Assignment Exercises 15-1, 15-2, 15-3, and 15-4 on pages 494 through 495
Assignment Exercises 16-1 on page 497
The budgeted revenue and expenses still reflect the original expectation of 40,000 patient days; the budget report would look like this:
| Actual | Budget | Static Budget Variance | |
| Revenue | $21,600,000 | $24,000,000 | $(2,400,000) |
| Expenses | 22,000,000 | 22,400,000 | (400,000) |
| Excess of Expenses over Revenue | $ (400,000) | $ 1,600,000 | $(2,000,000) |
Note: The negative actual result of (400,000) combined with the positive budget expectation of 1,600,000 amounts to the negative net variance of (2,000,000).
This example has shown a static budget, geared toward only one level of activity and remaining constant or static.
Practice Exercise 15–I: Budgeting
Budget assumptions for this exercise include both inpatient and outpatient revenue and expense. Assumptions are as follows:
As to the initial budget:
· The budget anticipated 30,000 inpatient days this year at an average of $650 revenue per day.
· Inpatient expenses were budgeted at $600 per patient day.
· The budget anticipated 10,000 outpatient visits this year at an average of $400 revenue per visit.
· Outpatient expenses were budgeted at $380 per visit.
As to the actual results:
· Assume that only 27,000, or 90%, of the inpatient days are going to actually be achieved for the year.
· The average revenue of $650 per day will be achieved for these 270,000 inpatient days.
· The outpatient visits will actually amount to 110%, or 11,000 for the year.
· The average revenue of $400 per visit will be achieved for these 11,000 visits.
· Further assume that, due to the heroic efforts of the Chief Financial Officer, the actual inpatient expenses will amount to $11,600,000 and the actual outpatient expenses will amount to $4,000,000.
Required
1. Set up three worksheets that follow the format of those in Example 15A. However, in each of your worksheets make two lines for revenue; label one as Revenue—Inpatient and the other Revenue—Outpatient. Add a Revenue Subtotal line. Likewise, make two lines for expense; label one as Expense—Inpatient and the other Expense—Outpatient. Add an Expense Subtotal line.
2. Using the new assumptions, complete the first worksheet for “As Budgeted.”
3. Using the new assumptions, complete the second worksheet for “Actual.”
4. Using the new assumptions, complete the third worksheet for “Static Budget Variance.”
Assignment Exercise 15–1: Budgeting
Select an organization: either from the Case Studies in Chapters 27–28 or from one of the Mini-Case Studies in Chapters 29–31.
Required
1. Using the organization selected, create a budget for the next fiscal year. Set out the details of all assumptions you needed in order to build this budget.
2. Use the “Checklist for Building a Budget” (Exhibit 15–2) and critique your own budget.
Exhibit 15–2 Checklist for Building a Budget
| · 1. What is the proposed volume for the new budget period?
· 2. What is the appropriate inflow (revenues) and outflow (cost of services delivered) relationship? · 3. What will the appropriate dollar cost be? (Note: this question requires a series of assumptions about the nature of the operation for the new budget period.) · 3a. Forecast service-related workload. · 3b. Forecast non-service-related workload. · 3c. Forecast special project workload if applicable. · 3d. Coordinate assumptions for proportionate share of interdepartmental projects. · 4. Will additional resources be available? · 5. Will this budget accomplish the appropriate managerial objectives for the organization? |
Assignment Exercise 15–2: Budgeting
Find an existing budget from a published source. Detail should be extensive enough to present a challenge.
Required
1. Using the existing budget, create a new budget for the next fiscal year. Set out the details of all the assumptions you needed in order to build this budget.
2. Use the “Checklist for Building a Budget” (Exhibit 15–2) and critique your own effort.
3. Use the “Checklist for Reviewing a Budget” (Exhibit 15–3) and critique the existing budget.
Exhibit 15–3 Checklist for Reviewing a Budget
| · 1. Is this budget static (not adjusted for volume) or flexible (adjusted for volume during the year)?
· 2. Are the figures designated as fixed or variable? · 3. Is the budget for a defined unit of authority? · 4. Are the line items within the budget all expenses (and revenues, if applicable) that are controllable by the manager? · 5. Is the format of the budget comparable with that of previous periods so that several reports over time can be compared if so desired? · 6. Are actual and budget for the same period? · 7. Are the figures annualized? · 8. Test one line-item calculation. Is the math for the dollar difference computed correctly? Is the percentage properly computed based on a percentage of the budget figure? |
Assignment Exercise 15–3: Transactions Outside the Operating Budget
Review Figure 15–2 and the accompanying text.
