NR614: Foundations of Health Care Economics, Accounting and Financial Management WEEK 7: Budgeting SLIDE 1: Week 7: Week Seven Sample Problem: Budgeting... There is one sample problem provided in week 7. This presentation will provide you with instructions on how to complete the sample problem: Budgeting SLIDE 2: + Sample Problem Assigned Problem: Revenue Budget and Labor Budget Review the sample problem prior to completing the assigned problem. The sample problem is identical to the assigned problem. The sample problem information is provided in the Excel spreadsheet below. Click on the link labeled "Sample problem week 7 Budgeting" to access the sample problem information. Sample problem for week 7: Budgeting Presentation, You may wish to download and print the transcript and the slides handout for your notes. Sample problem for week 7 Budgeting After reviewing the sample problem, complete the work for the assigned problem related to Clark Health Care Clinic. Click on the link below labeled "Assigned Problem Week Seven Budgeting" to obtain the word document with the information for the assigned problem. Assigned Problem Week Seven Budgeting After reading the assigned problem information, click on the link below labeled "Week Seven Assigned Problem Worksheets Clark Health Care Clinic" to obtain the Excel Spreadsheet you will use to complete this assigned problem. Week Seven Assigned Problem Worksheets Clark Health Care Clinic Save the Excel spreadsheet using the file naming protocol. Submit the spreadsheet to the appropriate Dropbox by 8:00 a.m. Monday of week 8.
SLIDE 3: Sample Problem Spreadsheet Calculating Revenue Calculating Labor Budget Budget SLIDE 4: Calculating Revenue Sample Problem: Calculating Revenue Problem Givens: Fee price per RVU is $60.00 Payment sources: Medicare, Medicaid, Private Insurance, and Private Pay Payment Arrangements: Medicare pays $32.00 per RVU, Medicaid pays $26.00 per RVU, Private Insurance pays $65.00 per RVU and Private Pay is $110 per RVU January RVUs: Medicare: 892, Medicaid: 944, Private Insurance: 215, and Private Pay: 1,126 February RVUs: Medicare: 870, Medicaid: 835, Private Insurance: 215, and Private Pay: 1,324 March RVUs: Medicare: 860, Medicaid: 1,132, Private Insurance: 215, and Private Pay: 1,056 A Relative Value Unit (RVU) represents the time increment used to bill for services provided. For example, a physician might charge by 15 minute increments. Each increment is considered a relative value unit.
Each provider determines the length of time required to see each patient. For example, an initial visit might be 4-RVUs while a follow-up visit might be 1-RVU. Each RVU has a dollar value and is billed based on the number of RVUs used for each patient. The fee for each RVU is the fee charged to every patient regardless of payment source. However, third-party payers negotiate a reduced rate with the provider and the reduced rate is what the third-party payer pays for each RVU. For this problem the value of each RVU has been set at $60 and the actual amount to be paid by third-party payers has been negotiated. SLIDE 5: Calculating Revenue Calculations: Determine the number of RVUs for each payer source. Determine the price per RVU. This is usually determined by the organization. Revenue is determined by the number of RVUs used per visit. This problem requires you to determine the number of RVUs for each payer source. The negotiated rate is used for each payer source and multiplied by the number of RVUs used per visit by the patient who is covered by a specific payer source. SLIDE 6: Calculating Revenue Calculations: Gross charges are determined by multiplying the RVUs by price per RVU in each payer source category. The total of all payer source RVUs is gross charges. This is the amount the provider bills but not necessarily the amount the provider receives due to contract discounts with third-party payers. The gross charges total is added to the operating budget as Patient Revenue.
To determine net charges (charges after discounts are applied) is determined using the number of RVUs for each payer source as part of this calculation. For billing purposes, all RVUs are billed at the set amount. For this sample problem, the set amount is $60 per RVU. The billed amount is the gross amount owed to the provider. When billed, this amount is added to the operating budget as patient revenue (the amount owed the provider by the patient). Net charges are the amount owed to the provider by third-party payers once the discount is applied. SLIDE 7: Calculating Revenue Calculations: The net charges total is added to the budget as Net Patient Revenue (see Budget sheet) The discounted rate for each RVU is negotiated with third-party payers are known as the payment arrangement. Each payer source will usually have a different discounted rate due to the negotiation process. The payment arrangement value (discounted rate) is multiplied by the number of RVUs for each payer source. This value is the net charges, what is actually paid by the third-party payers. As stated, net charges are added to the account titled Net Patient Revenue for budgeting purposes. This is the amount that will actually be paid by third-party payers. Patients, who pay privately, do not receive a discount and will pay the actual amount billed for services provided, usually a higher amount than the set amount of $60 per RVU.
