Budget development for nurse managers

This chapter from the newly revised second edition of The Nurse Manager's Guide to Budgeting & Finance explores the six steps of the budget-development work flow.

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Nurse managers set goals and design the budget (usually in collaboration with the finance department) for their own responsibility center, or nursing unit. After the budget has been developed and updated, it is submitted to administration and ultimately to the board of directors for approval. After the budget is approved and the fiscal year begins, the organization must deliver the planned services and programs.

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NOTE
The budgeting process is ongoing and dynamic. It should provide feedback; this is essential in managing the budget.

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The budget-development work flow involves the following steps:

1. Collecting relevant data
2. Planning services
3. Planning activities
4. Implementing the plan
5. Monitoring the budget
6. Taking corrective measures when necessary

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NOTE
Spreadsheets, typically in Microsoft Excel, are used to calculate all budget components at the unit level.

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Collecting relevant data
A critical task in creating a budget is collecting relevant data. The finance department ultimately collects the data, but this is done in collaboration with the nurse manager to create a functional budget. This includes the following information:

• Services offered. This data is collected by the nurse manager. That person knows best what services are currently offered and will be offered in the future. For example, a nurse manager may plan to increase bed capacity on an underutilized nursing unit as the census has increased the past year. The nurse manager knows that another surgeon is coming on staff who will bring increased volume to the facility, thus justifying the need for increasing the bed capacity.
• Patient mix/case mix. This pertains to the complexity of care. Generally, the more complex the case, the higher the reimbursement. Each hospital and nursing facility calculates an overall case-mix index. This is a number that is calculated by the finance department for the organization. The higher the number, the higher the reimbursement level.
• Payer mix. This number, also calculated by the finance department, reflects the patient demographics. For example, it might indicate that 50% of patients of a healthcare facility are below the age of 65 and have a managed care plan as their insurance plan. Generally, for such patients, length of stay is shorter, and reimbursement may be higher than for a Medicare patient. In contrast, this number might indicate that 70% of a facility’s patients are over the age of 65 and that their primary insurance is Medicare. With Medicare, reimbursement is generally less than with commercial insurance companies, but length of stay is increased.
• Acuity index. The acuity index is a numeric calculation of the acuity of each patient on a given nursing unit. Once upon a time, there were level systems—for example, level 1 through 5, with 5 being the most complex case. The nurse manager or charge nurse on each shift would assign a numeric rank to each patient. A calculation was then done. The acuity index predicted the level of staffing required. Most of these systems were extremely inaccurate and almost always predicted a huge increase in staff that the organization could not afford. This was because the acuity index was always based on the subjectivity of the nurse completing the index. Today, computerized systems are used, which has significantly increased the accuracy of these systems.

In addition, the following data should be gathered:

• Hours provided per patient day
• Standards of care
• Plans for changes in services provided
• Plans for changes in resource utilization

All this information can be gleaned from the following data sources:

• Historical information. This data is composed of the prior years’ history of operational performance found in budget reports. Information such as patient days, average length of stay, nursing hours per patient day, staff overtime, and so on are reviewed for prior years to make budget projections for the upcoming year.

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  NOTE
  Historical budgets can provide extremely useful information to plan the next year’s budget. As a chief nursing officer (CNO), when I was planning the following year’s budget, the finance department would always provide useful historical information. The facility that I worked for generally would provide information for the previous 4 to 5 years.
  
  Whenever data is provided, analysis of such data is critical. From reviewing the previous years’ data, I could quickly identify patterns and trends. For example, were admissions increasing, decreasing, or remaining level? Was the patient’s average length of stay increasing, decreasing, or remaining level? Once managed care kicked in it was very interesting to note how the length of stay of patients decreased. One of the data elements that I really homed in on was the nursing hours of care per patient day. From my experience speaking around the country, most facilities do make use of historical budgeting as a vital component of planning the next fiscal year’s budget.

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• Statistical reports/prior budget reports. Statistical reports result from 1 year of operations in an organization. This year then becomes a prior year report and is part of the history of the organization. Most organizations do historical budgeting, so the finance department and the nurse manager refer to prior year reports when creating the budget for the next fiscal year.
• Industry trends. An example of an industry trend is a change in technology. For example, some orthopaedic total hip replacements now take an anterior approach, with the patient discharged the next day rather than enduring a 3-day hospital stay. This affects reimbursement. Another example is the use of percutaneous cardiac interventions rather than coronary bypass surgery in myocardial infarction patients. Other industry trends could relate to things happening in politics, such as decreasing reimbursement in the Medicare or Medicaid programs. Nurses need to be attuned to what the federal government does with federal insurance programs, as well as what their respective state government does with Medicaid, charity care, and other programs managed by the state.
• Organizational goals and objectives. Organizational goals and objectives are developed by the top administration. These are generally communicated to staff through their department directors and administrators. Nurse managers will formulate their own goals and objectives, which must be aligned with the overall organizational goals and objectives.

