Additional Learning Exercises and Applications
DISPLAY 10.2 Fiscal Terminology
Accountable care organizations (ACOs)—groups of providers and suppliers of service who work together to better coordinate care for Medicare patients (does not include Medicare Advantage) across care settings
Acuity index—weighted statistical measurement that refers to severity of illness of patients for a given time. Patients are classified according to acuity of illness, usually in one of four categories. The acuity index is determined by taking a total of acuities and then dividing by the number of patients.
Affordable Care Act—officially known as the Patient Protection and Affordable Care Act, this act passed in March 2010 to assure that all Americans have access to affordable health insurance by reducing the barriers to obtaining health coverage as well as accessing needed health-care services.
Assets—financial resources that a health-care organization receives, such as accounts receivable Baseline data—historical information on dollars spent, acuity level, patient census, resources needed,
hours of care, and so forth. This information is used as basis on which future needs can be projected.
Break-even point—point at which revenue covers costs. Most health-care facilities have high fixed costs.
Because per-unit fixed costs in a noncapitated model decrease with volume, health-care facilities under this model need to maintain a high volume to decrease unit costs.
Bundled payment—a payment structure in which different health-care providers who are treating a patient for the same or related conditions are paid an overall sum for taking care of that condition rather than being paid for each individual treatment, test, or procedure. In doing so, providers are rewarded for coordinating care, preventing complications and errors, and reducing unnecessary or duplicative tests and treatments (Healthcare.gov, n.d.).
Capitation—a prospective payment system (PPS) that pays health plans or providers a fixed amount per enrollee per month for a defined set of health services, regardless of how many (if any) services are used
Case mix—type of patients served by an institution. A hospital’s case mix is usually defined in such patient-related variables as acuity levels, diagnosis, personal characteristics, and patterns of treatment.
Cash flow—rate at which dollars are received and dispersed
Controllable costs—costs that can be controlled or that vary. An example would be the number of personnel employed, the level of skill required, wage levels, and quality of materials.
Cost–benefit ratio—numerical relationship between the value of an activity or procedure in terms of benefits and the value of the activity’s or procedure’s cost. The cost–benefit ratio is expressed as a fraction.
Cost center—smallest functional unit for which cost control and accountability can be assigned. A nursing unit is usually considered a cost center, but there may be other cost centers within a unit (orthopedics is a cost center, but often the cast room is considered a separate cost center within orthopedics).
Diagnosis-related groups (DRGs)—rate-setting PPS used by Medicare to determine payment rates for an inpatient hospital stay based on admission diagnosis. Each DRG represents a particular case type for which Medicare provides a flat dollar amount of reimbursement. This set rate may, in actuality, be higher or lower than the cost of treating the patient in a particular hospital.
Direct costs—costs that can be attributed to a specific source, such as medications and treatments; costs that are clearly identifiable with goods or service
Fee-for-service (FFS) system—a reimbursement system under which insurance companies reimburse health-care providers after the needed services are delivered.
Fixed budget—style of budgeting that is based on a fixed, annual level of volume, such as number of patient-days or tests performed, to arrive at an annual budget total. These totals are then divided by 12 to arrive at the monthly average. The fixed budget does not make provisions for monthly or seasonal variations.
Fixed costs—costs that do not vary according to volume. Examples of fixed costs are mortgage or loan payments.
For-profit organization—organization in which the providers of funds have an ownership interest in the organization. These providers own stocks in the for-profit organization and earn dividends based on what is left when the cost of goods and of carrying on the business is subtracted from the amount of money taken in.
Full costs—total of all direct and indirect costs
Full-time equivalent (FTE)—number of hours of work for which a full-time employee is scheduled for a weekly period. For example, 1.0 FTE = five 8-hour days of staffing, which equals 40 hours of staffing per week. One FTE can be divided in different ways. For example, two part-time employees, each working 20 hours per week, would equal 1 FTE. If a position requires coverage for more than 5 days or 40 hours per week, the FTE will be greater than 1.0 for that position. Assume a position requires 7-day coverage, or 56 hours, then the position requires 1.4 FTE coverage (56/40 = 1.4). This means that more than one person is needed to fill the FTE positions for a 7-day period.
