Financial Management for Health Care Organizations

FinancialManagement for Health Care Organizations

Student’sname:

Budgetdevelopment

Thebusiness budget development process is an essential tool of revenueand expenditure planning to cater for both new projects and thosebusinesses that exist. It provides a reliable basis for businessfinancial needs. Thus budget preparations by helping oversee futureneeds of a business acts as a vital tool in the business success(Arnold, 2010). Although budget development is a complex and most ofthe time discouraging, it is a simple process. It all involves theapplication of basic accounting principles systematically to thefacts of your project/ business. The primary purpose of the budget isto help the management in achieving their financial goals andobjectives.

Abudget constitute of the financial estimates of the expected revenueand expenditures in the succeeding financial years. It is, therefore,important for the budget analysts to apply high professionalism forthem to be able to come up with a reliable close estimate. As theBudget Director of Alamo Hospice, I have developed the attachedbudget for the next year which was based on the prevailing, economicand environmental conditions. The estimates used have been derivedfrom the data of the previous year’s budget. The past year`s trendhas been used to develop assumptions and estimates of the followingyear (ArnoldG. 2008).

Budgetingprocedures

Thebudgeting process begins by assessing the organizational objectivesin our health care institution. My team has developed specific,realistic and measurable goals that will help in coming up with amost accurate financial plan in the organization. Our goals aremeasurable in a manner that one can easily see on the means to attainthem. They are also reasonably reaching a specific resources of theorganization and hence, more realistic from the financial managementperspective. We have also ensured that the set goals are timely byadhering to a specific timeline throughout the budgeting process.

Inincreasing the accuracy level of the budget, I have considered thevarious driving forces in the health care market in connection withthe financial data of the previous years. Reviewing the existingfinancial documents is more essential in the budget developmentprocess. We have therefore made use of the company’s historicalbudgets in creating the new revenue-expenditure plan for thesubsequent financial year. Apart from company’s historical data, Ihave also considered the relevant general industry’s statisticsavailable in the public records for more reliable and close estimatesin this budget.

Assumptionsused in the budgeting process

Budgetbeing a projected financial plan is based on some assumption andestimates that are useful in predicting the next year’s businessoperations (Arnold, 2010). For example, the number of the patientsadmitted to the hospital is expected to grow by 6.5% in the nextyear. In is due to the growth of our current market share as we havebeen experiencing in the past few years. The market share is expectedto grow continually with our good reputation and customer loyalty.Alamo Hospice being a non-profit institution is much determined atsticking to their mission that is a statement of what theorganizations offers. The managers have also developed the key goalsand objectives to govern the organization in the next year. The fourkey goals are first, is to provide quality health services to thepatients. Second, is to improve our productivity by at least 2% inthe following year. Thirdly, is to develop an operating profit marginof at least 5% and last but not least, our organization also have akey goal of increasing the number of patients admitted to the AlamoHospice in the next year. The above goals provide a clear path ofour bottom line.

Volume

Intwo years ago our organization admitted 720 patients whereby eachpatient was enrolled for an average of 67 days. In one year ago, thenumber of patients admitted to the hospital rose to 750 which isapproximately 4.5% increase. In this current year, this has risen to790 which is equivalent to 5.5% increase from the preceding year. Theassumption made to predict the number of patients expected in thenext year is that there will be a 6.5% increase from that of thecurrent year. The average length of stay for home care patients isexpected to increase by one in the following year and increase by twofor the long-term care patients. On the other hand, the percentage ofthe patients on home care basis is expected to fall by 3% in the nextyear while that of the patients in the long-term care is expected torise by 3%. Therefore, the next year’s approximated number ofpatients can be estimated from the computation below

Numberof patients admitted in the next year = 790 + (790 × 6.5/100 ) = 840 patients