Metropolis Health System (MHS) has received a wellness grant from the charitable arm of an area electronics company. The grant will run for 24 months, beginning at the first of the next fiscal year. Two therapists and two registered nurses will each be spending half of their time working on the wellness grant. All four individuals are full-time employees of MHS. The electronics company has only recently begun to operate the charitable organization that awarded the grant. While they have gained all the legal approvals necessary, they have not yet provided the manuals and instructions for grant transactions that MHS usually receives when grants are awarded. Consequently, guidance about separate accounting is not yet forthcoming from the grantor.
Figure 15–2 Transactions Outside the Operating Budget.
Figure 15–3 and the accompanying text.
Metropolis Health System is preparing for a significant upgrade in both hardware and software for its information systems. As part of the project, the Chief of Information Operations (CIO) has indicated that the Information Systems (IS) department can change the format of the MHS operating budgets and related reports before the operating budget is constructed for the coming fiscal year. The Chief Financial Officer (CFO) has long wanted to modify what costs are identified and what costs are allocated (along with the method of allocation). This is a golden opportunity to do so. To gain ammunition for the change, the CFO is preparing to conduct a survey. The survey will obtain a variety of suggestions for potential changes in allocation methods for the new operating budget report formats. You have been selected as one of the
CHAPTER 16
Example 16A: Description of Capital Expenditure Proposals Scoring System
Worthwhile Hospital has a total capital expenditure budget for next year of five million dollars. Of this amount, three million is already committed as spending for capital assets that have already been acquired and are in place. The remaining two million dollars is available for new assets and for new projects or programs.
Worthwhile Hospital typically divides the available capital expenditure funds into monies available for inpatient purposes and monies available for outpatient purposes. This year the split is proposed to be 50-50.
The hospital’s CFO is also proposing that a scoring system be used to evaluate this year’s proposals. She has set up a scoring system that allows a maximum of five points. Thus the low is a score of one point and the high is a score of five points.
In addition to the points earned by a funding proposal, the CFO will allow one “bonus point” for upgrading existing equipment and one “bonus point” for funding expansion of existing programs.
Practice Exercise 16–I: Capital Expenditure Proposals
Jody Smith, the director who supervises the Intensive Care Units, wants to secure as much of the one million dollars available for inpatient purposes as is possible for the ICU. At the same time Ted Jones, the director who supervises the Surgery Unit, also wants to secure as much of the one million dollars available for inpatient purposes as is possible for his Surgery Unit.
Given the CFO’s new scoring system, how should Jody go about choosing exactly what to request?
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Assignment Exercise 16–1: Capital Expenditure Proposals
Ted Jones, the Surgery Unit Director, is about to choose his strategy for creating a capital expenditure funding proposal for the coming year. Ted’s unit needs more room. The Surgery Unit is running at over 90% capacity. In addition, a prominent cardiology surgeon on staff at the hospital wants to create a new cardiac surgery program that would require extensive funding for more space and for new state-of-the-art equipment. The surgeon has been campaigning with the hospital board members.
Required
What should Ted decide to ask for? How should he go about crafting a strategy to justify his request, given the hospital’s new scoring system?
CHAPTER 27 Case Study: Strategic Financial Planning in Long-Term Care Neil R. Dworkin, PhD
BACKGROUND
John Maxwell, CEO of Seabury Nursing Center, a not-for-profit long-term care organization located in suburban Connecticut, had just emerged from a board of directors meeting. He was contemplating the instructions he had received from the board’s executive committee to assess the financial feasibility of adding a home care program to the Center’s array of services.
Seabury’s current services consist of two levels of inpatient care, chronic care, and subacute units, and a senior citizens’ apartment complex financed in part by the Federal Department of Housing and Urban Development. In keeping with its mission, Seabury has a reputation of providing personalized, high-quality, and compassionate care across all levels of its continuum.
The CEO and his executive team agreed to meet the following week to plan the next steps.
FRAMEWORK OF THE BOARD’S MANDATE
At its last retreat, the board made clear that, reimbursement and payment systems notwithstanding, Seabury must establish realistic and achievable financial plans that are consistent with their strategic plans. Accordingly, three points relative to integrating strategic planning and financial planning should hold sway:
· 1. Both are the primary responsibility of the board
· 2. Strategic planning should precede financial planning
· 3. The board should play an active role in the financial planning process
Ultimately, every important investment decision involves three general principles:
· 1. Does it make sense financially?
· 2. Does it make sense operationally?
· 3. Does it make sense politically?
The board’s interest in a possible home initiative was guided by these stipulations, particularly as they relate to Seabury’s growth rate in assets and profitability objectives. As a result of the financial downturn, the organization is experiencing declining inpatient volumes, a deteriorating payer mix, and a higher cost of capital, all of which have the potential to weaken its liquidity position.
Taking the strategic service line path to a home care program would be less capital intensive and should appeal broadly to the significant baby boomer population residing in its service area, whose preference would undoubtedly be to be treated in their homes.