Health maintenance organization (HMO)—historically, a prepaid organization that provided health care
to voluntarily enrolled members in return for a preset amount of money on a per-person, per-month basis; often referred to as a managed care organization (MCO)
Hours per patient-day (HPPD)—hours of nursing care provided per patient per day by various levels of nursing personnel. HPPD are determined by dividing total production hours by the number of patients.
International Classification of Disease (ICD) codes—coding used to report the severity and treatment of patient diseases, illnesses, and injuries to determine appropriate reimbursement; currently in its 10th revision (ICD-10)
Indirect costs—costs that cannot be directly attributed to a specific area. These are hidden costs and are usually spread among different departments. Housekeeping services are considered indirect costs.
Managed care—term used to describe a variety of health-care plans designed to contain the cost of health- care services delivered to members while maintaining the quality of care
Medicaid—federally assisted and state-administered program to pay for medical services on behalf of certain groups of low-income individuals. Generally, these individuals are not covered by Social Security. Certain groups of people (e.g., older adults, blind, disabled, members of families with dependent children, and certain other children and pregnant women) also qualify for coverage if their incomes and resources are sufficiently low.
Medicare—nationwide health insurance program authorized under Title 18 of the Social Security Act that provides benefits to people aged 65 years or older. Medicare coverage also is available to certain groups of people with catastrophic or chronic illness, such as patients with renal failure requiring hemodialysis, regardless of age.
Noncontrollable costs—indirect expenses that cannot usually be controlled or varied. Examples might be rent, lighting, and depreciation of equipment.
Not-for-profit organization—this type of organization is financed by funds that come from several sources, but the providers of these funds do not have an ownership interest. Profits generated in the not- for-profit organization are frequently funneled back into the organization for expansion or capital acquisition.
Operating expenses—daily costs required to maintain a hospital or health-care institution
Patient classification system—method of classifying patients. Different criteria are used for different systems. In nursing, patients are usually classified according to acuity of illness.
Pay for performance (also known as P4P) programs—Incentives are paid to providers to achieve a targeted threshold of clinical performance, typically a process or outcome measure associated with a specified patient population (Keckley, Coughlin, & Gupta, 2011).
Pay for value programs—Typically, these incentive payments are specific to a provider setting (i.e., hospital inpatient or outpatient, physician, home health, skilled nursing facility, and dialysis) and linked to both quality and efficiency improvements (Keckley et al., 2011).
Preferred provider organization (PPO)—health-care financing and delivery program with a group of providers, such as physicians and hospitals, who contract to give services on an FFS basis. This provides financial incentives to consumers to use a select group of preferred providers and pay less for services. Insurance companies usually promise the PPO a certain volume of patients and prompt payment in exchange for fee discounts.
Production hours—total amount of regular time, overtime, and temporary time. This also may be referred to as actual hours.
Prospective payment system—a hospital payment system with predetermined reimbursement ratio for services given
Revenue—source of income or the reward for providing a service to a patient
Staffing mix—ratio of registered nurses (RNs), licensed vocational nurses (LVNs)/licensed practical nurses (LPNs), and unlicensed workers (e.g., a shift on one unit might have 40% RNs, 40% LPNs/LVNs, and 20% others). Hospitals vary on their staffing mix policies.
Third-party payment system—a system of health-care financing in which providers deliver services to patients, and a third party, or intermediary, usually an insurance company or a government agency, pays the bill
Turnover ratio—rate at which employees leave their jobs for reasons other than death or retirement. The
rate is calculated by dividing the number of employees leaving by the number of workers employed in the unit during the year and then by multiplying by 100.
Value-Based Purchasing (VBP)—a payment methodology that rewards quality of care through payment incentives and transparency. In VBP, value can be broadly considered to be a function of quality, efficiency, safety, and cost (Keckley et al., 2011).
Variable costs—costs that vary with the volume. Payroll costs are an example.
Workload units—In nursing, workloads are usually the same as patient-days. For some areas, however, workload units might refer to the number of procedures, tests, patient visits, injections, and so forth.
