Norfolk State University Establishing Forecast Content Items Discussion

Norfolk State University Establishing Forecast Content Items Discussion

Norfolk State University Establishing Forecast Content Items Discussion.

Establishing Forecast Content Item

Description

Assignment

• Review and study Chapter 14 in the textbook (Nowicki, 2018).
• Review and study the PowerPoints posted in Blackboard.   
• Use critical thinking and metacognition when you read the Mini-Case Study (Nowicki, 2018, p. 321):
  • Suppose you are the new Chief Executive Officer (CEO) at Memorial Hospital.  Memorial is a nonprofit hospital with 300 beds and is located in a busy metropolitan area directly adjacent to a large university. Memorial is the only hospital within a 20-mile radius of campus, but construction on a new, competing hospital has just started within 5 miles.  
    • Identify three forecast content items.  How will they be measured?
    • What is the expected status of the content items in the future?
    • Which forecasting techniques should you use? 

Forecast • forecasting techniques – – – – – – – task forces delphi techniques delbecq techniques questionnaires permanent panels essay writing computer-facilitated group processes steps

Name Individual Assignment 4 (30 Points) – Rubric Description Health Financial Management, HSM 331-90 Module 6 Rubric Detail Levels of Achievement Somewhat Acceptable Criteria Not Acceptable Acceptable Highly Acceptable Quality 0 Points Work is not clearly connected to the required elements in the assignment.

Thesis statement is not clear, logical and sets up the focus of the paper. The Research questions are not clearly stated and capture the full scope of the research effort. 6 Points Work is somewhat connected to some of the required elements in the assignment. Thesis statement is somewhat clear, logical and sets up the focus of the paper.

The Research questions are somewhat clearly stated and capture the full scope of the research effort. 8 Points Work is connected to all the required elements in the assignment. Thesis statement is clear, logical and sets up the focus of the paper. The Research questions are clearly stated and capture the full scope of the research effort.

Critical Thinking 0 Points Work did not successfully include coherence, clarity, and critical thinking skills. Metacognition is not clearly connected to the required elements. 0 Points Work contained numerous grammatical, spelling, and punctuation errors. 0 Points Work did not include references or in-text citations, according to APA format.

References are not peer-reviewed, and they are greater than 10 years old. 6 Points Work included some coherence, clarity, and critical thinking skills. Metacognition is somewhat connected to the required elements. 8 Points Work included coherence, clarity, and critical thinking skills. Metacognition is connected to the required elements.

10 Points Work is exceptional and the ideology was clearly connected to all the required elements in the assignment. The elements of the Thesis Statement are clear, logical, and sets up the focus of the paper. The Research questions are clearly stated and capture the full scope of the research effort.

10 Points Work exceeded expectations including coherence, clarity, and critical thinking skills. Metacognition is connected to the required elements. 3 Points Work contained some grammatical, spelling, and punctuation errors. 4 Points Work is largely free of grammatical, spelling, and punctuation errors.

5 Points Work is free of grammatical, spelling, and punctuation errors. 3 Points Work somewhat included references or in-text citations, according to APA format and/or references are not peer-reviewed, and they are greater than 10 years old. 4 Points Work included references or in-text citations according to APA format.

References are peerreviewed and are less than 10 years old. 5 Points Work reflects stellar research efforts. Work shows in-text citations, according to APA format. References are peerreviewed, they are less than 10 years old, and met the requirements. Grammar and Spelling References Used to Support Rationale Health Financial Management, HSM 331-90 Individual Assignment 4 (30 Points) Module 6 Assignment • Review and study Chapter 14 in the textbook (Nowicki, 2018).

• Review and study the PowerPoints posted in Blackboard. • Use critical thinking and metacognition when you read the Mini-Case Study (Nowicki, 2018, p. 321): o Suppose you are the new Chief Executive Officer (CEO) at Memorial Hospital. Memorial is a nonprofit hospital with 300 beds and is located in a busy metropolitan area directly adjacent to a large university.

Memorial is the only hospital within a 20-mile radius of campus, but construction on a new, competing hospital has just started within 5 miles. ▪ Identify three forecast content items. How will they be measured? ▪ What is the expected status of the content items in the future? ▪ Which forecasting techniques should you use? • Write a 2-3-page paper in APA (2020) format, create a thesis statement relative to health financial management, and answer the research questions listed above in the Mini-Case Study.