Thisis as represented in the table below

Admissions

&nbsp2 Years ago

&nbsp1 Year ago

&nbspCurrent

&nbspNext year

Total

720

750

790

840

Home Care %

60.0%

57.0%

56.0%

53.0%

Long Term Care %

40.0%

43.0%

44.0%

47.0%

Average Length of Stay

&nbsp

&nbsp

&nbsp

&nbsp

Home Care

66

67

68

69

Long Term Care

68

70

72

74

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

Patient Days

&nbsp

&nbsp

&nbsp

&nbsp

Home Care

28,512

28,676

30,056

30,705

Long Term Care

19,584

22,540

25,056

29,230

Total

48,096

51,216

55,112

59,935

Average Daily Census

&nbsp

&nbsp

&nbsp

&nbsp

Home Care

78.1

78.6

82.3

84.1

Long Term Care

53.7

61.8

68.6

80.1

Total

131.8

140.3

151.0

164.2

(Table1, volume of patients admitted to the Alamo Hospice)

Thedriving forces supporting the growth in the number of patients

Asit was mentioned earlier, the increase in the number of patients isdue to increased demand for the healthcare services in the UnitedStates. Our organization is also planning to attract more clients byoffering quality services with an application of modern technology.The organization also intends to invest more in new equipment in thenext financial year to help us serve more and more clients. Theimproved operating efficiency will also help the organization inincreasing the profit margin (Sadoulet,E 1995).

Revenue

Themajor source of revenue at Alamo Hospice is the Medicare. The salesdepartment is capable of tracking its revenue by pay source. However,the management does not expect the payers mix to change in the nextyear and therefore, the percentage of the admits by pay source willremain unchanged. The gross revenue for one day of service iscomputed from charges imposed on the patients. The managed carepayers and the commercial payers’ contracts are expected toincrease by 2.0% and 2.5% respectively in the next financial year.The management expects the routine charges to increase from $180 to$181 in the next year. For the inpatients, the charges will increasefrom $174 to $176 in the next year. There is also an expectedincrease in the charges for respite and continuous services assummarized in the table below.

Theprimarily driving force resulting to this increase of the charges ofthe health services is the economic factors such inflation. As we areall aware, the general price of products and services is continuallyincreasing day after the other. It is in this regard that we projectthat the Medicare charges will automatically be higher in the nextyear than in the current year. The organization has categorized partof the patients who cannot afford to pay for the services as one ofthe charity care, and they expect no revenue from this charity care.The management has also set aside a provision for doubtful debt tocater for the part of the debts that have proven to be irrecoverable.

Gross Charges

&nbsp2 Years ago

&nbsp1 Year ago

&nbspCurrent

&nbspNext year

Routine

$175.00

$178.00

$180.00

$181.00

Inpatient

$760.00

$762.00

$764.00

$766.00

Respite

$182.00

$185.00

$187.00

$188.00

Continuous

$980.00

$985.00

$990.00

$995.00

Expenses

Theservices at Alamo Hospice are primarily delivered by RegisteredNurses (RN), Home Care Aides (HCA), Medical Social Workers (MSW) andthe Pastoral Counsellors (PC) the productivity of the labour hours isexpressed from the number of patients served by a Full-TimeEquivalent (FTE). With an Aim of reducing the travel time betweenpatients, the management will need to increase the productivity ofthe long-term care team as compared to that of the home care team.The table below shows the budgeted labour hours for every team anddiscipline in the past and the next year.

Productivity (Patients per Full Time Equivalent)

&nbsp2 Years ago

&nbsp1 Year ago

&nbspCurrent

&nbspNext year

Home Care

&nbsp

&nbsp

&nbsp

&nbsp

RN

9.8

9.7

9.9

10.0

MSW

21.5

21.6

21.7

21.8

HCA

5.0

5.0

5.0

5.0

Pastoral

50.5

50.6

51.0

51.7

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

Long Term Care

&nbsp

&nbsp

&nbsp

&nbsp

RN

11.5

11.6

12.0

12.5

MSW

25.0

25.1

25.2

25.3

HCA

6.0

6.0

6.0

6.0

Pastoral

55.0

55.0

55.0

55.0

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

Administrative

&nbsp

&nbsp

&nbsp

&nbsp

Management

42.0

42.0

42.5

42.9

Clinical Management

30.0

31.0

32.0

33.0

Clerical

4.2

4.2

4.3

4.4

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

1 FTE = Paid Hours

2,080.00

2,080.00

2,080.00

2,080.00

Otheroperating fixed costs are not expected to change in the next year.This is because fixed cost does not depend on the volume ofproduction or the services offered (Arnold, 2010). On the other hand,variable cost is estimated to increase by between 2% to 6% dependingon the cost per patient day. Other driving forces for the changes inthe variable cost are assumed to be triggered by various economicfactors.