Steps in the Budgetary Process
The nursing process provides a model for the steps in budget planning:
1. The first step is to assess what needs to be covered in the budget. Generally, this determination should reflect input from all levels of the organizational hierarchy because budgeting is most effective when all personnel using the resources are involved in the process. A composite of unit needs in terms of labor, equipment, and operating expenses can then be compiled to determine the organizational budget.
2. The second step is diagnosis. In the case of budget planning, the diagnosis would be the goal or what needs to be accomplished, which is to create a cost-effective budget that maximizes the use of available resources.
3. The third step is to develop a plan. The budget plan may be developed in many ways. A budgeting cycle that is set for 12 months is called a fiscal-year budget. This fiscal year, which may or may not coincide with the calendar year, is then usually broken down into quarters or subdivided into monthly or semiannual periods. Most budgets are developed for a 1-year period, but a perpetual budget may be done on a continual basis each month so that 12 months of future budget data are always available.
Selecting the optimal time frame for budgeting is also important. Errors are more likely if the budget is projected too far in advance. If the budget is shortsighted, compensating for sunexpected major expenses or purchasing capital equipment may be difficult.
4. The fourth step is implementation. In this step, ongoing monitoring and analysis occur to avoid inadequate or excess funds at the end of the fiscal year. In most health-care institutions, monthly statements outline each department’s projected budget and deviations from that budget. Some managers artificially inflate their department budgets as a cushion against budget cuts from a higher level of administration. If several departments partake in this unsound practice, the entire institutional budget may be ineffective. If a major change in the budget is indicated, the entire budgeting process must be repeated. Top-level managers must watch for and correct unrealistic budget projections before they are implemented.
5. The last step is evaluation. The budget must be reviewed periodically and modified as needed throughout the fiscal year. Each unit manager is accountable for budget deviations in his or her unit.
Most units can expect some change from the anticipated budget, but large deviations must be examined for possible causes and remedial action taken if necessary.
A budget that is predicted too far in advance has greater probability for error.
LEARNING EXERCISE
10.1
Would You Accept This Gift?
O
ne of the oncologists on your unit (Dr. Sam Jones) has offered to give you his old photocopier because his office is purchasing a new one. As a condition of acceptance, he requires that all the oncologists and radiologists be allowed to use the copier free of charge.A S S I G N M E N T:
1. Justify acceptance or rejection of the gift. What influenced your choice?
2. What are the fixed and variable costs?
3. What are the controllable and noncontrollable costs?
4. What factors determine whether the use of Dr. Jones gift is cost-effective?
5. How much control will you, as a unit manager, have over the use of the copier?
Types of Budgets
Three major types of budgets that the nurse-manager may be directly involved in with fiscal planning are personnel, operating, and capital budgets.
The Personnel Budget
The largest of the budget expenditures is the workforce or personnel budget because health care is labor intensive. To handle fluctuating patient census and acuity, managers need to use historical data about unit census fluctuations in forecasting short- and long-term personnel needs. Likewise, a manager must monitor the personnel budget closely to prevent understaffing or overstaffing. As patient-days or volume decreases, managers must decrease personnel costs in relation to the decrease in volume.
The largest of the budget expenditures is the workforce or personnel budget because health care is labor intensive.
In addition to numbers of staff, the manager must be cognizant of the staffing mix. Staffing mix refers to the mix (percentages) of licensed (registered nurse [RN] and licensed vocational nurse [LVN]) and unlicensed assistive personnel (certified nursing assistant [CNA]/nursing assistive personnel [NAP]) working at a given time. The manager must also be aware of the patient acuity so that the most economical level of nursing care that will meet patient needs can be provided.
Although Unit V discusses staffing, it is necessary to briefly discuss here how staffing needs are expressed in the personnel budget. Most staffing is based on a predetermined standard. This standard may be addressed in hours per patient-day (HPPD) (medical units), visits per month (home health agencies), or minutes per case (the operating room). Because the patient census, number of visits, or cases per day never remains constant, the manager must be ready to alter staffing when volume increases or decreases. Sometimes, the population and type of cases change so that the established standard is no longer appropriate. For example, an operating room that begins to perform open-heart surgery would involve more nursing time per case; therefore, the standard (number of nursing minutes per case) would need to be adjusted. Normally, the standard is adjusted upward or downward once a year, but staffing is adjusted daily depending on the volume.