Include a cover page, a reference page, three peer-reviewed references, and use the textbook. The paper should follow the SESC format of state, explain, support, and conclude, see the Sample Paper. • Review the Rubric to maximize points. Chapter 13 Strategic and Operational Planning HSM 331-90, Health Financial Management Norfolk State University Dr.

Batrina Martin, PhD, MSM, MPA, MSW(c), QMHP A/C Strategic and Operational Planning Learning Objectives • • • • • • Define and understand the importance of planning. Identify the prerequisites to the planning process. Explain the types of planning. Compare and contrast strategic and operational planning.

List, in order, and explain each step in the planning process. Discuss the methods used to evaluate the planning process. Textbook Nowicki, M. (2018). Introduction to the financial management of healthcare organizations (7th ed.). Chicago, IL: Health Administration Press. Copyright © 2018 Foundation of the American College of Healthcare Executives.

Not for sale. Introduction • Strategic planning is critical for economic survival in today’s turbulent environment. • It is often neglected by healthcare managers. • Existence of a strategic plan, delegation of plan responsibilities to the CEO, and board member involvement in the development of the strategic plan had a statistically significant effect on higher financial performance.

Definition of Planning • Planning is the process of deciding in advance what must be done in the future. • Establishes – – – – – – Goals Objectives Policies Procedures Methods Rules Definition of Planning • Planning precedes, and serves as the framework for, the other management functions of organizing, staffing, influencing, and controlling.

. Prerequisites to Planning • • • • Sound organizational structure Well-defined chart of accounts Prompt and accurate accounting system Comprehensive management information system Types of Planning • Planning horizon – Strategic vs. Operational • Management approach – Top-down vs. Bottom-up • Design characteristics – – – – Incremental vs.

Zero-base Comprehensive vs. Limited-in-scope Fixed vs. Flexible Discrete vs. Continuous Corporate Planning • Planning based on market needs • Four major stages – – – – Strategic planning Operational planning Budgeting Capital budgeting Corporate Planning Corporate Planning Process Exhibit 13.

1 Stage & Planning Horizon Strategic Planning: 3-10 yrs out, revised annually 1. Validate mission & strategic interpretations 2. Assess the external environment 3. Assess the internal environment 4. Formulate the vision 5. Establish strategic thrusts, or goals 6. Identify critical success factors 7.

Develop primary, or core objective 8. Develop the strategic financial plan Operational Planning: 1 year out 9. Develop secondary, or department, objectives 10. Develop policies 11. Develop procedures 12. Develop methods 13. Develop rules Budgeting: 1 year out 14. Project volumes 15. Convert volumes into revenues 16.

Convert volumes into expenses requirements, 17. Adjust revenues and expenses as necessary. Capital Budgeting: 1-3 years out 18. Identify and prioritize requests 19. Project cash flows 20. Perform cash flows 21. Identify nonfinancial benefits 22. Evaluate benefits and make decisions Strategic Planning • Joint Commission and Medicare required • Strategic planning forces managers to: – Anticipate where they want the healthcare organization to be in 3-10 years – Identify the resources that will be necessary to get there – Preview the provision of healthcare services at the end of the planning horizon The Planning Process 1.

Validate Mission and Strategic Interpretations • Common characteristics of effective mission statements (from a study of over 200 Fortune 500 companies) – Target customers and markets Indicate the principle services delivered by the organization Specify the geographic area in which the organization intends to operate Identify the organizations philosophy Confirm the organizations self-image Express the organizations desired public image The Planning Process 2.

Assess the External Environment – – Determine direction of industry as a whole. Determine direction of local market and investigate the following elements: • • Demographic and socioeconomic characteristics of the primary and secondary service areas and their effect on present and future utilization patters Key economic and employment indicators, and their effect on present and future utilization patterns The Planning Process (continued) • Patient migration patterns to determine from where potential patients come from • Market share statistics for key competitors to determine market strengths and weakness • Competitor profiles • Managed care profile to determine present and future managed care penetration • Physician profile The Planning Process 3.

Assess the Internal Environment – – Assessment should include a determination of the direction of the organization by investigating organizational trends. SWOT analysis The Planning Process Some of the organizational trends for analysis might include: • Patient composition, including utilization patterns (i.

e., patient days, outpatient visits, admissions, discharges, lengths of stay, age, payer, patient origin) • Medical staff composition, including use patterns by specialty, age, practice (solo versus group), admissions, lengths of stay, and board certification • Agreements with payers and managed care organizations • Financial assistance policy readily available to the public • Financial ratios, including liquidity, profitability, activity, capital structure, and operating ratios (see chapter 3) • Joint Commission quality measures and safety indicators The Planning Process 4.

