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.
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.
The budgeting process is ongoing and dynamic. It should provide feedback; this is essential in managing the budget.
The budget-development work flow involves the following steps:
- Collecting relevant data
- Planning services
- Planning activities
- Implementing the plan
- Monitoring the budget
- Taking corrective measures when necessary
Spreadsheets, typically in Microsoft Excel, are used to calculate all budget components at the unit level
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.
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.
- 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.
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.
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.
Nursing is aware of what types of services will be rendered in the next fiscal year. Finance may be aware if it is a large project that the organization has been involved with, but many times finance is not aware of every type of service that will be rendered. For example, a nurse manager in an emergency department may be planning on opening a fast-track part of the emergency department to accommodate the minor emergencies more efficiently. This type of new service will require additional staffing. The budget will have to be formulated with this new service in mind. All associated costs, as well as projected volume and revenue, will need to be accounted for in the budget.
When you are planning a new service for the next fiscal budget, this needs to be communicated to the finance department. I always had an ongoing relationship with the finance department. It is crucial for nurse executives to embrace the concept of working well with the individuals in the organization who control the purse strings. I would meet biweekly with the budget manager. He would also meet with all of my managers on a biweekly basis. The purpose of these meetings was to review current finance reports, and these meetings also provided a communication forum for current and future activities and planning.
During budget preparation time, the budget manager from finance would also meet individually with my managers to plan the next fiscal year’s budget. This also provided a mechanism for communicating any anticipated changes or additions in services.
Usually in a fiscal year there will be budget surprises. So how do these get communicated to finance? One example that happened to me was in the operating room. Laparoscopic surgical procedures were just beginning. Some of our medical staff had trained on this procedure and mid budget year they decided that they wanted to implement it. There were no huge costs associated with this; however, they were unplanned costs. New equipment needed to be purchased for the operating room. I then communicated this change with finance, the chief financial officer (CFO), and the chief executive officer (CEO). I explained that this would increase revenue in the long run and that we would lose market share if we did not implement this new procedure. We then as a united group sold this to the board of directors, who approved the purchase of the equipment for the implementation of this new procedure.
I think that what is important for mid budget year events is to really analyze what is requested. Some questions to consider are the following: Can it wait until the next fiscal year? Will market share be lost if we delay purchase or implementation? What are the overall costs? Do the costs outweigh the benefits? Will revenue increase?
An activity may be a particular treatment that is new to the department. This will also have to be planned accordingly in the budget.
For example, when tissue plasminogen activator (TPA) was first available on the market to treat myocardial infarction patients in emergency departments, the cost of this medication was around $2,000 per treatment. The nurse manager would be aware of this new treatment, not the finance department. Let’s say that this emergency department treats 2,000 myocardial infarction patients every year. Further, let’s say that 75% of these patients could receive TPA.
The nurse manager needs to figure out how much cost this would be: (0.75 × 2,000 patients = 1,500 patients that could potentially receive TPA).
The costs would be: (1,500 patients × $2,000 per patient = $3,000,000.00 total costs).
If the nurse manager did not make finance aware of this new treatment and the associated costs, there would be a significant negative budget variance. Finance also would need to see if the insurances would reimburse this new treatment. You can see why the nurse manager is critical to planning activities for the budget.
DEFENDING YOUR PROPOSALS
Often, creating the budget involves defending what you have proposed. Nurse managers must be prepared to defend what they are proposing. It is a give-and-take process, based on the available resources of the organization.
Generally, the nursing department will estimate that more staffing and dollars will be needed to deliver care than what the finance group estimates. Given this, it’s critical that nursing and finance come to agreement on the budget prior to presenting it to administration. Having these two departments in agreement becomes an item of defense if the CEO does not approve the budget as submitted.
The CEO will most likely question certain budgeted items. The item questioned most often is the care hours provided per patient day, because these hours convert to staffed hours. Usually, nursing attempts to increase the hours. Care hours provided should be in alignment with the complexity of the cases and the acuity system utilized (if any, because many healthcare facilities do not use acuity systems).
