Budgeting, Productivity, and Costing Out Nursing



Budgeting, Productivity, and Costing Out Nursing


Mary Ellen Murray



imagehttp://evolve.elsevier.com/Huber/leadership/


National Health Expenditures (NHEs) are a measure of spending for health care in the United States. In 1998, NHE exceeded $1 trillion for the first time. By 2020, NHE are projected to increase to $4.6 trillion (Keehan et al., 2011). Considered from another perspective, this amount of money in 1998 represented 13.1% of the gross domestic product (GDP), the value of all the goods and services produced in the United States in 1 year. By 2020, NHE is projected to represent 19.8% of the GDP. By 2014, when major coverage expansions from the Affordable Care Act begin, national spending growth is expected to reach 8.4%.


The magnitude of these expenditure increases emphasizes the need for nurses, as members of the largest health care profession, to understand the implications of these data for clinical practice. Understanding budgeting, productivity, and costing out nursing and relating that knowledge to the management of professional nursing is a leadership skill that will serve the nursing profession in an era of accelerating health care expenditures.



BACKGROUND


All nurses will be involved in budgeting for nursing services in different ways and to different degrees. Staff nurses in particular often report, “I just want to take care of patients—don’t bother me with money matters.” Some nurse administrators have said, “Show me your budget and I will tell you your values.” Nurses at all levels need to understand that “finance is not a dirty word” (Sorbello, 2008). Given that health care resources are limited, nurses do compete for these resources and need to understand financial management. In many organizations, staff nurses are expected to be aware of their unit’s financial performance and the impact their decisions may have on it. Staff nurses’ involvement is essential to the ability to contain costs at the unit level because they make many decisions about supply and resource use.


Budgeting is a major aspect of an organization’s or unit’s planning processes. A budget is a plan that is specified in dollar amounts. This plan becomes a guiding framework for organizational activities. It conveys management’s intentions and financial expectations regarding revenues and expenditures. An organization-level budget compares expected revenues with expected expenses to forecast profit (margin) or loss (deficit). Budgeting is a cyclical process of planning, implementing, and evaluating.


Budgets are designed to be planning documents. However, one often hears the statement, “We don’t have the budget for that,” or, “The budget won’t allow it.” It is crucial for managers to understand that the budget is a tool, created by humans. To be useful, it must be flexible and have processes in place to modify it when necessary. Individuals and organizations should not become so constrained by the approved budget that they hesitate to take appropriate actions or make appropriate decisions that vary from or were unanticipated in the budget process.



DEFINITIONS


A budget is defined as a written financial plan aimed at controlling the allocation of resources. It functions as both a planning instrument and an evaluation tool useful for financial management. A budget is used to manage programs, plan for goal accomplishment, and control costs. Expenses are defined as the costs or prices of activities undertaken in the organization’s operations. Revenue is defined as income or amounts owed for purchased services or goods. Total operating expenses are the result of summing the costs of all resources used to produce services. Total operating revenues are the result of multiplying the volume of services provided by the charges (rate) for the services. Income (or profit) is the excess of revenues over expenses, or revenues minus expenses. A variance is the difference between the budgeted and the actual amounts. A variance may be favorable or unfavorable relative to the budget amount.


There are three main types of organizational budgets, as follows:




THE BUDGET PROCESS


Each institution will establish standard budgetary formats and processes. Because employees of a cost center will have to implement the budget decision, it is imperative that they have input into the process. This is often done in staff meetings where the manager uses the opportunity to teach about the process, present financial and volume data, and solicit staff input.


The annual budgeting cycle process is complex and requires the completion of several related documents. It may be compared to income tax preparation where an individual gathers all the necessary data and receipts, completes all of the required forms, and submits them to the Internal Revenue Service. Like tax preparation, the budget process may require multiple revisions.


A typical budget process follows the priorities identified in the organization’s strategic plan. This ensures that resources are aligned with key organizational initiatives. The budget process consists of the following three time periods:



1. Preparation: As a beginning point, the manager reviews the organization’s strategic plan and the last year’s budget for the cost center. The strategic plan will aid in writing a budget justification for any capital requests as well as linking to organizational priorities. The prior year’s budget for the cost center will help the manager to identify volume projections and changes in the past year and potential changes in the coming year. In the hospital, patient days are the usual volume measurement. If the manager of a surgical unit knows that two general surgeons are being recruited to the organization, it is reasonable to project an increase in patient days. By reviewing the previous year’s data, an informed projection can be made about the increase that can be anticipated. Similarly, the manager may be aware of factors that will decrease the volume of patient days, such as a new hospital being built in the suburbs. In ambulatory care, the volume unit of measurement is clinic visits. If a new nurse practitioner is being hired, how would that impact the volume of visits projected?


2. Completing the forms: The manager will be given budget documents to use in preparing the cost center budget. These are usually spreadsheets sent electronically. They include embedded formulas that compute the summary statistics, thereby reducing human error. Firm due dates are assigned for the completion of this first draft of the budget. The finance department then “rolls up” the unit budget into the organizational budget.