Formulate the Vision – Based on assessment of external and internal environments The Planning Process Effective vision statements have following characteristics in common: • • • • • • • Be inspiring first of all to employees, but also to customers Be clear, challenging, and about excellence Make sense to the community, be flexible, and stand the test of time Be stable, but change when necessary Provide direction in a chaotic environment Prepare for the future while honoring the past Be easily translated into action The Planning Process 5.

Establish Strategic Thrusts – Broad statements of significant results that the organization wants to achieve related to the vision The Planning Process 6. Identify Critical Success Factors – – Critical success factors measure progress toward achieving the plan. Assessment of the environment should introduce strategic thrusts and critical success factors.

The Planning Process Critical success factors from the following areas should be included: • • • • • • • Inpatient use and market share Outpatient use and market share Managed care use and market share Medical staff profiles and activity levels Accessibility indicators Cost-effective indicators Quality indicators The Planning Process 7.

Develop Primary, or Core, Objectives – – Support the strategic thrusts or goals See exhibit 13.2 example of not-for-profit nursing home strategic plan The Planning Process 8. Develop the Strategic Financial Plan – – Link between the strategic plan and operational plan Will tell management if organization can make progress towards achieving its strategic plan Value of Strategic Planning • Value lies in its systematic approach to dealing with an uncertain future.

• Effective strategic planning has the following benefits: – Integrates mission, vision, strategic thrusts, and primary objectives with the secondary objectives, policies, procedures, and rules of the operating plan. – Provides a process and time frame for making strategic decisions. – Provides framework for the operating plan, budget, and capital budget.

Operational Planning • Operational planning—the process of translating the strategic plan into a year’s objectives • Three characteristics distinguish strategic planning from operational planning: – Planning horizon – Principle participants – Objectives Operational Planning 9.

Develop Secondary, or Department, Objectives – – Support organization’s strategic plan Management by objectives (MBO) Operational Planning 10. Develop Policies – Broad guides to thinking that help subordinates with decision making The Planning Process Good policies have the following characteristics: • They are issued by top management and provide managers with general guidelines for decision making.

• They are flexible, so managers can apply them to normal and abnormal circumstances • They are stated simply and clearly. Policies should not require complex interpretation. • They should be communicated so that both managers and subordinates are aware of policies. Most policies are written, which helps ensure consistent understanding.

• They should be consistent with one another. The Planning Process 11. Develop Procedures – – Guides to action Identify a step-by-step way of accomplishing the policy The Planning Process 12. Develop Methods – Detailed, uniform actions with specific instructions and predictable outcomes The Planning Process 13.

Develop Rules – Statements that either require or forbid an action or inaction Evaluating Plan Performance • Governing body of an organization should review strategic plan on annual basis and evaluate CEO based on progress towards accomplishing primary objectives. • Executive management should review operational plan, probably on a monthly or quarterly basis.

Evaluating Plan Performance • The relevant standard requires leaders to “establish priorities for performance improvement.” • Leaders set priorities for performance improvement activities and patient health outcomes. • Leaders give priority to high-volume, high-risk, or problemprone processes for performance improvement activities.

• Leaders reprioritize performance improvement activities in response to changes in the internal or external environment. Key Points • Planning is the process of deciding in advance what must be done in the future. • Planning can be classified several ways: by planning horizon, by management approach, and by design characteristics.

• Corporate planning has replaced facility planning for most healthcare organizations. • Corporate planning consists of four major stages: strategic planning, operational planning, budgeting, and capital budgeting. Key Points • Strategic planning looks three to ten years into the future and consists of several sequential steps: validating the mission and strategic interpretations; assessing the external environment; assessing the internal environment; formulating the vision; establishing strategic thrusts, or goals; identifying critical success factors; developing primary, or core, objectives; and developing a strategic financial plan.

• The value of strategic planning lies in its systematic approach toward dealing with an uncertain future. Key Points • Operations planning is the process of translating the strategic plan into the next year’s objectives and consists of several sequential steps: developing secondary, or department, objectives; developing policies; developing procedures; developing methods; and developing rules.