and conclusion

Thedeveloped budget confirms that it is in line with the mission of ourorganization. Therefore, approving and implementing this budget willhelp the firm in achieving its objectives. Alamo Hospice being anon-profit institution is much determined at sticking to theirmission that is a statement of what the organizations offers.

Inestimating the expenditure or cash outs in the budget, variousexpenses have been categorized into their respective cost categories.Some of these categories included the following taxes, interestcharges, insurance, raw materials, the cost of goods sold, payrolland other operating expenses. Revenue analysis has also been takencare of by estimating the volume of clients expected to visit ourhealth care institution in the next year. Various assumptions havebeen made in coming up with these estimates that were used in ourbudgeting(Wagstaff, A. 2000).The below is the resulting income statement for the next financialyears.

Alamo Hospice

Income Statement Next Year`s Budget

Variance

Next Yr

Amt

%

&nbsp

&nbsp

&nbsp

REVENUES

&nbsp

&nbsp

&nbsp

Inpatient Medicaid

$ 1,861,961

$ 379,678

25.6%

&nbsp

&nbsp

&nbsp

Hospice Revenue

&nbsp

&nbsp

&nbsp

Medicare

$ 9,912,855

$ 858,621

9.5%

Medicaid

371,806

31,807

9.4%

Managed Care

867,709

74,472

9.4%

Commercial

867,709

74,472

9.4%

Charity

123,875

10,495

9.3%

Self Pay

248,112

21,853

9.7%

&nbsp

&nbsp

&nbsp

Total Hospice Service Revenue

$ 12,392,066

$ 1,071,720

9.5%

&nbsp

&nbsp

&nbsp

Gross Patient Revenue

$ 14,254,027

$ 1,451,398

11.3%

&nbsp

&nbsp

&nbsp

Deductions from Revenue

&nbsp

&nbsp

&nbsp

NH Pass Thur

$ 93,098

$ 18,984

25.6%

Hospice Services

1,865,407

100,773

5.7%

Total

$ 1,958,505

$ 119,757

6.5%

&nbsp

&nbsp

&nbsp

NET OPERATING REV

$ 12,295,522

$ 1,331,641

12.1%

&nbsp

&nbsp

&nbsp

OPERATING EXPENSES

&nbsp

&nbsp

&nbsp

Salaries

$ 4,878,660

$ 296,540

6.5%

Benefits

1,090,381

77,733

7.7%

Contract Labour

48,219

2,557

5.6%

Professional Services

61,769

1,987

3.3%

Contract Services

4,431,066

615,951

16.1%

Supplies &amp Mileage

510,023

59,442

13.2%

Occupancy

563,756

13,019

2.4%

Other Expenses

63,261

602

1.0%

Interest

46,348

46,348

0.0%

Depreciation

134,270

100,130

293.3%

&nbsp

&nbsp

&nbsp

Total Oper Expenses

$11,827,753

$1,214,309

11.4%

&nbsp

&nbsp

&nbsp

Net Income

$467,769

$117,332

33.5%

Fromthe above income statement, it is clear that the organization willcontinually increase its profit margin. The budget will also act asmanagement tool that will help in achieving the set goals of theorganization. It is in this regard that I would recommend for theapproval of the budget.

References

ArnoldG. (2008). CostAccounting 4th Edition.Britain: Pearson Education.

Sadoulet,E., &amp De Janvry, A. (1995).&nbspQuantitativedevelopment policy analysis(p.397). Baltimore: Johns Hopkins University Press.

Wagstaff,A., &amp Van Doorslaer, E. (2000). Equity in health care finance anddelivery.&nbspHandbookof health economics,&nbsp1,1803-1862.