INDUSTRY PROFILE
When John Maxwell convened his executive team the following week, he had already decided to present an overview of the home health industry as gleaned by Seabury’s Planning Department. He prefaced his comments by drawing on recent research by the federal Agency for Healthcare Research and Quality that detailed why home health care in the 21st century is different from that which has existed in the past. He cited four reasons:
· 1. We’re living longer and more of us want to “age in place” with dignity.
· 2. We have more chronic, complex conditions.
· 3. We’re leaving the hospital earlier and thus need more intensive care.
· 4. Sophisticated medical technology has moved into our homes. Devices that were used only in medical offices are now in our living rooms and bedrooms. For example, home caregivers regularly manage dialysis treatments, infuse strong medications via central lines, and use computer-based equipment to monitor the health of loved ones.1
The CEO presented a profile of national home care data as compiled by the National Association for Home Care and Hospice as follows:
· Approximately 12 million people in the United States require some form of home health care.
· More than 33,000 home healthcare providers exist today.
· Almost two-thirds (63.8%) of home healthcare recipients are women.
· More than two-thirds (69.1%) of home healthcare recipients are over age 65.
· Conditions requiring home health care most frequently include diabetes, heart failure, chronic ulcer of the skin, osteoarthritis, and hypertension.
· Medicare is the largest single payer of home care services. In 2009, Medicare spending was approximately 41% of the total home healthcare and hospice expenditure.2
According to the U.S. Census Bureau, he continued, in 2010 Connecticut’s population was 3,574,097 of which 14.4% were age 65 or older.3 A Visiting Nurse Association (VNA) analysis of revenue by payer source in the state indicated that 60% of revenue was derived from Medicare.4
FEASIBILITY DETERMINATION
The CEO went on to explain that the feasibility determination would be based on initially setting the home care program’s capacity at 50 clients because that was the minimum required for Certificate-of-Need (CON) approval in Connecticut. He distributed a model developed by healthcare finance expert William O. Cleverly ( Figure 27–1 ), which presents the logic behind the integration of strategic and financial planning.
In essence, he said, financial planning is influenced by the definition of programs and services in consort with the mission and goals. The next step entails financial feasibility of the proposed homecare program. Among the components that should be considered in determining financial feasibility are the following:
· The configuration and cost of staff
· The prevailing Medicare and Medicaid reimbursement rates
Figure 27–1 Integration of Strategic and Financial Planning.
Reproduced from W.O. Cleverley, Essentials of Health Care Finance, 7th ed. (Sudbury, MA: Jones & Bartlett), 289.
· A projection of visit frequency by provider category based on the most prevalent clinical conditions
· The physical location of the program and its attendant costs (e.g., rent, new construction)
· A projection of cash flows
Direct care staff associated with the home care program includes:
· • Medical Social Worker (MSW)
· • Physical Therapist (PT)
· • Home Health Aide (HHA)
· • Registered Nurse (RN)
· • Registered Dietitian (RD)
Maxwell indicated that it would be useful to create a scenario depicting a home health visit abstract incorporating prevailing Medicare and Medicaid reimbursement rates for a 70-year-old male with heart failure and no comorbidities in order to gain traction and project potential cash flow. As previously noted, heart failure is a condition frequently requiring home healthcare services. Productivity in the home is typically based on the average number of visits per day by provider category. The visit scenario is depicted in Table 27–1 .
Table 27–1 A Home Health Visit Scenario
| Services | Visit Frequency | Payer | Rate | Rate × 4.2 * | Medicare Cost | Medicaid Cost |
| Nursing (RN) | 2x/month, every other week | Mc | $166.83 | $700.69 | $700.69 | |
| Medical Social Worker (MSW) | Visits wkly for 4 wks | MA | $119.51 | $501.94 | $501.94 | |
| Physical Therapist (PT) | 3x wkly for 2 wks | Mc | $103.22 | $433.52 | $433.52 | |
| Home Health Aide (HHA) | Visits 4hrs MWF wkly for 60 days | Mc | $25.00 | $1,260.00 | $1,260.00 | |
| Registered Dietitian (RD) | 3x wkly for 1 wk | MA | $103.16 | $309.48 |
Mc = Medicare
MA = Medicaid
* 4.2 = The state′s formula for the #wks/per month
Total monthly Medicaid budget = $826.95
Total monthly Medicare budget = $2,394.21
Figure 27–2 Seabury Nursing Center’s Home Healthcare-Related Organization Chart.
Once the board decides to move ahead with the home care program and it is approved by the state, implementation and ongoing operations becomes a management control issue (see the Cleverly model in Figure 27–1). The CEO refers to a proposed table of organization as illustrated in Figure 27–2 .
Given the paucity of other home care programs in its service area, Maxwell knows that Seabury is likely to be accorded a green light.