SLIDE 8: Calculating Revenue Calculations: The final calculation is to determine the discounts and allowances by subtracting the net charges from the gross charges. The discounts and allowances total is added to the budget as Discounts and Allowances (see Budget sheet #3) The difference between the gross charges and the net charges are the discounts and allowances. You will note that private pay is the only negative value. Private pay values tend to be negative because the individual who pays privately pays full price for the services provided, thus usually not receiving a discount unless the organization provides a discount for paying on time. Your organization may consider applying a discount to individuals who pay at the time services are provided or within a set period of time from the date of billing. This discount would also be identified in the account titled Discounts and Allowances. This account is used to track the discounts and allowances provided to help explain the difference between the patient revenue account and the net patient revenue account.
SLIDE 9: Calculating Revenue JANUARY Medicare Medicaid Private Insurance Private Pay Total Determination of Gross Charges: Statistics A. Number of RVUs Budget 892 944 215 1,126 3,177 B. Price per RVU Given 80 80 80 80 C. Gross Charges [ A x B] 71,360 75,520 17,200 90,080 254,160 Determination of Net Charges: D. Number of RVUs from A. E. Payment Arrangement Given $32.00 $26.00 $65.00 $110.00 F. Net Charges [D x E] $28,544 $24,544 $13,975 $123,860 $190,923 G. Discounts and Allowances [C - F] $42,816 $50,976 $3,225 ($33,780) $63,237 To determine revenue, the number of RVUs for each payer source (line A in the table) is multiplied by the actual price per RVU (line B in the table). The amount realized for each payer source is the gross charges (line C in the table). Only private pay individuals will pay this amount unless offered a separate discount or allowance by the provider. Once gross charges are determined, the next step is to determine net charges for each payer source. The same number of RVUs is used for this next step (line D in the table is the same as line A in the table). The amount the third party payer will actually pay is the payment arrangement (line E in the table). Net charges are determined by multiplying the number of RVUs by the payment arrangement amount for each RVU (line F in the table). The difference between the gross charges and the net
charges is the discounts and allowances found in line G of the table. You will notice that the private pay individual is actually paying more per RVU than the price per RVU, resulting in a negative number between gross charges and net charges. SLIDE 10: Calculating Revenue FEBRUARY Medicare Medicaid Private Insurance Private Pay Total Determination of Gross Charges: Statistics A. Number of RVUs Budget 870 835 215 1,324 3,244 B. Price per RVU Given 80 80 80 80 C. Gross Charges [ A x B] 69,600 66,800 17,200 105,920 259,520 Determination of Net Charges: D. Number of RVUs from A. E. Payment Arrangement Given $32.00 $26.00 $65.00 $110.00 F. Net Charges [D x E] $27,840 $21,710 $13,975 $145,640 $209,165 G. Discounts and Allowances [C - F] $41,760 $45,090 $3,225 ($39,720) $50,355 The same calculations are completed for the month of February as discussed for the month of January.
SLIDE 11: Calculating Revenue MARCH Private Medicare Medicaid Insurance Pay Total Determination of Gross Charges: A. Number of Statistics RVUs Budget 860 1,132 215 1,056 3,263 B. Price per RVU Given 80 80 80 80 C. Gross Charges [ A x B] 68,800 90,560 17,200 84,480 261,040 Determination of Net Charges: D. Number of RVUs from A. E. Payment Arrangement Given $32.00 $26.00 $65.00 $110.00 F. Net Charges [D x E] $27,520 $29,432 $13,975 $116,160 $187,087 G. Discounts and Allowances [C - F] $41,280 $61,128 $3,225 ($31,680) $73,953 The same calculations are completed for the month of March as discussed for the month of January. Each month, the total gross charges are added to the account titled Gross Charges. This is the amount billed to each payer source except private pay individuals, who will be charged the net charges amount. Each month the total net charges are added to the account titled net charges and this is the amount expected to be paid by the third-party payers and individuals who pay privately (private pay net charges tend to be higher than the gross charges). The discounts and allowances account tracks the difference between gross charges and net charges for accounting purposes.
SLIDE 12: Calculating Labor Budget Sample Problem: Calculating the Fixed Labor Budget 1. Assume all benefits are 30% 2. Assume all raises are 7% 3. Assume all the other assumptions in the exhibit remain the same. Calculating the labor budget requires that each employee s salary is known; the benefits, which is usually a percentage of the employee s annual salary; and the expected salary increase for the next budget period, which is usually stated as a percentage increase of the current annual salary. Slides 13 through 16 provide the necessary information required to calculate the labor budget. SLIDE 13: Calculating Labor Budget CALCULATIONS: To determine salary costs, you need to find out the annual salary for every employee. In this sample, each position is provided with the annual salary. The next step is to determine the pay increase for the next year. This is usually determined by the organization prior to the next fiscal year. In this sample, the annual pay raise is provided. You will note the annual pay raise is 7% for all employees.