The best advice is to prepare for and anticipate questions. Back up information with data. Finance can help you in this preparation. For example, if you predict more care hours due to an increased census, demonstrate with data how the census has increased the past year. Demonstrate what percent occupancy your unit was at and for how long a time. Demonstrate how this trend will continue into the foreseeable future.
One of the challenging items to justify in a budget is a new nursing position, such as a new role. I really believe in the role of a clinical nurse specialist on a nursing unit. There is no doubt in my mind that a good clinical nurse specialist improves care and mentors and motivates nursing staff to excel. I was able to hire my first clinical specialist in maternal child health. This person was a dynamo who really improved care in this area. My vision was to have a clinical nurse specialist for every major service, for example, neuro, critical care, operating room, etc. Each year I would add a new clinical nurse specialist position to the budget. I had to justify this, but I utilized concrete outcome measurement from the clinical specialists in the role. This provided data that enabled me to get approval on these positions.
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.
Monitoring the budget
The budget must be monitored, with accurate financial reporting on a routine basis. It is the responsibility of the nurse manager and the finance department to monitor the budget. Using reports, you must compare actual revenue and expenses to the budgeted revenue and expenses. Variances must be identified. A variance analysis must be completed, where appropriate, to analyze cost, efficiency, and volume variances.
Variance analyses are completed whenever you have a deficit—that is, where actual expenses exceed budgeted expenses and where actual revenue is less than budgeted revenue. The variance analysis is completed so that the nurse manager knows exactly what is causing the problem. Armed with this knowledge, the nurse manager can take corrective action in the next budget cycle.
The finance department almost always completes these reports and sends them to the nurse manager for analysis and action. In some organizations the nurse manager may be completing a variance analysis and report. This will vary from organization to organization, but if it’s the case for you, consult the finance department to learn the appropriate way to complete a variance report.
Taking corrective measures when necessary
Based on performance, the initial goals may need to be modified. A change in the types and levels of services and the resources used may also be required.
As an example, let’s return to the emergency department and review how the TPA administration to myocardial infarction patients is working out. Suppose that everything is going well and that the first quarter budget report is right on target with the budget, both from an expense side and a revenue side. In the second quarter, new evidence demonstrates that patients with an acute myocardial infarction ideally should be treated promptly in a cath lab so that percutaneous cardiac interventions can be performed (for example, an angioplasty with stent placement). During this second quarter, patients are now triaged right to the cardiac cath lab.
The budget projections are now not met with TPA secondary to this newer recommendation. The cath lab will need to change their budget for the next operating period as they are seeing a lot more cath patients. They will have to add staffing and more on-call shifts in their budget. The emergency department will need to downward adjust their projected cost and revenue for TPA as there are many fewer patients receiving TPA.
Management’s role in budgeting
In terms of budgeting, management responsibilities are broken down as follows:
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.
SPOTTING A DYSFUNCTIONAL BUDGET
Budgets are viewed by managers as dysfunctional when they are considered to be any of the following:
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.
Inventory management refers to the overseeing and controlling of the ordering, storage, and use of supplies that a hospital or other healthcare organization will use in the provision of care. A hospital or healthcare organization’s inventory is one of its major assets and represents an investment that is tied up until the item is used. It also costs money to store, track, and insure inventory. Inventories that are mismanaged can create significant financial problems for a healthcare entity, whether the mismanagement results in inventory excess or an inventory shortage.
Successful inventory management involves creating a purchasing plan that ensures that items are available when they are needed (but that neither too much nor too little is purchased) and keeping track of existing inventory and its use. Two common inventory-management strategies are as follows:
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.
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.
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.
This chapter discussed the following steps of the budget-development work flow:
Implementing the plan
Monitoring the budget
Taking corrective measures when necessary
Management’s role in budgeting
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.