As he and his team reflect on this, the looming question will be where will the clients come from? He knows that likely referral sources will include Seabury’s subacute inpatient population and residents from its senior citizens’ apartment complex who are
“aging in place.” Other likely sources will be recently discharged patients from the region’s two community hospitals, both bereft of home care programs. A premium will be placed on effective case management, and direct marketing to the community will also be necessary.
NOTES
1. U.S. Department of Health and Human Services, “Human Factors Challenges in Home Health Care,” Research Activities, no. 376 (December 2011).
2. National Association for Home Care and Hospice, Basic Statistics about Home Care (Updated 2010).
3. Department of Commerce, U.S. Census Bureau, 2010 Demographic Profile.
4. Visiting Nurse Association, VNA Healthcare Annual Report (Hartford, CT: Hartford Healthcare, 2012).
CHAPTER 28 Case Study: Metropolis Health System
BACKGROUND
· 1. The Hospital System Metropolis Health System (MHS) offers comprehensive healthcare services. It is a midsize taxing district hospital. Although MHS has the power to raise revenues through taxes, it has not done so for the past seven years.
· 2. The Area MHS is located in the town of Metropolis, which has a population of 50,000. The town has a small college and a modest number of environmentally clean industries.
· 3. MHS Services MHS has taken significant steps to reduce hospital stays. It has developed a comprehensive array of services that are accessible, cost-effective, and responsive to the community’s needs. These services are wellness oriented in that they strive for prevention rather than treatment. As a result of these steps, inpatient visits have increased overall by only 1,000 per year since 2008, whereas outpatient/same-day surgery visits have had an increase of over 50,000 per year.A number of programmatic, service, and facility enhancements support this major transition in the community’s institutional health care. They are geared to provide the quality, convenience, affordability, and personal care that best suit the health needs of the people whom MHS serves.
· • Rehabilitation and Wellness Center—for outpatient physical therapy and return-to-work services, plus cardiac and pulmonary rehabilitation, to get people back to a normal way of living.
· • Home Health Services—bringing skilled care, therapy, and medical social services into the home; a comfortable and affordable alternative in longer-term care.
· • Same-Day Surgery (SDS)—eliminating the need for an overnight stay. Since 1998, same-day surgery procedures have doubled at MHS.
· • Skilled Nursing Facility—inpatient service to assist patients in returning more fully to an independent lifestyle.
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· • Community Health and Wellness—community health outreach programs that provide educational seminars on a variety of health issues, a diabetes education center, support services for patients with cancer, health awareness events, and a women’s health resource center.
· • Occupational Health Services—helping to reduce workplace injury costs at over 100 area businesses through consultation on injury avoidance and work-specific rehabilitation services.
· • Recovery Services—offering mental health services, including substance abuse programs and support groups, along with individual and family counseling.
· 4. MHS’s Plant The central building for the hospital is in the center of a two-square-block area. A physicians’ office building is to the west. Two administrative offices, converted from former residences, are on one corner. The new ambulatory center, completed two years ago, has an L shape and sits on one corner of the western block. A laundry and maintenance building sits on the extreme back of the property. A four-story parking garage is located on the eastern back corner. An employee parking lot sits beside the laundry and maintenance building. Visitor parking lots fill the front eastern portion of the property. A helipad is on the extreme western edge of the property behind the physicians’ office building.
· 5. MHS Board of Trustees Eight local community leaders who bring diverse skills to the board govern MHS. The trustees generously volunteer their time to plan the strategic direction of MHS, thus ensuring the system’s ability to provide quality comprehensive health care to the community.
· 6. MHS Management A chief executive officer manages MHS. Seven senior vice presidents report to the CEO. MHS is organized into 23 major responsibility centers.
· 7. MHS Employees All 500 team members employed by MHS are integral to achieving the high standards for which the system strives. The quality improvement program, reviewed and reestablished in 2010, is aimed at meeting client needs sooner, better, and more cost-effectively. Participants in the program are from all areas of the system.
· 8. MHS Physicians The MHS medical staff is a key part of MHS’s ability to provide excellence in health care. Over 75 physicians cover more than 30 medical specialties. The high quality of their training and their commitment to the practice of medicine are great assets to the health of the community. The physicians are very much a part of MHS’s drive for continual improvement on the quality of healthcare services offered in the community. MHS brings in medical experts from around the country to provide training in new techniques, made 394395possible by MHS’s technologic advancements. MHS also ensures that physicians are offered seminars, symposiums, and continuing education programs that permit them to remain current with changes in the medical field. The medical staff’s quality improvement program has begun a care path initiative to track effective means for diagnosis, treatment, and follow-up. This initiative will help avoid unnecessary or duplicate use of expensive medications or technologies.