• The governing body of the healthcare organization is responsible for evaluating the progress of the strategic plan; the executive management of the healthcare organization is responsible for evaluating the progress of the operating plan. Chapter 15 Capital Budgeting HSM 331-90, Health Financial Management Norfolk State University Dr.

Batrina Martin, PhD, MSM, MPA, MSW(c), QMHP A/C Capital Budgeting Learning objectives • Define and understand the importance of capital budgeting. • Explain the types of capital budgets. • List in order and explain each step in the capital budgeting stage of the corporate planning. • Describe the methods used to finance capital expenditures.

• Discuss the methods used to evaluate the capital budgeting process. Textbook Nowicki, M. (2018). Introduction to the financial management of healthcare organizations (7th ed.). Chicago, IL: Health Administration Press. Copyright © 2018 Foundation of the American College of Healthcare Executives.

Not for sale. Introduction • Capital costs are generally defined as purchases of land, buildings, and equipment. • Capital costs make up a relatively small percentage of an organization’s total costs—roughly 6–10% in hospitals. Introduction • National Health Planning and Resource Development Act & Social Security Amendments of 1974 – Certificate of need • Tax Reform Act of 1986 • Omnibus Budget Reconciliation Act of 1990 • Balanced Budget Act of 1997 Introduction These acts slowed capital growth markedly, causing one investment banker to comment: “Starting in 1988 [1990] the typical hospital should be viewed as a more risky venture, and will pay higher interest rates unless they can demonstrate DRG profitability.

Hospitals shall no longer have government as a “Sugar Daddy” paying the interest on their debt coupon by coupon. One thousand hospitals may close. We view such hospitals as “cross-eyed javelin throwers” in that they will not win any awards, but they will keep the attention of their fearful audience.

” —Steve Eastaugh, 1987 Definition of Capital Expenditures • Defined in organization’s capital expenditures policy; therefore, definitions may vary • Capital expenditures—purchases of land, buildings, and equipment used for operations, not for resale • Have a useful life of more than one year • Cost $5,000 or more • Subject to depreciation (with the exception of land) Definition of Capital Expenditures Categories of capital expenditures: • • • • • • Land Land improvements Buildings Fixed equipment Major moveable equipment Major repairs Types of Capital Expenditure Budgets Divided into two categories Replacement • At end of useful life or when fully depreciated • Improved productivity • Improved quality • Required by regulation New Ventures • Expanded services • Improved safety conditions • Reduced operating expenses • Improved patient care Steps in Capital Budgeting Stage • The capital budget stage is the final part of the 22-step corporate planning process that was introduced in chapter 13 (see exhibit 13.

1). • A crucial follow-up to the budgeting stage (chapter 14), should be concluded to determine funds available for capital expenditures Steps in Capital Budgeting Stage Step 18: Identify and Prioritize Requests • • List capital/building needs and justify them. Budget committee prioritizes list based on community need and compliance with strategic plan.

Critical Concepts Allen County Clinic has been growing rapidly in the past few years. Many of the patients it sees are women needing prenatal care and screening. To meet these needs, Allen County Clinic would like to open a new women’s health clinic. – Name three steps Allen County Clinic needs to take to ensure that this is a viable option.

In addition to building an addition to the clinic, what other costs must be considered? – What are some of the advantages and disadvantages of building a new clinic? – What are some options for the clinic to fund for this new addition? Steps in Capital Budgeting Stage Step 19: Project Cash Flows • • Replacement equipment New equipment Steps in Capital Budgeting Stage Step 20: Perform Financial Analysis • • • • • Required to ensure that capital expenditure would generate enough revenue to repay loans Payback period Discounted payback period Net present value (NPV) Internal rate of return (IRR) Case Study • A federally qualified community health center is implementing an electronic medical record (EMR) costing $35,000 per physician provider.

– Identify benefits of the EMR and ways the benefits can be estimated to calculate a benefit–cost ratio. Steps in Capital Budgeting Stage Payback period—the number of years necessary for cash flows to recover the original investment • Least sophisticated of the three analyses because it does not take into account the effects of time on money Payback Period Problem ABC Day Surgery Center wants to buy equipment for $10,000 with projected cash flows (net revenues minus expenses) of $3,000 per year during the equipment’s five-year useful life.

