Week 3: Process of Budget Preparation

After exploration of the types of budgets and the processes for their development at your institution. How and from whom is input into the budgets acquired and used? Where does control of the budget lie? What influence do unit and midlevel managers have on the various kinds of budgets?

Guidelines for Touchpoint Reflections

A downloadable version of the guidelines, which includes further information, is available for access on the Course Resources page.

Reflection Information

EXPERIENCE

This week’s readings contained a great deal of information on financial and budgeting principles. Some of you may have had some familiarity with the concepts and maybe even experience in working with them. However, there is always something new to learn.

REFLECTION

What pre-conceived notions related to healthcare financial and budgeting principles did you hold before this week that you understand better now or for which you have a different perspective? How have these new revelations influenced your thinking related to access, availability, and quality of healthcare?

IMPLICATIONS FOR THE FUTURE

  • How has your enhanced knowing affected the way you view your proposed project?
  • What areas of additional financial or budgeting data gathering have you identified as a need for your plan?

Scholarly references to support your response are required.

Week 3: Introduction

Table of Contents

Welcome to Week 3

In the prior weeks, we’ve examined the financial healthcare environment through the broad lens of the payer systems’ impact on the Triple Aim. This week, we focus on financial and budgeting principles and the role of the nurse manager or executive related to creating and maintaining a viable financial environment within the healthcare organization. This content of this week provides the basic foundation for a more detailed application of these principles in the next few weeks.

Outcomes

2

Apply evidence based financial knowledge and skills within the context of holistic care principles and caring health environments. (PO 1, 2, 5) {AACN Essentials: II,III, V, VIII} {ANCC-NE-DOP: I,III}

Weekly Objectives

  • Recognize the principles of basic finance and budgeting in a selected healthcare institution. (CO 2) (ANCC-NE-DOP I.B.1; I.B.7)
  • Differentiate the characteristics and locus of control of various budget types in a selected healthcare system (CO 2) (ANCC-NE-DOP I.B 5; I.B.6)

5

Analyze personal gaps in knowledge, skills, and competencies in healthcare financial principles that require further development. (PO 3) {AACN Essentials: II,IV,VI,IX}{ANCC-NE-DOP: II}

Weekly Objectives

  • Reflect on areas of needed personal knowledge related to budgeting and financial principles in a nurse leader role (CO 5) (ANCC-NE-DOP II.A.6)

Week 3: Reading

  • DueSep 23 by 10pm
  • PointsNone

Required Readings

Leger, J. M., & Dunham-Taylor, J. (2018). Financial management for nurse managers: Merging the heart with the dollar (4th ed.). Burlington, MA: Jones & Bartlett.

  • Introduction
  • Chapter 5: Budgeting Principles and Terminology

Marquis, B. L., & Huston, C. J. (2017). Leadership roles and management functions in nursing: Theory and application (9th ed.). Philadelphia, PA: Wolters Kluwer Health.

  • Chapter 10: Fiscal Planning
    • Basics of Budget
    • Steps in the Budgetary Process
    • Types of Budgets
    • Budgeting Methods
  • Chapter 17: Staffing Needs and Scheduling Policies
    • The Impact of Nursing Staff Shortages on Staffing

Rundio, A. (2016). The nurse manager’s guide to budgeting and finance (2nd ed.). Indianapolis, IN: Sigma Theta Tau International.