· 9. MHS Foundation Metropolis Health Foundation is presently being created to serve as the philanthropic arm of MHS. It will operate in a separate corporation governed by a board of 12 community leaders and supported by a 15-member special events board. The mission of the foundation will be to secure financial and nonfinancial support for realizing the MHS vision of providing comprehensive health care for the community. Funds donated by individuals, businesses, foundations, and organizations will be designated for a variety of purposes at MHS, including the operation of specific departments, community outreach programs, continuing education for employees, endowment, equipment, and capital improvements.
· 10. MHS Volunteer Auxiliary There are 500 volunteers who provide over 60,000 hours of service to MHS each year. These men and women assist in virtually every part of the system’s operations. They also conduct community programs on behalf of MHS. The auxiliary funds its programs and makes financial contributions to MHS through money it raises on renting televisions and vending gifts and other items at the hospital. In the past, its donations to MHS have generally been designated for medical equipment purchases. The auxiliary has given $250,000 over the last five years.
· 11. Planning the Future for MHS The MHS has identified five areas of desired service and programmatic enhancement in its five-year strategic plan:
· I. Ambulatory Services
· II. Physical Medicine and Rehabilitative Services
· III. Cardiovascular Services
· IV. Oncology Services
· V. Community Health Services
MHS has set out to answer the most critical health needs that are specific to its community. Over the next five years, the MHS strategic plan will continue a tradition of quality, community-oriented health care to meet future demands.
· 12. Financing the Future MHS has established a corporate depreciation fund. The fund’s purpose is to ease the financial burden of replacing fixed assets. Presently, it has almost $2 million for needed equipment and renovations.
MHS CASE STUDY
Financial Statements
· • Balance Sheet ( Exhibit 28–1 )
· • Statement of Revenue and Expense ( Exhibit 28–2 )
Exhibit 28–1 Balance Sheet
| Metropolis Health System Balance Sheet March 31, 2___ | |
| Assets | |
| Current Assets | |
| Cash and Cash Equivalents | $1,150,000 |
| Assets Whose Use Is Limited | 825,000 |
| Patient Accounts Receivable | 7,400,000 |
| (Net of $1,300,000 Allowance for Bad Debts) | |
| Other Receivables | 150,000 |
| Inventories | 900,000 |
| Prepaid Expenses | 200,000 |
| Total Current Assets | 10,625,000 |
| Assets Whose Use Is Limited | |
| Corporate Funded Depreciation | 1,950,000 |
| Held by Trustee Under Bond Indenture Agreement | 1,425,000 |
| Total Assets Whose Use Is Limited | 3,375,000 |
| Less Current Portion | (825,000) |
| Net Assets Whose Use Is Limited | 2,550,000 |
| Property, Plant, and Equipment, Net | 19,300,000 |
| Other Assets | 325,000 |
| Total Assets | $32,800,000 |
| Liabilities and Fund Balance | |
| Current Liabilities | |
| Current Maturities of Long-Term Debt | $525,000 |
| Accounts Payable and Accrued Expenses | 4,900,000 |
| Bond Interest Payable | 300,000 |
| Reimbursement Settlement Payable | 100,000 |
| Total Current Liabilities | 5,825,000 |
| Long-Term Debt | 6,000,000 |
| Less Current Portion of Long-Term Debt | (525,000) |
| Net Long-Term Debt | 5,475,000 |
| Total Liabilities | 11,300,000 |
| Fund Balances | |
| General Fund | 21,500,000 |
| Total Fund Balances | 21,500,000 |
| Total Liabilities and Fund Balances | $32,800,000 |
Exhibit 28–2 Statement of Revenue and Expense
| Metropolis Health System Statement of Revenue and Expense for the Year Ended March 31, 2___ | ||
| Revenue | ||
| Net patient service revenue | $34,000,000 | |
| Other revenue | 1,100,000 | |
| Total Operating Revenue | $35,100,000 | |
| Expenses | ||
| Nursing services | $5,025,000 | |
| Other professional services | 13,100,000 | |
| General services | 3,200,000 | |
| Support services | 8,300,000 | |
| Depreciation | 1,900,000 | |
| Amortization | 50,000 | |
| Interest | 325,000 | |
| Provision for doubtful accounts | 1,500,000 | |
| Total Expenses | 33,400,000 | |