What is the payback period? Payback Period Problem Year Cash Flow ($) Cumulative Cash Flow ($) cf0 (10,000) ($10,000) cf1 3,000 (7,000) cf2 3,000 (4,000) cf3 3,000 (1,000) cf4 3,000 2,000 cf5 3,000 5,000 Payback Period Problem According to the table, the day surgery center will recover the cost of the equipment during year 4.

Assuming an even distribution of cash flows during the year, the following equation can be used to determine exactly when during year 4 the center will recover the equipment cost. Payback Period Problem Payback period = year before recovery + unrecovered cost at beginning of year cash flow during the year = 3 + (1,000 / 3,000) = 3.

33 years Steps in Capital Budgeting Stage Net present value • Relies on discount cash flows • Provides an answer in dollars • An NPV of zero means the capital expenditure is generating discounted cash flows just sufficient to repay the original investment Calculating the Present Value • Discounting is used to compare capital expenditures that will generate future cash flows.

It is a way of looking at the future value (FV) of money, and calculating the present value (PV) of money using the following formula: PV = FV (1 + i)n Calculating the Present Value • What is the present value of $100,000, discounted at 5% annually for five years? PV = FV = $100,000 = $100,000 = $78,351 (1+i) n (1+.

05)5 1.2763 Calculating the Present Value Entry Function Answer 1 P/YR 5 N 5 I/YR -100,000 FV PV 78,352.62 Discounted Payback Period Problem Discount Rate (%) – Exhibit 15.1 10 20 30 40 50 Year 1 0.909 0.833 0.769 0.714 0.667 Year 2 0.826 0.694 0.592 0.511 0.444 Year 3 0.751 0.579 0.455 0.364 0.296 Year4 0.

683 0.482 0.351 0.261 0.198 Year 5 0.621 0.402 0.269 0.186 0.132 Year 6 0.564 0.335 0.207 0.133 0.088 Year 7 0.513 0.279 0.159 0.095 0.059 Year 8 0.467 0.233 0.123 0.068 0.039 Year 9 0.424 0.194 0.094 0.048 0.026 Year 10 0.385 0.162 0.073 0.035 0.017 Steps in Capital Budgeting Stage Internal rate of return • Minimum return one needs to break even on an investment • Provides an answer in a percentage • Rate of return when the NPV is held at zero Net Present Value / Internal Rate of Return Problem ABC Day Surgery Center wants to buy equipment for $10,000 with projected cash flows of $3,000 per year during the equipment’s five-year useful life.

What is the NPV of the equipment at a discount rate of 10%? What is the IRR? Using HP10BII Entry Function Periods/year 1 P/YR Initial cf CFj Next cf CFj …… Interest rate I/YR NPV IRR Display 1.0 O 1 NPV answer IRR answer Using HP10BII Function 1 P/YR -10,000 cfj 3,000 cfj 3,000 cfj 3,000 cfj 3,000 cfj 3,000 cfj Display 1.

0 0 CF 1 CF 2 CF 3 CF 4 CF 5 CF Using HP10BII Function 10 I/YR NPV IRR/YR Display 10.00 1,372.36 15.238 Steps in Capital Budgeting Stage Step 21: Identify Nonfinancial Benefits • Community need • Medical staff politics Steps in Capital Budgeting Stage Step 22: Evaluate Benefits and Make Decisions • Criteria are listed on the horizontal axis, and the capital expenditure requests are listed on the vertical axis.

• Criteria should be determined and weighted before evaluating the capital expenditure requests. Steps in Capital Budgeting Step 22: Evaluate Benefits and Make Decisions – Exhibit 15.2 Decision Matrix for Capital Budget Financial analysis Community Need Cost Containment Physician Relations Request 40 20 30 10 Total A 30 20 25 10 85 B 40 10 20 05 80 C 35 05 10 10 60 D 20 20 05 10 55 Financing Capital Expenditures • Funded depreciation—used to finance replacement equipment • Philanthropy, operating surpluses, and debt—used to finance new equipment • Operating surpluses • Debt to finance capital expenditures Financing Capital Expenditures • Organizations may not have access to the capital they need because of: – Rising demand from aging facilities – A need for expansion – New technology • In 2012, Moody’s reported a negative outlook for hospitals for the next several years.

However, Standard & Poor’s raised its credit rating from negative to stable in 2016, largely due to declines in charity care attributable to the ACA. Financing Capital Expenditures • Creditworthiness is one of the most significant factors in an organization’s ability to gain access to capital.

