
 Quick generation of multiple report formats
 Rapid and easy report distribution
 Ability to provide reports that range from high-level to
highly detailed
LOCAL / STATEWIDE CHALLENGES
 DMC Acquisition by




VANGUARD
Medicaid CHAMPS
implementation
BCBSM
Unemployment rate =
growing uninsured, bad
debt, charity market
Commercial / managed
care contracting
 State Budget
 Executive Order
 Employment Market /




Insured
New Insurance Products
Regulatory changes
Life expectancy
utilization of services
Political changes
Michigan 2011




New governor and lieutenant governor
New attorney general
New Secretary of state
Elect all 110 members of the state House of Representatives
– currently led by a Democratic majority; 34 of the 110 state
Representatives are term-limited
 Elect all 38 members of the state - currently controlled by a
Republican majority; 29 of the 38 state Senators are termlimited
 Elect 2 out of 7 justices on Michigan Supreme Court – both
seats contested are held by Republicans; Democratic win
would gain 5-2 majority; expect “reapportionment” of
congressional district borders to be challenged and decided
here.
NATIONAL CHALLENGES
 FFY2011 Medicare cuts to hospitals & post-acute services
 RAC Recoveries
 Federal Budget
 Extension of Federal Medical Assistance Percentage - 6 month extension
saving $500M in state Medicaid support
 CMS leadership change
 Looming Medicare Insolvency
 Quality indicators / measurements – proposal to add two new indicators:
elective total hip/knee; and 30 day all-cause readmission following elective
total hip/knee
 National health insurance
The New Health Care System
National Health Insurance
 Reduce federal deficits by $1.3T 2020-2029
 Extend insurance coverage to 32M Americans by 2019
 Build healthcare delivery system reform
 Goal: increase healthcare “value”
 Prerequisite: electronic health records
 Tactics: value-based purchasing; reduce preventable
readmissions; reduce hospital acquired conditions;
bundled payment; accountable care organizations
(ACO)
Key Legislative Provisions
 Cost Cutting – market basket update adjustments for
productivity will reduce reimbursement over 10 years
starting in FFY 2010; reduction to Medicare & Medicaid
DSH; reduction to Medicare Advantage; home care and
SNF cuts; revamp physician payments
 Delivery System Reforms – implements “Tactics” over 10
years that is expected to save $13.5B
 Independent Payment Advisory Board – Starting in 2015,
creates a MedPAC-like commission that has Medicare rate
setting authority. Effective for hospitals after 2019;
expected to save almost $15B over 10 years
Key Legislative Provisions (con’t)
 Tax Exempt Status – includes four new criteria providers
must satisfy to retain tax-exempt status; $50k penalty for
those who don’t.
Conduct community needs assessment every two years
2. Develop, implement and communicate a charity care policy
3. Limit charges for emergency or other medically necessary
care to eligible individuals for charity
4. Use aggressive collection efforts only after attempts to
determine eligibility for charity care have been exhausted
1.

Mandates for individuals and businesses begin in 2014
Budget Challenges from
New HealthCare System
 Further cost reductions
 Where can efficiencies be gained?
 Determine new contract negotiation strategies
since payers will have less pricing flexibility under
new law.
 What will be the cost of additional reporting
burdens?
 How to model impact of coverage extension of
uninsured to Medicaid, shifting of rates, bundled
payments, ACOs?
lubaway, masten & company, ltd.
Healthcare regulatory, financial, revenue cycle and managed care
consulting services
Nancy Drury (248) 766-1485
Debby Sieradzki (586) 292-6446
510 Highland Avenue #311
Milford, MI 48381
www.lubawaymasten.com