| Income from Operations | $1,700,000 | |
| Nonoperating Gains (Losses) | ||
| Unrestricted gifts and memorials | $20,000 | |
| Interest income | 80,000 | |
| Nonoperating Gains, Net | 100,000 | |
| Revenue and Gains in Excess of Expenses and Losses | $1,800,000 |
· • Statement of Cash Flows ( Exhibit 28–3 )
· • Statement of Changes in Fund Balance ( Exhibit 28–4 )
· • Schedule of Property, Plant, and Equipment ( Exhibit 28–5 )
· • Schedule of Patient Revenue ( Exhibit 28–6 )
· • Schedule of Operating Expenses ( Exhibit 28–7 )
· • Hospital Statistical Data ( Exhibit 28–8 )
· • MHS Nursing Practice and Administration Organization Chart ( Figure 28–1 )
· • MHS Executive-Level Organization Chart ( Figure 28–2 )
Exhibit 28–3 Statement of Cash Flows
| Metropolis Health System Statement of Cash Flows for the Year Ended March 31, 2___ | |
| Statement of Cash Flows | |
| Operating Activities | |
| Income from operations | $1,700,000 |
| Adjustments to reconcile income from operations | |
| to net cash flows from operating activities | |
| Depreciation and amortization | 1,950,000 |
| Changes in asset and liability accounts | |
| Patient accounts receivable | 250,000 |
| Other receivables | (50,000) |
| Inventories | (50,000) |
| Prepaid expenses and other assets | (50,000) |
| Accounts payable and accrued expenses | (400,000) |
| Reduction of bond interest payable | (25,000) |
| Estimated third-party payer settlements | (75,000) |
| Interest income received | 80,000 |
| Unrestricted gifts and memorials received | 20,000 |
| Net cash flow from operating activities | $3,350,000 |
| Cash Flows from Capital and Related Financing Activities | |
| Repayment of long-term obligations | (500,000) |
| Cash Flows from Investing Activities | |
| Purchase of assets whose use is limited | (100,000) |
| Equipment purchases and building improvements | (2,000,000) |
| Net Increase (Decrease) in Cash and Cash Equivalents | $750,000 |
| Cash and Cash Equivalents, Beginning of Year | 400,000 |
| Cash and Cash Equivalents, End of Year | $1,150,000 |
Exhibit 28–4 Statement of Changes in Fund Balance
| Metropolis Health System Statement of Changes in Fund Balance for the Year Ended March 31, 2___ | |
| General Fund Balance April 1, 2____ | $19,700,000 |
| Revenue and Gains in Excess of Expenses and Losses | 1,800,000 |
| General Fund Balance March 31, 2____ | $21,500,000 |
Exhibit 28–5 Schedule of Property, Plant, and Equipment
| Metropolis Health System Schedule of Property, Plant, and Equipment for the Year Ended March 31, 2___ | |
| Buildings and Improvements | $14,700,000 |
| Land Improvements | 1,100,000 |
| Equipment | 28,900,000 |
| Total | $44,700,000 |
| Less Accumulated Depreciation | (26,100,000) |
| Net Depreciable Assets | $18,600,000 |
| Land | 480,000 |
| Construction in Progress | 220,000 |
| Net Property, Plant, and Equipment | $19,300,000 |
Exhibit 28–6 Schedule of Patient Revenue
| Metropolis Health System Schedule of Patient Revenue for the Year Ended March 31, 2___ | |
| Patient Services Revenue | |
| Routine revenue | $9,850,000 |
| Laboratory | 7,375,000 |
| Radiology and CT scanner | 5,825,000 |
| OB–nursery | 450,000 |
| Pharmacy | 3,175,000 |
| Emergency service | 2,200,000 |
| Medical and surgical supply and IV | 5,050,000 |
| Operating rooms | 5,250,000 |
| Anesthesiology | 1,600,000 |
| Respiratory therapy | 900,000 |
| Physical therapy | 1,475,000 |
| EKG and EEG | 1,050,000 |
| Ambulance service | 900,000 |
| Oxygen | 575,000 |
| Home health and hospice | 1,675,000 |
| Substance abuse | 375,000 |
| Other | 775,000 |
| Subtotal | $48,500,000 |
| Less allowances and charity care | (14,500,000) |
| Net Patient Service Revenue | $34,000,000 |
Exhibit 28–7 Schedule of Operating Expenses
| Metropolis Health System Schedule of Operating Expenses for the Year Ended March 31, 2___ | |
| Nursing Services | |
| Routine Medical/Surgical | $3,880,000 |
| Operating Room | 300,000 |
| Intensive Care Units | 395,000 |
| OB–Nursery | 150,000 |
| Other | 300,000 |
| Total | $5,025,000 |
| Other Professional Services | |
| Laboratory | $2,375,000 |
| Radiology and CT Scanner | 1,700,000 |
| Pharmacy | 1,375,000 |
| Emergency Service | 950,000 |