SLIDE 14: Calculating Labor Budget CALCULATIONS: For each month only those employees receiving the pay increase having the percentage added into their base salary. The new base salary is found by adding the base salary to the annual increase. The monthly salary is determined by dividing the base salary by 12. Benefits are determined by the organization and are usually calculated annually. SLIDE 15: Calculating Labor Budget CALCULATIONS: For this sample, benefits are determined based on the monthly salary. The benefit amount is found by multiplying the percent of benefits by the salary amount. Salary and benefits are added together to obtain a more complete picture of the cost for each employee. The raise date is documented to avoid missing the date and the employee not receiving their raise.
SLIDE 16: Calculating Labor Budget CALCULATIONS: You will note in the sample problem that the last two positions for Office Staff were not filled. Therefore, the information is blank. The salaries for each position were calculated for the months of January, February and March. Finally, a separate table was developed to show the positions and salaries for all employees, for the months of January, February and March. The totals are added to the Budget. All line items in the Budget are developed prior to development of the Budget. The values are based on historical data, current values and anticipated future values for each line item. The next three slides, slides 17 through 19 provide the monthly calculations for the labor budget (January, February and March).
SLIDE 17: Calculating Labor Budget Position Annual Base Salary % Raise JANUARY New Base Salary Monthly Salary Benefits Benefit Amount Monthly Salary Plus Raise Benefits Date Physician I Physician II 140,634 7.00% 150,478 12,540 138,745 7.00% 148,457 12,371 30% 30% 3,762 3,711 16,302 16,083 Jan Jan Physician's Assistant 68,428 0.00% 68,428 5,702 30% 1,711 7,413 Mar Physician's Assistant 60,321 0.00% 60,321 5,027 30% 1,508 6,535 Feb RN 49,354 7.00% 52,809 4,401 30% 1,320 5,721 Jan LPN I 36,276 0.00% 36,276 3,023 30% 907 3,930 Sep LPN II 39,987 0.00% 39,987 3,332 30% 1,000 4,332 Feb Nurse's Aide 28,987 0.00% 28,987 2,416 30% 725 3,140 Feb Office Manager 35,000 0.00% 35,000 2,917 30% 875 3,792 Feb Office Staff 21,473 0.00% 21,473 1,789 30% 537 2,326 Mar Office Staff 0 0.00% 0 0 30% 0 0 Jul Office Staff 0 0.00% 0 0 30% 0 0 Jun Calculating the labor budget requires that each position be added to the spreadsheet. This may be a simple task for a small unit, but when the annual budget is developed for an entire organization, this can become more tedious as the number of employees increases. This table looks at the month of January. The same calculations can be applied to all subsequent months. The first column identifies all the positions. The next column is the salary column. The salary amount applied here is the annual salary the employee earns as of January 1, 20xx, or the first day of the fiscal year for the organization.
The next column provides the percent raise anticipated for the employee on the date the raise is provided. This amount is determined by the organization. If the employee is not anticipated to receive a raise in the month the labor budget is developed, the amount applied to the column will be identified as 0%. In some organizations, the salary increase is applied on the same date for every employee while other organizations give raises on another date, often the anniversary of the employee s start date with the organization. For this sample problem, the employees receive their raises in different months. You will note for the month of January, three employees are going to receive a raise. The new base salary column is determined by adding the annual base salary to the salary increase. The salary increase is determined by multiplying the percentage increase by the original annual salary. The salary increase percentage amount is added to the original annual salary to obtain the new base salary. The monthly salary is determined by dividing the new base salary by 12. Benefits need to be considered as part of the cost of the labor budget. In this case, employees receive 30% of their salary in benefits. The organization calculates this amount for the manager by identifying the value of benefits each employee receives and dividing that amount by the employee s annual salary to obtain the percentage. The monthly salary is multiplied by the benefits percentage to obtain the monthly dollar value of the benefits the employee receives. This is added to the benefits amount column. The monthly salary plus benefits column amount is determined by adding the monthly salary with the benefits value identified in the benefits amount column. The final column gives the month the employee will receive their raise. If employees receive raises at different times, adding this column in the labor budget is important to ensure each employee receives their raise on time and the budget accurately depicts the correct salary amount. If a mistake is made, the mistake will stand for the remainder of the budget year, resulting in erroneous values for the entire budget year. This also applies to the listing of the employees. If one position is missed, the budget will have a negative variance for the entire year. This will cause problems when the labor budget is used to project future costs or if the labor budget is used as collateral for a loan or as part of a report for investors. Accuracy is essential for the labor budget.