The standard formula for calculating nursing care hours (NCH) per patient-day (PPD) is shown in Figure 10.1.
A unit manager in an acute care facility might use this formula to calculate daily staffing needs. For example, assume that your budgeted NCH are 6 NCH/PPD. You are calculating the NCH/PPD for today, January 31; at midnight, it will be February 1. The patient census at midnight is 25 patients. In checking staffing, you find the following information:
Ideally, you would use 12 midnight to compute the NCH/PPD for January 31, but most staffing calculations based on traditional 8-hour shifts are made beginning at 11 PM and ending at 11 PM the following night.
Therefore, in this case, it would be acceptable to figure the NCH/PPD for January 31 by using numerical data from the 11 PM to 7 AM shift last night and the 7 AM to 3 PM and 3 PM to 11 PM shifts today. The first step in this calculation requires a computation of total NCH worked in 24 hours (including the ward clerk’s hours).
This can be calculated by multiplying the total number of staff on duty each shift by the hours each worked in their shift. Each shift total then is added together to get the total number of nursing hours worked in all three shifts or 24 hours: The nursing hours worked in 24 hours are 136 hours.
The second step in solving NCH/PPD requires that you divide the nursing hours worked in 24 hours by the patient census. The patient census in this case is 25. Therefore, 136/25 = 5.44.
The NCH/PPD for January 31 was 5.44, which is less than your budgeted NCH/PPD of 6.0. It would be possible to add up to 14 additional hours of nursing care in the next 24 hours and still maintain the budgeted NCH standard. However, the unit manager must remember that the standard is flexible and that patient acuity and staffing mix may suggest the need for even more staff for February 1 than the budgeted NCH/PPD.
The personnel budget includes actual worked time (also called productive time or salary expense) and time that the organization pays the employee for not working (nonproductive or benefit time). Nonproductive time includes the cost of benefits, new employee orientation, employee turnover, sick and holiday time, and education time. For example, the average 8.5-hour shift includes a 30-minute lunch break and two 15-minute breaks. Thus, this employee would work 7.5 productive hours and have 1.0 hours of nonproductive time.
LEARNING EXERCISE
10.2
Calculating NCH/PPD
C
alculate the NCH/PPD if the midnight census is 25, but use the following as the number of hours worked:The Operating Budget
The operating budget is the second area of expenditure that involves all managers. The operating budget reflects expenses that change in response to the volume of service, such as the cost of electricity, repairs and maintenance, and supplies. Although personnel costs lead the hospital budget, the cost of supplies runs a close second.
Next to personnel costs, supplies are the second most significant component in the hospital budget.
Effective unit managers should be alert to the types and quantities of supplies used in their unit. They should also understand the relationship between supply use and patient mix, occupancy rate, technology
requirements, and types of procedures performed on the unit. Saving unused supplies from packs or trays, reducing obsolete and slow-moving inventory, eliminating pilferage, and monitoring the uncontrolled usage of supplies and giveaways all represent potential cost savings. Other ways to cut supply costs might be in rental versus facility-owned equipment, stocking products on consignment, and just-in-time stockless inventory. Just-in-time ordering is a process whereby inventory is delivered to the organization by suppliers only when it is needed and immediately before it is to be used.
The Capital Budget
The third type of budget used by managers is the capital budget. Capital budgets plan for the purchase of buildings or major equipment, which include equipment that has a long life (usually greater than 5 to 7 years), is not used in daily operations, and is more expensive than operating supplies. Capital budgets are composed of long-term planning, or a major acquisitions component, and a short-term budgeting component. The long- term major acquisitions component outlines future replacement and organizational expansion that will exceed 1 year. Examples of these types of capital expenditures might include the acquisition of a positron emission tomography imager or the renovation of a major wing in a hospital. The short-term component of the capital budget includes equipment purchases within the annual budget cycle, such as call-light systems, hospital beds, and medication carts.
Often, the designation of capital equipment requires that the value of the equipment exceed a certain dollar amount. That dollar amount will vary from institution to institution, but $1,000 to $5,000 is common.
Managers are usually required to complete specific capital equipment request forms either annually or semiannually and to justify their request.