| Medical and Surgical Supply | 1,800,000 |
| Operating Rooms and Anesthesia | 1,525,000 |
| Respiratory Therapy | 525,000 |
| Physical Therapy | 700,000 |
| EKG and EEG | 185,000 |
| Ambulance Service | 80,000 |
| Substance Abuse | 460,000 |
| Home Health and Hospice | 1,295,000 |
| Other | 130,000 |
| Total | $13,100,000 |
| General Services | |
| Dietary | $1,055,000 |
| Maintenance | 1,000,000 |
| Laundry | 295,000 |
| Housekeeping | 470,000 |
| Security | 50,000 |
| Medical Records | 330,000 |
| Total | $3,200,000 |
| Support Services | |
| General | $4,600,000 |
| Insurance | 240,000 |
| Payroll Taxes | 1,130,000 |
| Employee Welfare | 1,900,000 |
| Other | 430,000 |
| Total | $8,300,000 |
| Depreciation | 1,900,000 |
| Amortization | 50,000 |
| Interest Expense | 325,000 |
| Provision for Doubtful Accounts | 1,500,000 |
| Total Operating Expenses | $33,400,000 |
Exhibit 28–8 Hospital Statistical Data
| Metropolis Health System Schedule of Hospital Statistics for the Year Ended March 31, 2___ | |||
| Inpatient Indicators: | Departmental Volume Indicators: | ||
| Patient Days | |||
| Medical and surgical | 13,650 | Respiratory therapy treatments | 51,480 |
| Obstetrics | 1,080 | Physical therapy treatments | 34,050 |
| Skilled nursing unit | 4,500 | Laboratory workload units (in thousands) | 2,750 |
| Admissions | EKGs | 8,900 | |
| Adult acute care | 3,610 | CT scans | 2,780 |
| Newborn | 315 | MRI scans | 910 |
| Skilled nursing unit | 440 | Emergency room visits | 11,820 |
| Ambulance trips | 2,320 | ||
| Discharges | Home health visits | 14,950 | |
| Adult acute care | 3,580 | ||
| Newborn | 315 | Approximate number of employees (FTE) | 510 |
| Skilled nursing unit | 445 | ||
| Average Length of Stay (in days) | 4.1 |
Figure 28–1 MHS Nursing Practice and Administration Organization Chart.
Courtesy of Resource Group, Ltd., Dallas, Texas.
Figure 28–2 MHS Executive-Level Organization Chart.
Courtesy of Resource Group, Ltd., Dallas, Texas.
CHAPTER 29 Mini-Case Study 1: Proposal to Add a Retail Pharmacy to a Hospital in the Metropolis Health System
Sample General Hospital belongs to the Metropolis Health System. The new chief financial officer (CFO) at Sample Hospital has been attempting to find new sources of badly needed revenue for the facility. Consequently, the CFO is preparing a proposal to add a retail pharmacy within the hospital itself. If the proposal is accepted, this would generate a new revenue stream. The CFO has prepared four exhibits, all of which appear at the end of this case study. Exhibit 29–1 , a three-year retail pharmacy profitability analysis, is the primary document. It is supported by Exhibit 29–2 , the retail pharmacy proposal assumptions. The profitability analysis is further supported by Exhibit 29–3 , a year 1 monthly income statement detail. Finally, Exhibit 29–4 presents the supporting year 1 monthly cash flow detail and assumptions.
When the controller reviewed the exhibits, she asked how the working capital of $49,789 was derived. The CFO explained that it represents 3 months of departmental expense. He also explained that the cost of drugs purchased for the first 60 days was offset by these purchases’ accounts payable cycle, so the net effect was 0. In essence, the vendors were financing the drug purchases. Thus, the working capital reconciled as follows:
| Working Capital: | |
| Cost of drugs (2 months) | $303,400 |
| Vendor financing (accounts payable) | ($303,400) |
| Departmental expense (3 months) | $49,789 |
| Total Working Capital Required | $49,789 |
The controller also noticed on Exhibit 29–4 that the cost of renovations to the building is estimated at $80,000 and equipment purchases are estimated at $50,000 for a total capital expenditure of $130,000. The building renovations are depreciated on a straight-line basis over a useful life of 15 years, whereas the equipment purchases are depreciated on a straight-line basis over a useful life of 5 years. The required capital is proposed to be obtained from hospital sources, and no borrowing would be necessary. In addition, the total capital expenditure is projected to be retrieved through operating cash flows before the end of year 1.