SLIDE 18: Calculating Labor Budget FEBRUARY Annual Base Salary % Raise New Base Salary Monthly Salary Benefits Benefit Amount Monthly Salary Plus Benefits Raise Date 140,634 7.00% 150,478 12,540 30% 3,762 16,302 Jan 138,745 7.00% 148,457 12,371 30% 3,711 16,083 Jan 68,428 0.00% 68,428 5,702 30% 1,711 7,413 Mar 60,321 7.00% 64,543 5,379 30% 1,614 6,992 Feb 49,354 7.00% 52,809 4,401 30% 1,320 5,721 Jan 36,276 0.00% 36,276 3,023 30% 907 3,930 Sep 39,987 7.00% 42,786 3,566 30% 1,070 4,635 Feb 28,987 7.00% 31,016 2,585 30% 775 3,360 Feb 35,000 7.00% 37,450 3,121 30% 936 4,057 Feb 21,473 0.00% 21,473 1,789 30% 537 2,326 Mar 0 0.00% 0 0 30% 0 0 Jul 0 0.00% 0 0 30% 0 0 Jun The labor budget for February is calculated the same way as it was for the month of January.
SLIDE 19: Calculating Labor Budget MARCH Annual Base Salary % Raise New Base Salary Monthly Salary Benefits Benefit Amount Monthly Salary Plus Benefits Raise Date 140,634 7.00% 150,478 12,540 30% 3,762 16,302 Jan 138,745 7.00% 148,457 12,371 30% 3,711 16,083 Jan 68,428 7.00% 73,218 6,101 30% 1,830 7,932 Mar 60,321 7.00% 64,543 5,379 30% 1,614 6,992 Feb 49,354 7.00% 52,809 4,401 30% 1,320 5,721 Jan 36,276 0.00% 36,276 3,023 30% 907 3,930 Sep 39,987 7.00% 42,786 3,566 30% 1,070 4,635 Feb 28,987 7.00% 31,016 2,585 30% 775 3,360 Feb 35,000 7.00% 37,450 3,121 30% 936 4,057 Feb 21,473 7.00% 22,976 1,915 30% 574 2,489 Mar 0 0.00% 0 0 30% 0 0 Jul 0 0.00% 0 0 30% 0 0 Jun The labor budget for March is calculated the same way as it was for the month of January.
SLIDE 20: Calculating Labor Budget Position JAN FEB MARCH Physician I 16,302 16,302 16,302 Physician II 16,083 16,083 16,083 Physician's Assistant 7,413 7,413 7,932 Physician's Assistant 6,535 6,992 6,992 RN 5,721 5,721 5,721 LPN I 3,930 3,930 3,930 LPN II 4,332 4,635 4,635 Nurse's Aide 3,140 3,360 3,360 Office Manager 3,792 4,057 4,057 Office Staff 2,326 2,326 2,147 Office Staff 0 0 0 Office Staff 0 0 0 TOTAL $69,574 $70,819 $71,159 The change in salaries is based on raises given in January. Finally, the labor budget totals for each month are applied to a report that includes all 12 months for all positions. Each position is listed along with the monthly salary plus benefits for each month. All positions for each month are added together to obtain the total cost of salaries plus benefits for each month. Then, the totals for each month are added together to obtain the total for the year. For the purposes of this problem, only the first three months are calculated. You will note that the second and third office staff are not included. This is because they are budgeted for (later in the year) but have not been hired yet. This is what a typical labor budget might look like. While you may not use this budget (you will more than likely use an operating budget), knowing how the costs are derived is very important to your role as a manager. Too often managers forget to include elements of the cost of labor such as benefits, vacation, payroll taxes, etc. While we did not include all these elements in this sample problem, you will need to take all these costs into consideration when developing a labor budget.