• Agencies – Standard & Poor’s – Moody – Fitch Financing Capital Expenditures Most common factors that affect credit upgrades: • Effective management and governance • Improved and sustained operating performance • Strong and liquid investment portfolios and management of debt structure risks • Favorable market demographics and market share • Favorable changes in organizational or legal structure Lease Versus Purchase Decisions • Operating leases are for periods less than the equipment’s useful life.

• Capital leases are for periods that approximate the equipment’s useful life and usually include provisions for purchase at the end of the lease. Lease Versus Purchase Decisions Lease advantages • • • • • Flexibility Financing for other equipment Protection against technological changes Routine maintenance Tax advantages for for-profits Lease Versus Purchase Decisions Lease disadvantages • More expensive • Penalties for early lease termination Lease Versus Purchase Decisions • See exercise 15.

1. • Purchase considerations – – – – Borrow $1.3 million at 10 percent Depreciate straight line over five years Trade-in value of $130,000 at the end of the useful life Maintenance expense of $12,000 per year Lease Versus Purchase Decisions Year Principle Payment Interest Payment Maintenance Expense Total Expense PV Factor at 10% PV Expense 1 260,000 130,000 12,000 402,000 0.

909 365,418 2 260,000 104,000 12,000 376,000 0.826 310,576 3 260,000 78,000 12,000 350,000 0.751 362,850 4 260,000 52,000 12,000 324,000 0.683 221,292 5 260,000 26,000 12,000 298,000 0.621 185,058 Trade (130,000) 0.621 (80,730) 1,264,464 Lease Versus Purchase Decisions Lease considerations • Lease payments of $26,000 per month for 60 months (includes maintenance) Lease Versus Purchase Decisions Year Lease Payment PV Factor at 10% PV Expense 1 312,000 0.

909 283,608 2 312,000 0.826 257,712 3 312,000 0.751 234,312 4 312,000 0.683 213,096 5 312,000 0.621 193,752 1,182,480 Evaluating Capital Budgeting Performance • Debt-to-capitalization ratio Long-term debt Long-term debt + Net assets Evaluating Capital Budgeting Performance • Average age of plant Accumulated depreciation Depreciation expense Key Points • Capital costs are important to consider because of rising healthcare costs and in dictating the trends of acquisitions, mergers, joint ventures, and closing.

• Capital expenditures are the purchases of land, buildings, and equipment for operations. • Replacement and new are the two broad categories for capital expenditures. • There are five steps in the capital budgeting process: identifying and prioritizing requests, projecting cash flows, performing financial analysis, identifying nonfinancial benefits, and evaluating benefits and making decisions.

Key Points • Funded depreciation should be used to finance replacement equipment; operating surpluses, or debt should be used to finance new equipment. • The decision to lease or purchase is a financial decision, both with its pros and cons. • The debt-to-capitalization ratio, capital expense ratio, and average age of plant are three of the ratios used to evaluate capital budgeting performance.

Chapter 14 Budgeting HSM 331-90, Health Financial Management Norfolk State University Dr. Batrina Martin, PhD, MSM, MPA, MSW(c), QMHP A/C Budgeting Learning Objectives • • • • Define and understand the importance of budgeting. Identify the prerequisites to the budgeting process. Explain the types of budgeting.

Outline the steps in the budgeting stage of the corporate planning process. Textbook Nowicki, M. (2018). Introduction to the financial management of healthcare organizations (7th ed.). Chicago, IL: Health Administration Press. Copyright © 2018 Foundation of the American College of Healthcare Executives.

Not for sale. Introduction Healthcare managers must do more work with fewer resources because of: • Healthcare costs and rapidly changing demographics at the center of public debate • Prospective payment limiting the ability of organizations to “just raise rates” to cover expenses Definition of Budgeting • Budgeting is the process of converting, or “dollarizing,” the operational plan into monetary terms.

• Budgets become the control standard against which performance is easily measured. • The budget process is an excellent opportunity for the financial manager to educate nonfinancial department managers. Prerequisites to Budgets • • • • • • • • Sound organizational structure Well-defined chart of accounts Prompt and accurate accounting system Comprehensive management information system Budget director Budget committee Budget manual and budget calendar Last year’s data regarding volumes, revenues, and expenses Types of Budgets • Management approach – Top-down vs.