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UNDERSTANDING THE CHART OF ACCOUNTS
During the budget-creation process, the financial department will establish what is known as a chart of accounts.

In accounting, the chart of accounts is a list of the names of income (revenue), expense (what the business spends), liability (what the business owes), and asset (what the business owns) accounts that a company uses in maintaining their books in a general ledger. The chart of accounts is set up by finance at the start of the business. Reference numbers are used to help classify the accounts by type. For example, in a hospital, each nursing unit will have a reference number. The chart organizes and tracks all of the business activities. Reports can then be easily generated in a logical sequence to track the financial history and progress of the business.

The chart of accounts does the following:

• It provides a format for the financial structure of the budget, so that all expenses and revenues can be tracked and recorded.
• It structures the recording and reporting of activities (revenue and expense).
• It organizes the information.
• It identifies the various areas of responsibility and the types of transactions that occur in each.

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NOTE
Here is how I view a chart of accounts, which sounds much more dramatic than what it really is. Think of a chart of accounts like your own household budget. My household budget is constructed with columns in a tabular format. In my household budget, I list all the revenue, that is, the income that I make from my primary job, practice as a nurse practitioner, consulting, etc. I then list all my expense items, for example, mortgage, car payment, electricity costs, gas costs, credit card bills, and other expense items. Each column has total amounts, for example, my total income from all that I do and my total expenses.

In a chart of accounts, the business’s assets as well as liabilities are listed. I recently paid the mortgage off on the house so the house is now fully owned. I no longer need to list the mortgage amount as an expense. In my household budget I do not list my home as asset, even though it is. In comparison in a chart of accounts for a business, if the business fully owned the physical plant, the net worth of that plant would be listed as an asset. Liabilities are what the business owes, so they would also be listed in the chart of accounts.

Most nurse managers do not see nor prepare the chart of accounts. That is an accounting function of the finance department. However, it is important to know and realize that one does exist for a business.

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Implementing the plan
The budget plan is implemented by the nurse manager after approval by upper-level administration and ultimately the board of directors of the organization.

Implementing the plan means providing the services. For many nursing managers, this process will be no different from previous years. For some nurse managers, this might entail the implementation of new services or treatments. Implementation of the plan is really what occurs on a day-to-day basis with general operations of the organization (that is, the provision of care to patients). Budgeted expenses and revenue will be compared to actual expenses and revenue.

• Department head. Each department head or nurse manager is responsible for confirming the detailed operating expense budget for his or her department (cost center), consistent with organizational goals and objectives.
  
  
• Director of budget. The director of budget ensures that all budget forms are properly prepared and that data is accumulated within the specified timetable.
  
  
• Vice presidents. Vice presidents are responsible for the establishment of the basic annual budget formulation parameters. They assimilate departmental budgets into an organizational master budget consistent with organizational goals and objectives.
  
  
• President/CEO. The president or CEO has overall responsibility for the formulation and execution of the organization’s budget. The president ensures consistency between the budget and divisional goals and objectives.
  
  
• Finance committee and board of trustees. These bodies are responsible for the review and approval of the completed operating budget.

In a healthcare setting, department heads and nurse managers are involved with some of the most critical functions in budgetary planning and the control process. They serve as the link between the plans of administration and the performance of the institution’s workforce. If they fail to achieve the objectives and goals of the budget, the desired results will not be achieved. 

• Rigid. Some fiscal departments are very conservative, and once the budget is created for the next year, it is more or less placed in stone. Variances are identified and explained, but the budget does not change for the entire year even though volume may have increased on a consistent basis.

• Externally imposed. A budget may be externally imposed by a higher administrative person (for example, a director of nursing). This person completes the budget with the finance budget manager and hands the budget down to nurse managers without their input. Another scenario could be that the nurse manager had input and recommended more staffing, but it is determined by higher administration that this staffing is not possible. Then the nurse manager must manage within the confines of the budget that was provided to him/her initially by the finance budget manager.