  • Chapter 1: Budgeting for the Nurse Manager
  • Chapter 3: Budget Types

Required Article

Mensik, J. (2014). What every nurse should know about staffing. American Nurse Today, 9(2). Retrieved from https://www.americannursetoday.com/what-every-nurse-should-know-about-staffing/

Recommended Articles

Ittner, H. M. (2016). Budgeting Principles. CINAHL Nursing Guide. Retrieved from https://chamberlainuniversity.idm.oclc.org/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=nup&AN=T904204&site=eds-live&scope=site

Mennella, H. A., & Heering, H. C. (2017). Flexible Budgeting. CINAHL Nursing Guide. Retrieved from https://chamberlainuniversity.idm.oclc.org/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=nup&AN=T904210&site=eds-live&scope=site

Optional Article

25 tips for revenue cycle success: Ideas and inspiration from HFMA’s MAP Award winners. (2014). hfm (Healthcare Financial Management), 68(9), 110. Retrieved from https://chamberlainuniversity.idm.oclc.org/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=f5h&AN=100006248&site=eds-live&scope=site

Week 3: Lesson

Table of Contents

Financial Management

Introduction

Every nurse manager needs to be familiar with the basic principles of finance and budgeting related to the healthcare systems and delivery. This week, our lesson helps us move into the explicit elements of financial management. Our focus will be on differentiating among the different types of budgets, their purposes, who controls them, and the nurse executive’s role in managing them.

Hi and welcome to lecture three. Last week we looked at quality and how hospitals are reimbursed for the level of quality care they provide. Now that we understand where the majority of the money comes from when you are in healthcare, it is essential to understand the basic financing budgeting principles.

Most specifically, the budgeting process, types of budgets, and how the budgets are divided between the different cost categories. [BLANK_AUDIO] Budgeting for a healthcare organization is similar to budgeting for your personal life. You have your everyday living expenses such as mortgage, rent, utilities, food, clothes, etc.. And then you have your bigger purchases such as a car, computer, new appliances, etc.

A healthcare organization has these two categories as well. They are the expense or operational budget and the capital budget. Ability to understand the differences between these types of budgets is essential to any healthcare leader. How does a nurse leader formalize his or her budget? A budget is not just what will the expenses be or how much money is available.

It is the revenue that comes in, in comparison to the expenses. Developing a budget is a process that must include the overarching organizational goals, mission, vision, and strategic plan. Just like you plan to buy a car, the organization must have a plan that strategizes what they will be looking at doing in the coming year or years and how do they work this into the budgeting process.

The budget process includes planning were predictions are made for the next year’s volume, revenue and expenses. These predictions involve the process of forecasting. Forecasting is a process that involves looking at historical and actual data. For volume, revenue, and expenses, analyzing the data and predicting how the year’s budget will compare, based on the data.

Additionally, forecasting involves projecting estimations for growth. If you take a minute and think about the area you currently work, is there a time of year when your unit is at maximum bed capacity? For the ICU or ED, think about flu season. In the January time frame are you busier than normal?

This piece of information is important when forecasting your budget. The same applies for a surgical unit in operating room. Do you see the number of elected surgeries increased based on the time of the year? When the end of year is near, patients have already noted deductible, do you see an increase in the number of electric surgeries performed?

How about Christmas breaks? Do the tonsillectomies increase because there is no school? Again, these are important pieces of information to have when forecasting the coming budget. Historically, nurse leaders have been most involved with their expense budget, the spending that occurs. But they are held accountable for all aspects of their budget.

It is essential for the nurse leader to understand how income directly relates to the expenses of staff and volume and how these directly relate to the number of nurses. With this understanding allows sound decision making and further explains why a unit is staffed the way that it is. So Medicare, Medicaid, insurance, and self pay, enhance the criticality of balancing the revenue with the occurred expenses such as your equipment, medical supplies, and salaries.

I am sure each of you have heard on your unit, we need more staff. Or, our staffing ratios are unsafe. As a nurse leader, being able to understand the income directly relating to the volume and the number of nurses will help you explain the why. Having the skills and vocabulary to determine the available financial information, obtain that information, interpret the impact on patient care, and communicate to others within the organization will provide you with a high level overview of the budgeting process.

So now we must look at the capital budget versus the operational budget. The operating budget is the day to day cost of a nursing unit. This often include salaries, medical supplies, equipment that does not meet the capital equipment requirements, repairs and maintenance on equipment, travel and education, dues and subscriptions, just to name a few.