Bottom-up • Design characteristics – – – – Incremental vs. Zero-base Comprehensive vs. Limited-in-scope Fixed vs. Flexible Discrete vs. Continuous Steps in the Budgeting Stage Step 14: Project volumes (often called statistical budget) • Production units—the best measures of what an entity is producing • Also used to – Measure and evaluate department productivity – Measure and evaluate employee productivity – Serve as the basis for calculating the cost of each procedure – Serve as the basis for calculating the charge for each procedure – Serve as the basis for determining staffing requirements and schedules Steps in the Budgeting Stage Project (forecast) volumes • Forecast content—description of specific situation in question • Subjective factors that can affect forecast content: – Political Social Economic Technological Personal health Environmental health Steps in the Budgeting Stage Project (forecast) volumes • Forecast content—description of specific situation in question • Forecast rationale—explanation of how the situation will progress from its current state to its forecasted state Steps in the Budgeting Stage • Use of Experts – Depends on manager’s ability to identify and secure the services of appropriate experts – Must consider the advantages and disadvantages of using experts in preparing the forecast • Forecasting techniques – – – – – – – Task forces Delphi techniques Delbecq techniques Questionnaires Permanent panels Essay writing Computer-facilitated group processes Steps in the Budgeting Stage • Program evaluation and review technique (PERT) – Requires estimates of future scenarios: • Optimistic (O) • Pessimistic (P) • Most likely (ML) Expected value = (O + P + 4ML) 6 Steps in the Budgeting Stage Causal model • Used when the forecast variable is dependent on a causal, or independent, variable • Regression analysis is the most common statistical method used in causal models Linear Regression and Estimation Problem If a hospital emergency department had the following history of volumes, what would be the projected volume for 2018? Year Volume 2013 10,000 2014 10,500 2015 10,200 2016 10,400 2017 10,600 Linear Regression and Estimation Problem Key CL∑ 2013 input 10,000 ∑+ 2014 input 10,500 ∑+ 2015 input 10,200 ∑+ 2016 input 10,400 ∑+ 2017 input 10,600 ∑+ Display 0.

00 2013.00 1.00 2014.00 2.00 2015.00 3.00 2016.00 4.00 2017.00 5.00 Description Clears registers Enters year as X variable Enter volume as y variable Enters year Enters volume as second pair Enters year Enters volume as third pair Enters year Enters volume as fourth pair Enters year Enters volume as fifth pair Linear Regression and Estimation Problem Key Display Description 2018 input 2018.

00 Enters year Linear Regression and Estimation Problem Key Display 2018 input 2018.00 y,m 10,670 Description Enters year Displays predicted volume (y) with last year entered (x) Steps in Budgeting Stage Times-Series Methods • Used when the past behavior of a variable is available to predict the future behavior of the variable • Will exhibit trend, seasonal, cyclical, horizontal, and random patterns Case Study Suppose that you are the new chief executive officer for Memorial Hospital.

Memorial is a nonprofit hospital with 300 beds and is located in a busy metropolitan area directly adjacent to a large university. Memorial is the only hospital within a 20-mile radius of campus, but construction on a new, competing hospital has just started within 5 miles. – – – – Identify three forecast content items.

How will they be measured? What is the expected status of the content items in the future? Which forecasting techniques should you use? Why? Steps in the Budgeting Stage Step 15: Convert volumes into revenues • Cost-led pricing • Price-led costing Steps in the Budgeting Stage Step 16: Convert volumes into expense requirements • Labor expense with benefits – Review staffing mix – Review skill mix – Review cost-of-living raises – Review merit raise policy – Review bonus policy • • Nonlabor expense Overhead expense Steps in the Budgeting Stage Exhibit 14.

1 Staffing Mix Steps in the Budgeting Stage Step 17: Adjust revenues and expenses as necessary • The budget committee to determine whether budgeted net revenues are adequate to cover budgeted expenses Evaluating Budget Performance Variance analysis—compares actual performance to budget • Revenue variance • Expense variance Variance = Actual – Budget Budgeting Exercise Step 14: Project Volumes 1.

Calculate the current volume for each x-ray procedure. Procedure Admissions Volume Hand x-ray 1,100 x .50 550 Foot x-ray 1,100 x .20 220 Forearm x-ray 1,100 x .30 330 Budgeting Exercise Step 14: Project Volumes 2. Convert the current volumes to RVUs. Procedure Minutes Minutes/GCD RVUs/ Procedure Volume Total RVUs Hand x-ray 5 5/5 1 550 550 Foot x-ray 15 15/5 3 220 660 Forearm xray 30 30/5 6 330 1,980 3,190 Budgeting Exercise Step 14: Project Volumes 3.