3. Revise and resubmit: As budget documents go through review by senior management, requests tend to exceed the available resources. This necessitates review, adjustment, and appeal. This is when the competition for available resources enters the process. Managers may be asked to reduce their unit budget by a dollar percentage, leaving the question “where to cut” as the manager’s decision. At other times, a manager may be directed to reduce the personnel budget by a number of full time equivalents (FTEs). This is the point at which the nurse manager must skillfully advocate for patient care, ensuring safety and quality. The nurse manager’s knowledge of clinical care processes may be in conflict with directives of a financial administrator who lacks clinical expertise. This is the time when nurses must be prepared to “speak finance” in order to effectively respond to budget challenges. There may be multiple iterations of rebudgeting before the final budget is approved.



Capital Budget Development


Capital budget preparation is usually the first step in the annual budget cycle. The organization will define a capital expense in terms of a dollar amount and the anticipated life span of the purchase. For example, capital expenditures may be “items costing over $10,000 and having a life span of 5 years.” Items of this magnitude are not placed in the operating budget.


The specific process used to create a capital budget will vary from organization to organization, but most organizations require extensive background material to support capital budget requests. The background or supporting material required will probably include the vendor quotes for costs of purchase, installation, staff education or training, and a justification or explanation of the reasons that the capital expenditure is needed. The justification must relate the expenditure to the organization’s strategic goals or objective. For capital construction projects, architectural plans, regulatory considerations, and other supporting materials may also be required as part of the capital budget preparation process.


After each unit submits the capital expenditure list to the finance department, a compiled list is generated and typically prioritized by senior management. This is a period of intense negotiation. Given that there is rarely enough money to meet all of the requests, difficult decisions must be made.



Operating Budget Development


The operating budget covers a specific period, called a fiscal year. The fiscal year may begin July 1, may correspond to the calendar year beginning January 1, or may follow the federal government year that starts on October 1. Either way, it is the budget plan for day-to-day service delivery operations. It has at least has two parts: (1) the personnel budget, and (2) the expense budget for costs other than personnel. It includes historical or trend data, expenses, and revenues. Most nursing units in hospitals do not have a revenue budget but do use volume-based projections such as patient days.


The specific process used to develop operating budgets will vary considerably from one organization to another. The nurse manager’s and/or nurse executive’s role in developing operating budgets for nursing units and services will typically include input on or determination of volume projections, development of associated expense projections (including supplies, equipment, and salary/labor expenses), and some form of revenue projection. Many organizations develop and disseminate a set of budget assumptions that are to be used by managers and leaders in developing the operating budget. These assumptions may include such items as pre-established increases in labor or salary expenses based on contractual obligations, adjustments that must be made based on economic forecasts for supply charge changes (e.g., increased utility rates, increased cost of pharmaceuticals) or factors that will affect patient volume, such as the addition of a new service line.


The foundation of the development of the operating budget at the unit level is based on the projected volume of work for the coming year. The workload aspect often is measured in units of service. Key units of service need to be identified, the number of units predicted, and expenses and staffing calculated accordingly. Activity reports, such as historical census and average length of stay, identify trends related to volume of activity. The unit of service often needs to be adjusted to the case or patient mix, which is a proxy for severity of illness or need (Finkler et al., 2007).


Table 22-1 shows a sample volume budget flow sheet. Historical trend data are needed (e.g., occupancy percentages by time frames such as weekly or monthly) to determine growth projections and any impact of seasonality. The volume of services delivered for a year may be expressed as patient days, visits, procedures, or other units of service. Effects on volume are environmental effects such as reimbursement changes, new programs, process improvements, new technology, and marketing. If volume projections depend on another service or department, it is important for the two departments to communicate closely so that similar assumptions are used in establishing volume projections.



Once the volume projection has been completed, the manager can determine the personnel services (or staffing budget) portion of the expense budget. Calculation of staffing is complex and, given that staffing expenses generally are the largest portion of the nursing operating budget, nurse managers and nurse executives must have a consistent and well-defined approach to estimating staffing expenses. The methodology used will likely vary from organization to organization. Dunham-Taylor and Pinczuk (2006) described the following method that may be used to estimate staffing expenses.


First, the average daily census and occupancy (or utilization) rate are calculated using volume projections that have been developed. Next, the number of full-time equivalents (FTEs)—that is, the mix of full-time and part-time staff—needed to provide care for the expected volume is determined based on the unit’s staffing plan. The staffing plan should include any needed adjustments for non-patient care, sometimes called “nonproductive” hours (vacation, staff education, or sick leave) based on benefit levels. The staffing plan should also specify the skill mix of direct care staff (registered nurse [RN], licensed practical nurse/licensed vocational nurse [LPN/LVN], nursing assistant [NA]) and the nursing hours per patient day (NHPPD) appropriate for the patient population on the unit. Costs for administrative and other fixed staff members, such as unit clerks, need to be included. Other labor costs, such as overtime, shift or other differentials and premiums, and fringe benefit costs, must also be factored into the personnel budget.


Table 22-2 displays a sample budget expense sheet for salaries, and Table 22-3 demonstrates how personnel budgets might be displayed. Salary increases might also be included as another column.



Tags:
Aug 7, 2016 | Posted by in NURSING | Comments Off on Budgeting, Productivity, and Costing Out Nursing

Full access? Get Clinical Tree
Get Clinical Tree app for offline access