Question

discuss the following four budgets in healthcare, and when would it be appropriate to use them?

operating budget
cash budget
capital budget
grant/contract budget

Answer 1

Operating Budget

Healthcare organizations use various types of budgets to monitor the financial status of their organization, such as operating, program, product line, cash, or capital. A budget is a plan, roadmap, or a tool used by managers to ensure that quality and cost-effective services are provided to patients. In particular, nurse managers use budgets to monitor personnel and supply costs. It is important that nurse managers are familiar with the different types of budgets, specifically the operating budget, because it is the nurse manager who is closest to the patient and knows exactly what is needed to provide care and services.

The operating budget is a plan to monitor anticipated day-to-day activities, resources, personnel, and supplies, typically over a one-year period. Each nursing unit is considered a cost center and has an operating budget. It is important to note that nursing services are included in the overall charges of room and board and nursing costs are not considered revenue producing. The major components of the operating budget include revenues and expenses:

Revenue is based on charges and is the money the organization will receive for a patient visit, procedure, or inpatient hospitalization from Medicare, Medicaid, managed care, private insurers, and self-pay patients. Of course not all charges are paid in the full amount, depending if the charges were discounted or if the payer is Medicaid or Medicare. For a nursing unit, the revenues will be projected from patient days, average daily census, or procedures.

Expenses include the cost of staff, activities, supplies, and so forth in running the nursing unit. There are two main categories found in an operating budget: employment costs and non-salary expenses. Employment costs include salaries and wages, including overtime, shift differentials, holidays, orientation, education, in-service, and benefits. Salaries and wages consist of productive and non-productive time. Productive time is the actual hours that the employee works (includes overtime hours) and is based on 2080 hours (1 full time equivalent). Productive time is the actual time worked minus vacation, orientation, and education hours during the year. Included in the category of salaries and wages are the following subcategories that you may find in a typical operating budget:

• Contract labor: This includes the amount of money spent on individuals who are not considered employees of the facility, i.e. agency nurses. It is important that the nurse manager ensures that a charge nurse, scheduler, or payroll clerk maintains specific documentation in order to keep track of contract hours. This is because the money spent on contract labor is usually not posted in the month that the contract nurse worked due to billing cycles of the outside agency and facility.
• Orientation/education: Any orientation, in-service, and educational time that an employee uses is expected to be included by the nurse manager when preparing the budget.
• Benefits: Common benefits include vacation, holidays, and sick time. Vacation and holidays are earned and are considered an actual earned benefit. Vacation time can be controlled and should be approved and monitored by the manager. Many organizations have policies and procedures addressing vacation time. For example, no more than two staff members in a unit can take vacation at the same time, or no vacation can be taken during a holiday week. Holidays are also paid in the pay period that the holiday occurs. In addition, this category includes employment taxes, health insurance premiums (the portion the organization pays), and retirement contributions, if applicable.

The other main category found in the operating budget is non-salary expenses, which includes the following supplies and interdepartmental expenses:

• Medical supplies: Any items staff members use to care for patients, including IV tubing, catheter trays, bandages, and thermometer covers. Many of these supplies are bundled in the patient charges. Each nursing unit has an inventory of medical supplies that is stocked and restocked daily by central supply personnel.
• Office supplies: Products such as forms, paper clips, pencils, pens, and folders. If these supplies are not controlled, they can be costly, which is why most units have par levels for them.
• Equipment lease/rental: Equipment that is either leased or rented is included in this line item, such as specialty beds, IV pumps, or respirators.
• Repair and maintenance: Items that need repair and maintenance are included in this line item. For example, the repair of a telemetry unit or an IV pump might be required. Typically repairs under $500 are included, while anything between $500-$1,000 is a capital request allocated from another budget. Maintenance expenses are usually charged internally from various hospital departments on such things as preventive maintenance on telemetry units or computers.
• Travel: Trips for educational purposes attended by staff. A form usually has to be completed by the person traveling and many facilities set a limited amount of dollars for travel.

The third expense category in the operating budget includes the expenses incurred by another department and charged to your nursing unit budget. Such interdepartmental charges may include:

• Pharmacy: The pharmacy may stock your unit with stock medications (i.e. IVs and syringes). Once these items are used for a patient and charged, the pharmacy department will restock the items used.
• Central supply: Central supply may stock your unit with supplies such as glucometer strips, irrigation solution, IV kits, etc. Similar to the process that the pharmacy department uses, once the supply is used for a patient and charged, central supply will restock the items used.

As nurse managers, you are challenged to be cost-effective and aware of your unit finances. Use this basic description of an operating budget to get an understanding of its major components.

Cash budgeting

Cash budgeting is generally considered to be an important part of resource management in all businesses. However, respondents to a survey of not-for-profit health care entities revealed that some 40 percent of the participants do not currently prepare cash budgets. Where budgeting occurred, the cash forecasts covered various time frames, and distribution of the document was inconsistent. Most budgets presented cash receipts and disbursements according to operating, investing, and financing activities--a format consistent with the year-end cash flow statement. By routinely preparing monthly cash budgets, the not-for-profit health care entity can project cash inflow/outflow or position with anticipated cash insufficiencies and surpluses. The budget should be compared each month to actual results to evaluate performance. The magnitude and timing of cash flows is much too critical to be left to chance.

Capital Budget in Healthcare

Decision making is one important factor to long term success for healthcare providers, large and small, but is not the only aspect that hospitals and clinics need to take into account. Healthcare organizations who seek longevity, as well as heightened patient outcomes in the present, have to take financial planning into account. Healthcare organizations who brace for what lies ahead are better prepared for changes as they come. With healthcare markets changing day-to-day, it is not always easy to determine where funds are best spent, and how capital budgets should be balanced. However, those who are ready for the many possibilities of what the future may hold for the healthcare industry, can better strategically plan their financial future.

Financial security is made possible by those who plan where funds should be spent, while looking for areas where costs can be improved upon. There is typically a great deal of money wasted by healthcare providers who are not continuously looking for areas to increase efficiency. While some funds must be spent religiously on entities that are a must, other times substitute devices, contract analysis, vendor leverage and negotiations, and dozens of other metrics need to be looked at carefully. In these areas, money is often either being spent unnecessarily or there is a lack of input from some sectors that may be overlooked.

Contract Budget

The managed care system is a provider–purchaser model, in which the hospitals sell their output at a predetermined price to public sector purchasers. The purpose of contract-based budgeting (CBB) is to control the flow of resources in this system so that what is budgeted as revenue in the hospitals is budgeted as an expense in the municipalities. This study explores the process of how budgetary bias prevails in municipal and hospital district budgets despite the introduction of CBB. The data, which consists of budgetary documents and interviews, is informed by the framework by Burns and Scapens (Management Accounting Research, 11(1), pp. 3–25, 2000). The results obtained indicate that the changes in budgeting practices were not revolutionary, but incorporated the prevailing institutionalised practices into new ones. It also appears that the municipal frame budgets, conservative revenue estimation and the strict requirements for budgetary balance have a great potential to resist demands of change originating from outside.