Conversely, the capital budget is the purchase of a long term investment that is often referred to as a capital asset. This might include the purchase of new patient beds, construction for a new unit, IV pumps, an electronic medical record, things of that nature. Each organization has their own set of guidelines surrounding capital budget and one organization may include anything that cost more than $5,000 as a capital purchase.

Where my organization says it’s anything costing $1,000 or more. So take the time this week to ask your organization what they consider a capital purchase. We will go much more in depth in the future week on both staffing and capital budget. Costs. Controlling costs is a major function for the nurse leader.

Understanding costs concepts and the differing types of costs is a key to successful management. Costs can be thought of as controllable expenses and non-controllable expenses. Controllable expenses are those that can be controlled or varied by the manager. Whereas not controllable expenses cannot, for example, if unit manager can control the number of personnel working on a certain shift and the staffing next.

He or she, however, cannot control equipment depreciation, the number and type of supplies needed by each individual patient or overtime that occurs in response to an emergency. [BLANK_AUDIO] Fixed costs versus variable costs. Fixed costs are those cost that stay the same independent of volume or activity. So rent, insurance, taxes, depreciation expense.

From the nursing perspective, fixed costs are those minimum costs that are always paid. Minimum staffing requirements, salary and benefits of the nurse leader, supply costs. Those things that do not fluctuate with volume. Variable costs, those costs that fluctuate and change and are dependent of volume and activity. So the salaries that are paid for hourly employees, medical supplies, drugs the food for the patients.

It is essential to remember that volume as a complex concept that includes the unit senses, patient activity, patient minutes or hours per day and patient visits. Variable costs occur at the same time as fixed costs, and yield a total cost. So total costs is the fixed costs plus the variable costs.

[BLANK_AUDIO] So examples of some total costs are here on this table. This table demonstrates what some of the variable and fixed cost for unit budget might be. [BLANK_AUDIO] Remember that the variable cost could change and the fixed cost stay the same regardless of whether there is an increase or decrease in patient volume.

What are some things in your current position that are examples of fixed and variable costs? What other types of scenarios can you come up with? One thing that is very real to me right now is the cost of IV fluids. With the hurricane that ultimately shutdown Puerto Rico where the majority of IV fluids are manufactured set about a shortage of IV fluids throughout the country during flu season.

Healthcare organizations across the country were scrambling to have IV fluids to care for their patients. With the laws of supply and demand, the cost of IV fluids was driven to numbers that were much higher than normal, and this truly affected expense budget. We were seeing that we were paying far more for medications or IV fluids than normal, and this was exceeding the budgeted amount, and it really had nothing to do with volume.

So what is revenue? Now that we have looked at expenses of budgeting, we need to turn to the side that allows us to even have an expense, revenue. So the simplest way to understand revenue is the amount of money that is earned by an organization and is not when services are rendered.

So first, there’s actual revenue, paid at the time of service. Think of this as when you go to the physician and you pay your copay. That is actual money that is given at the time of service. Expected revenue is the payment that an organization expects to receive after services are rendered.

So have you ever looked at your physician office bill and it open says insurance pending? This is the expected revenue. Most healthcare organizations reimbursement is an expected revenue. [BLANK_AUDIO] So net revenue equals gross revenue minus the deductions for revenue. Although revenue is often looked at in terms of gross charges, in most reimbursement situations, organizations do not get paid in full for charges.

Consider two payments at patients admitted at the same time with the same diagnosis. Patient one, spends three days in the ICU and several more days at on the medical unit of the hospital. They have pneumonia. Rooming care charges and supply charges for this patient could be well and access at $10,000.

Patient two also has pneumonia, and just spends two nights in the hospital on a medical floor and they’re charges for $2,000. So we have patient one, $10,000, patient two, $2,000. Both in for pneumonia. And for Medicare this D or G pays 11,000 that’s it. So for patient one who cost us $10,000 will have $1,000 of revenue.