Calculate the projected volume for each x-ray procedure (1,100 DRG 250 x .091 increase = 1,200 DRG 250). Procedure Admissions Volume Hand x-ray 1,200 x .50 600 Foot x-ray 1,200 x .20 240 Forearm x-ray 1,200 x .30 360 Budgeting Exercise Step 14: Project Volumes 4. Convert the projected volumes to RVUs.

Procedure Minutes Minutes/GCD RVUs/ Procedure Volume Total RVUs Hand x-ray 5 5/5 1 600 600 Foot x-ray 15 15/5 3 240 720 Forearm xray 30 30/5 6 360 2,160 3,480 Budgeting Exercise Step 15: Convert Projected Volumes into Projected Revenues 1. Calculate projected gross and net revenues by payer—MEDICARE.

Procedure Projected Charge Projected Volume % Gross Revenue Rate Net Revenue Hand x-ray $75 600 .45 $20,250 .80 $16,200 Foot x-ray 285 240 .45 $30,780 .80 $24,624 Forearm xray 450 360 .45 $72,900 .80 $58,320 $123,930 $99,144 Budgeting Exercise Step 15: Convert Projected Volumes into Projected Revenues 1.

Calculate projected gross and net revenues by payer—MEDICAID. Procedure Projected Charge Projected Volume % Gross Revenue Rate Net Revenue Hand x-ray $75 600 .35 $15,750 .85 $13,388 Foot x-ray 285 240 .35 23,940 .85 20,349 Forearm xray 450 360 .35 56,700 .85 48,195 $96,390 $81,932 Budgeting Exercise Step 15: Convert Projected Volumes into Projected Revenues 1.

Calculate projected gross and net revenues by payer—MANAGED CARE. Procedure Projected Charge Projected Volume % Gross Revenue Rate Net Revenue Hand x-ray $75 600 .15 $6,750 .70 $4,725 Foot x-ray 285 240 .15 10,260 .70 7,182 Forearm xray 450 360 .15 24,300 .70 17,010 $41,310 $28,917 Budgeting Exercise Step 15: Convert Projected Volumes into Projected Revenues 1.

Calculate projected gross and net revenues by payer—SELF PAY. Procedure Projected Charge Projected Volume % Gross Revenue Rate Net Revenue Hand x-ray $75 600 .05 $2,250 .90 $2,025 Foot x-ray 285 240 .05 3,420 .90 3,078 Forearm xray 450 360 .05 8,100 .90 7,290 Total $13,770 $275,400 $12,393 $222,386 Budgeting Exercise Step 16: Convert Projected Volumes into Projected Expense Requirements 1.

Calculate current expenses per RVU. $225,000 x .25 = 56,250 ÷ 3,190 = 17.63 labor expense/RVU $185,000 x .25 = 46,250 ÷ 3,190 = 14.50 supply expense/RVU $375,000 x .25 = 93,750 ÷ 3,190 = 29.39 overhead expense/RVU Budgeting Exercise Step 16: Convert Projected Volumes into Projected Expense Requirements 2.

Calculate projected expenses per RVU Projected labor expense = 17.63 + 5% = 18.51 Projected supply expense = 14.50 + 6% = 15.37 Projected overhead expense = 29.39 + 0% = 29.39 Total expense per RVU $63.27 Budgeting Exercise Step 16: Convert Projected Volumes into Projected Expense Requirements 3. Calculate projected expenses per procedure.

Procedure Projected RVUs Projected Expense/RVU Total Projected Expense Hand x-ray 600 $63.27 $37,962 Foot x-ray 720 63.27 45,554 Forearm x-ray 2,160 63.27 136,663 Total $220,179 Budgeting Exercise Step 17: Adjust Revenues and Expenses as Necessary 1. Determine initial gain/loss. Net revenues Expenses Gain/(Loss) 2.

$222,386 220,179 $ 2,207 Make adjustments first to revenues, then to expenses. Key Points • Budgeting is the process of converting the operating plan into monetary terms. • Certain prerequisites need to be in place before budgeting can begin. • Budgeting consists of several sequential steps: projecting volumes, converting volumes to revenues, converting volumes into expense requirements, and adjusting revenues and expenses as necessary.

• The governing body should review the budget annually, and each management level in the organization should be evaluated based on their performance to budget.

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