SLIDE 21: Sample Operating Budget Sample Operating Budget JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC TOTAL A. Patient Revenues $254,160$259,520 $195,780 $323,600 $185,600 $210,325 $315,010$287,335 $352,300$295,600$398,400$356,700 $3,434,330 B. Deductions & Allowances -63,237-50,355-73,953-34,700-22,500-42,332-122,535-139,090-253,400-140,200-162,802-103,240-1,208,344 C. Net Patient Revenues 190,923 209,165 121,827 288,900 163,100 167,993 192,475 148,245 98,900 155,400 235,598 253,460 2,225,986 D. Non- Patient Revenues 3,250 2,795 4,122 4,567 1,256 5,290 6,350 4,075 5,130 4,822 6,570 6,160 54,531 E. Total Revenues 194,173 211,960 125,949 293,467 164,356 173,283 198,825 152,320 104,030 160,222 242,168 259,620 2,280,517 F. Operating Expenses Labor 69,574 70,819 73,648 72,445 68,259 65,444 79,422 82,680 85,400 82,300 84,500 78,200 912,691 Supplies 35,430 32,400 32,310 27,500 35,300 32,400 45,600 48,700 53,400 48,700 50,100 38,900 480,740 A & G Expenses (1) Interest 722 722 722 722 722 722 722 722 722 722 722 722 8,664 Depreciation 1,522 1,522 1,522 1,522 1,522 1,522 1,522 1,522 1,522 1,522 1,522 1,522 18,264 Utilities 13,500 13,500 13,500 13,500 13,500 13,500 13,500 13,500 13,500 13,500 13,500 13,500 162,000 Rent 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 6,500 78,000 Cleaning 600 600 600 600 600 600 600 600 600 600 600 600 7,200 Telephone 750 750 750 750 750 750 750 750 750 750 750 750 9,000 Travel 3,200 3,200 3,200 3,200 3,200 3,200 3,200 3,200 3,200 3,200 3,200 3,200 38,400 Insurance 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 13,000 156,000 Equipment Maintenance 200 200 200 200 200 200 200 200 200 200 200 200 2,400 Bad Debt 3,750 4,250 1,795 3,245 2,345 1,280 3,545 2,735 2,975 3,850 3,200 3,650 36,620 Total Operating 148,748 147,463 147,747 143,184 145,898 139,118 168,561 174,109 181,769 174,844 177,794 160,744 1,909,979
Expenses G. Non- Patient Care 125 125 125 125 125 125 125 125 125 125 125 125 1,500 Expenses H. Total Expenses 148,873 147,588 147,872 143,309 146,023 139,243 168,686 174,234 181,894 174,969 177,919 160,869 1,911,479 Excess of Revenues I. Over Expenses $45,300 $64,372 -$21,923 $150,158 $18,333 $34,040 $30,139 -$21,914 -$77,864 -$14,747 $64,249 $98,751 $369,038 This is what a typical operating budget looks like. Your sample problem as well as the assigned problem provides the opportunity to work with the operating budget to understand how the budget is developed. As a manager, you will use the operating budget as your guide to maintain fiscal responsibility for your unit. While you will not develop the budget, you may participate in the development of the budget. Knowing how the budget is developed is important to understand in order to use the budget in the day-to-day operation of your unit as well as the organization. Lines A through E refer to revenue. You developed a revenue budget for three months earlier in the sample problem. Now you will see how the work completed in the revenue portion of this sample problem is applied to the operation budget. Take a moment a go back to slide 9 while you listen to this presentation. The total gross charges for revenue were identified as $254,160 for the month of January. This amount is added to the operation budget on line A under the month of January. Line B provides for deductions and allowances. The amount listed on slide 9 for January is included in Line B of the operations budget is $63,237. This number is always identified as a negative number in the budget because it represents revenue that will not be collected due to the deduction or allowance provided. Net patient revenues are included in Line C. This is the actual amount of revenue to be collected from services provided. For slide 9, the sample problem indicates this amount as $190,923. This amount is included in the operating budget in Line C for January. The operating budget also reflects the labor budget developed in previous slides. Take a moment and return to slide 20. This slide provides the totals for January, February and March in terms of the labor budget. For January, the total labor budget was $69,574. This amount is added to the operation budget under Line F Operating Expenses for the month of January. All expenses are also identified under operating expenses. The same applies for February and March. When you are developing your own budget for your unit, you will complete the budget for the entire year for labor costs.
The operating budget is developed in this same manor for all line items included in the budget. Therefore, there will be a labor budget, revenue budget, supply budget, utilities budget, maintenance budget, depreciation budget, insurance budget, etc. Organizations may combine all expenses into one expense budget rather than separate budgets for each expense. This is the preference for the organization. The more budgets that exist, the concern related to transcription error is high. What is meant by transcription error, is calculating a specific revenue or cost amount and then transcribing that amount to more than one budget. This opens up the possibility for error if the numbers are not included in the budget correctly. However, to offset this potential for error, there are software packages that will apply the number to all areas required, reducing the risk for transcription error. Take a few more minutes to review the numbers developed for the revenue budget and labor budget in relationship to the operation budget.