For patient two, for $2,000 paid $11,000 will get $9,000 of revenue. So if we get paid the same amount for both of these patients, what would you as a clinical nurse leader look to do? You want to make sure that your staff is not wasting any supplies. You want to try and minimize expenses.

If we break everything we have discussed so far down, budgeting comes down to allocating a predetermined amount of dollars to a particular cost center. A department that generates expenses, not always, but often generates costs. So each nursing unit is often an individual cost center. But we have to remember that there are some areas within the organization that are cost centers.

But do not generate revenue, such as central sterile supply. This is a unit that supports the mission of the operating room. They clean and process the operating room supplies or instruments they use during surgery. They pay salaries for people to do this, but they do not generate any revenue by doing it.

They are a cost center that has no revenue. So what do you think the cost centers are in within your organization? I like to think about it as each unit or department is a cost center within the broader organizational budget. Which costs centers do you believe have the largest revenues or the largest budgets?

Most often those areas are the same ones that have the largest expenses. One example of this is the operating room. This is a high dollar area where supplies are expensive and reimbursements are high. The nursing process provides a model for the steps in budget planning. You should assess what you need the budget to cover.

You should diagnose what you want to accomplish in your budget. You should plan your budget. Implement your budget. And often, evaluate how you are doing with your budget. There are four types of budgeting methods. Budget is frequently classified according to how often it occurs, and the base on which the budgeting takes place.

So the four most common types are incremental budgeting, also called flat percentage, zero-based budgeting, flexible budgeting, and new performance budgeting. In healthcare organizations the CEO and the CFO generally determine the budgeting method their organization will use. Incremental budgeting is, the simplest budgeting method but not always the most efficient.

What happens in incremental budgeting is that, a set amount is determined to increase expenses by. So say that your medical supply expenses were $25,000 and your organization said the incremental budgeting percentages is gonna be 2%. You take the $25,000 and increase it by 2% and the new budget would be $25,500 for medical supplies.

[BLANK_AUDIO] Hospitals have historically used this type of budgeting. They often do the next year’s budget based on the first few months of a fiscal year, and then annualized the spend to determine what amount you’re starting with and where they think you’ll end up. The next is zero based budgeting.

In comparison, managers who use zero based budgeting must re-justify their programs or needs every budgeting cycle. This method does not automatically assume that because a program has been funded in the past that it is going to continue to be funded. Thus, this budgeting process is very labor intensive. And nurse managers, instead of looking at what has been spent previously and figuring a percentage increase, must look at each budget item individually.

For instance, if you had an IV catheter, it would looked at every year when it’s time for budgeting. Although historically, your organization would spend $3 per IV catheter, that doesn’t matter in this budgeting process. You would go out there and renegotiate and get a new price, and then determine what your budget should be.

The key components of zero based budgeting are listing of all current and proposed objectives or activities within a department. Having alternative plans for carrying out these activities, having the costs for each alternative and the advantages and disadvantages of continuing or discontinuing an activity. Flexible budgeting. Flexible budgets are budgets that flex up and down over the year depending on the volume.

A flexible budget automatically calculates what the expenses would be given the volume that is occurring. This works well in many healthcare organizations as a result of changing census and manpower needs that are difficult to predict, despite historical forecasting skills. Performance budgeting is the fourth method of budgeting. And it emphasizes the outcomes and results instead of the activities or outputs.

Thus, the manager would budget as needed to achieve specific outcomes. For example, a home health agency would set and then measure specific outcome in a group of patients such as diabetic patients, as a means of establishing and justifying the budget. Now that we have a broad overview of budgeting, the types of budget that exists, as well as the steps to formulate a budget, and the different budgeting methods.

Next week we can delve deeper into the types of budgets.

Summary

This lesson has been an overview of the various types of budgets and the nurse executive’s role in managing them. We have explored the different kinds of budgets, what they are used for and the focus of control for each. In the following weeks the two major budgets, operational and capital, will be explored in more depth

 

 
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