what goes on behind those budget doors?

HFMA Spring Conference

May 26, 2011

Presented by Nancy Drury, CPA & Deborah Sieradzki, PhD

AgendaWhat 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 CycleEvaluate 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 StayChanging

technology

Shifting practice patterns

Shifts in site of service

Environmental scan

Scenario Analytics

Market Forces

Potential Strategies

-Payor Mix-Uninsured-Compensation-Coinsurance-Healthcare reform

-Cost Reductions-Increased Market Share-Revenue Cycle improvements

Scenario AnalyticsRapid 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 BudgetsOperating – 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

Cash flow Budget

Operating Budget

Capital Budget

Operating Budget ApproachesHistorical – 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 BudgetsStatistical – 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 BudgetStatistical

VolumeHow many patients?

What services will they need?

How long will they stay

PayorHow will services be paid

% of each patient type by category

AcuityCase Mix Index (CMI)

Average Length of Stay (ALOS)

Components of Operating BudgetRevenue

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 CharityBad 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 MethodologiesCase 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 MethodologiesPayment 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 RevenueCafeteria

Retail

Telephone

Television

Parking

Investment Income

Research RevenueDirect 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 BudgetStaffing 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 BudgetNursing 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 LoadVolume 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 BudgetDetermine 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 HoursPatient

ClassificationNumber 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 StaffDaily 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 PlanInternal 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 BudgetNon-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 CostsAbout 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 BudgetNon-salary Expenses

FixedSomewhat 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 BudgetingBased on Operating and Capital Results

In Flow: ReceiptsPatients, insurance companies, foundation, interest, investments, bonds, etc

Out Flow: Disbursements / PaymentsCapital, operating costs, accounts payable, pension funding, bond payments, etc

Budgeting Capital AlignmentScarce 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

PROJECT 1

Balance Sheet

Operating Impact

Capital & Debt

Capacity

Financial ReportingDifferent audiences require different types of reporting

Board of directors

Senior leadership

Bond insurers

Rating agencies

Key requirementsQuick generation of multiple report formats

Rapid and easy report distribution

Ability to provide reports that range from high-level to highly detailed

LOCAL / STATEWIDE CHALLENGESDMC 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 2011New governor and lieutenant governorNew attorney generalNew Secretary of stateElect all 110 members of the state House of Representatives – currently led by a Democratic majority; 34 of the 110 state Representatives are term-limitedElect all 38 members of the state - currently controlled by a Republican majority; 29 of the 38 state Senators are term-limitedElect 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 CHALLENGESFFY2011 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 InsuranceReduce 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 ProvisionsCost 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.

1. 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

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