Exhibit 29–1 Sample General Hospital 3-Year Retail Pharmacy Profitability Analysis
| Year 1 | Year 2 | Year 3 | ||
| Rx Sales | 2,587,613 | 2,692,152 | 2,828,375 | |
| Cost of Goods Sold | 2,047,950 | 2,088,909 | 2,151,576 | |
| Gross Margin | 539,663 | 603,243 | 676,799 | |
| GM % | 20.9% | 22.4% | 23.9% | |
| EXPENSES | ||||
| Salaries and Wages | 192,000 | 197,760 | 203,693 | |
| Benefits | 38,400 | 39,552 | 40,739 | |
| Materials and Supplies | 12,000 | 14,400 | 17,280 | |
| Contract Services and Fees | 14,400 | 17,280 | 20,736 | |
| Depreciation and Amortization | 15,333 | 15,333 | 15,333 | |
| Interest | — | — | — | |
| Provision for Bad Debts | 25,876 | 26,922 | 28,284 | |
| Misc. Exp. | 3,600 | 4,320 | 5,184 | |
| Total Expense | 301,609 | 315,567 | 331,248 | |
| Net Income | 238,053 | 287,676 | 345,550 | |
| Operating Margin | 9.2% | 10.7% | 12.2% | |
| Cash Flow | ||||
| Year 1 | Year 2 | Year 3 | ||
| Sources | ||||
| Net Income | 238,053 | 287,676 | 345,550 | |
| Depreciation | 15,333 | 15,333 | 15,333 | |
| Borrowing | — | — | — | |
| Total Sources | 253,386 | 303,010 | 360,884 | |
| Uses | ||||
| Capital Purchasing | 130,000 | — | — | |
| Working Capital | 49,789 | — | — | |
| Total Uses | 179,789 | — | — | |
| Cash at Beginning of Period | — | 73,597 | 376,607 | |
| Net Cash Activities | 73,597 | 303,010 | 360,884 | |
| Cash at Ending of Period | 73,597 | 376,607 | 737,490 | |
| Volume | ||||
| Year 1 | Year 2 | Year 3 | ||
| Number of Prescriptions Sold | 55,350 | 56,457 | 58,151 |
Courtesy of Resource Group, Ltd., Dallas, Texas.
Exhibit 29–2 Sample General Hospital Retail Pharmacy Proposal Assumptions
| Prescriptions | ||||
| 1. | Annual Prescription Estimates—Rate of Growth/Capture | Per Day | Annual | |
| Year 1 | 225 | 55,350 | ||
| Year 2 | 2.0% | 230 | 56,457 | |
| Year 3 | 3.0% | 236 | 58,151 | |
| 2. | Average Net Revenue per Prescription—Yearly Increases | |||
| Year 1 | $ 46.75 | |||
| Year 2 | 2.0% | $ 47.69 | ||
| Year 3 | 2.0% | $ 48.64 | ||
| 3. | Bad Debt Percentage | 1.0% | ||
| 4. | Average Cost per Prescription—Yearly Increases | |||
| Year 1 | $ 37.00 | |||
| Year 2 | 3.0% | $ 38.11 | ||
| Year 3 | 3.0% | $ 39.25 | ||
| 5. | Inflation Rates—Per Year | |||
| Salary and Wages | 3.0% | |||
| Other Than Prescriptions | 2.0% | |||
| Benefits as a % of Salaries | 20.0% | |||
| 6. | Initial Capital Requirements | |||
| Building | 80,000 | |||
| Equipment | 50,000 | |||
| Working Capital | 49,789 | |||
| Total | 179,789 | |||
| Year 1 | Year 2 | Year 3 | ||
| Gross Margin | 539,663 | 603,243 | 676,799 | |
| Net Income before Taxes | 238,053 | 287,676 | 345,550 | |
| Year 1 | Year 2 | Year 3 | ||
| Beginning Cash Balance | — | 73,597 | 376,607 | |
| Net Cash Activity | 73,597 | 303,010 | 360,884 | |
| Ending Cash Balance | 73,597 | 376,607 | 737,490 |
Courtesy of Resource Group, Ltd., Dallas, Texas.
Exhibit 29–3 Sample General Hospital Retail PharmacyProposal Year 1 Monthly Income Statement Detail
Exhibit 29–4 Sample General Hospital Retail Pharmacy Proposal Year 1 Monthly Cash Flow Detail and Assumptions
So how was the proposal received by the hospital’s board of trustees? They first asked for a small market study to test the amount of prescription sales projected within the proposal. When the market study results came back positive, the board approved the project, and renovations are about to commence.
Identifiable Versus Allocated Budget Costs
Within a departmental budget, certain costs will be specifically identifiable while others will be allocated instead, as shown in Figure 15–3 :
· • Direct patient care and supporting patient care should be mostly identifiable.
· • General and administrative expense and patient-related expense will probably be mostly allocated costs.
· • Financial-related expense, such as interest expense, may not be included at all in the manager’s budget.
Figure 15–3 Identified Versus Allocated Costs.
Fixed Versus Variable Costs
You will recall that fixed costs do not change in total, even though volume rises or falls (within a wide range). Variable costs, however, rise or fall in proportion to a change (a rise or fall) in volume. You will further recall that volume, in the case of healthcare organizations, generally means number of procedures (outpatient services) or number of patient days (inpatient services) or perhaps, prescriptions filled (pharmacy services). Figure 15–4 illustrates this principle, while Exhibit 15–1 provides examples of fixed and variable cost categories that would typically be found within an operating budget.
Figure 15–1 Two Common Budget Responsibility Centers.
Figure 15–2 Transactions Outside the Operating Budget.
Figure 15–4 Fixed Versus Variable Costs.