• Interfering with interdepartmental/intradepartmental cooperation and communication. Departmental cooperation and communication can suffer when one department receives more in the budget compared to another department. For example, the nurse manager puts in a request in the capital budget for a new automatic blood pressure machine. This request is denied. The radiology department puts in a request for a new CT scanner, and this request is approved. The CT scanner is in the million-dollar range. The automatic blood pressure machine is in the thousand-dollar range. The nurse manager’s working relationship with the radiology director suffers because of this.

• Tools for which managers are held accountable but do not have the authority to control. A nurse manager may be held accountable for the budget they do not have the authority to control. For example, in my very first management job I never saw the budget nor did I ever see budget reports. That was the job of the Director of Nursing. Two years into the job I got reprimanded for utilizing too much overtime. How could I know how much overtime I was using if I never saw a budget report? Thus, I was held accountable for the overtime, yet had no authority to really manage it and control it as I had no access to necessary reports.

• The just-in-time method. Companies plan to receive items as they are needed rather than maintaining high inventory levels.

An example of just-in-time inventory is ordering a very expensive surgical device that is rarely used and is ordered for a scheduled elective surgical procedure for a patient.

• Materials requirement planning. Companies schedule material deliveries based on projected forecasts.

The reality is that a lot of inventory in a hospital or other healthcare organization needs to be kept on hand for daily use. The amount kept available is based on prior experience and projected volumes for an upcoming fiscal cycle.

Inventory management also includes rotating stock, checking stock for outdated or near-outdated supplies, and making certain that supplies are on hand when needed.

Hospitals and healthcare organizations that fail to pay vendors for inventory can place the organization in jeopardy, as eventually the vendor will stop providing supplies to the hospital or healthcare organization.

One of the highest costs of inventory in a hospital is the operating room. In most operating rooms, surgeons have a procedure card for each type of surgical procedure that the respective surgeon performs. The procedure cards lists all the items or inventory required for the procedure.

Hospitals often design their informatics system so that when the nurse pulls the inventory for the procedure, the system automatically bills the patient’s account and orders replacement inventory. This system definitely ensures that the correct amount of inventory is on hand and that the correct party is billed for the used inventory. This system also controls costs because items are replaced when used and excessive inventory is not maintained.

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DEALING WITH INVENTORY ISSUES
An emergency department nurse manager who managed a busy inner-city emergency department was checking the supply room for Lactated Ringer’s on a Friday afternoon, because this emergency department usually experienced a large number of trauma patients on a Friday evening. The nurse manager noticed that there were no bags of Lactated Ringer’s on the shelf. The nurse manager called the central processing department that stocked the supplies, questioning why there were no Lactated Ringer’s on the shelf. The response was that they had run out of Lactated Ringer’s. On further exploration, the nurse manager learned that the hospital was experiencing financial difficulty and had not been paying their vendors. The vendor that supplied the Lactated Ringer’s would not send more bags of Lactated Ringer’s until they received a payment.

Vendor disputes need to be addressed prior to a problem developing, such as the emergency department not having Lactated Ringer’s solution on hand. A well-functioning purchasing department would not have allowed such an event to occur. Certain vendors must be paid in a timely manner for critical supplies to be available. Can you imagine what would happen if the company that supplied the hospital’s oxygen was not paid and no oxygen was delivered?

The key is to negotiate reasonable charges. This can be done in several ways. One way certainly is to explore how many companies make a particular item and then get price quotes. Hospitals working together in a network can have a huge impact on lowering costs. For example, if 10 hospitals network with each other for group purchasing, and a company refuses to lower costs, most likely another company would be more than happy to do so as they would gain 10 hospitals’ business.

In the case example of the emergency department, this was a two hospital system and the other hospital had extra Ringer’s Lactate solution on hand so they sent some over to the hospital without the Ringer’s Lactate solution. Other crystalloid solutions could also be utilized on an emergency basis, such as normal saline solution.

Summary
This chapter discussed the following steps of the budget-development work flow:

• Collecting data
• Planning services
• Planning activities
• Implementing the plan
• Monitoring the budget
• Taking corrective measures when necessary
• Management’s role in budgeting
• Inventory management 

Information on purchasing The Nurse Manager's Guide to Budgeting & Finance (2nd ed.). 

Al Rundio, PhD, DNP, RN, APRN, NEA-BC, FNAP, FIAAN, FAAN, is associate dean for post-licensure nursing programs & CNE and clinical professor of nursing at Drexel University College of Nursing and Health Professions in Philadelphia, Pennsylvania.