CALIFORNIA STATE UNIVERSITY, NORTHRIDGE
TYING FLEXIBLE BUDGETS TO
PRODUCTIVITY STANDARDS
A graduate project submitted in partial satisfaction of the
requirements for the degree of Master of Sciences in
Health Administration
by
James Franklin Sherman
January 1987
The Graduate Project for James Franklin Sherman is approved:
Robert C. Boullon
Miriam P. Cotler, PhD/ Chair
California State University, Northridge
ii
Table of Contents
Abstract •••••
...... ............ ..... .....................
v
Introduction
..... .... .................... ...
Background/History ••••••. . . ... .. . .. ... . .. ... ... . .. . .
Study Design and Setting.
......... . ............
Problems with Current System. . .. . . .. ..... .. . ... . .. ..
Overview.
~
Significance of Study •••••••.••••••••••••••.••..•.••
1
2
5
5
8
Literature Review
Productivity -An Overview •••••••••••••••••.•..
11
...... 12
Management •••• ... .. .... .. . 14
Development and Use of Productivity Standards.
Productivity and Case Mix
Flexible Budgeting and Staffing •••..••••
15
Methods
Goals ••
.................. ........................... 21
Development of the Computer Model •••••.•••.•••.•.••• 21
Explanation of Calculations ••••••••
. . . . . . . . .. . . . . . . .
27
Criteria for Evaluating the Model •••.•••.•.••••••.•. 28
. .. .. .. ......... ..... . . .. .. .. .. . .. .. 28
Procedures •••••• . .. .. .. . . .... . . . . .. .. ..... . .. .. . . . .. 29
Data Collection.
Limitations of the Study •••••••...•••.•••••••••••••• 33
iii
Results
Revenue ••••••••••••••••••••••••••••••••••••••••••••• 34
Labor Expenses •••••••••••••••••••••••••••••••••••••• 35
Material and Services Expenses •••••••••••••••••••••• 37
Discussion, Conclusions, and Recommendations
Discussion..... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Conclusions and Recommendations ••••••••••••••••••••• 40
Footnotes ................................................. 43
References........ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Appendix A
History of Northridge Hospital Medical Center ••••••• 48
Appendix B
Overview of the Radiology Department ••••••••..•••••. 53
Appendix C
Step-By-Step Description of the Computer Model •••••• 55
Appendix D
Fixed Budget for the Radiology Department ••••••••••• 78
Appendix E
Data Summary and Analysis ••••••••••••••••••••••••••• 80
Appendix F
Analysis of Data from Fiscal Year 1985 - 1986 ••••••• 87
iv
ABSTRACT
TYING FLEXIBLE BUDGETS TO
PRODUCTIVITY STANDARDS
By
James Franklin Sherman
Master of Sciences in Health Administration
The purpose of this project was to determine the feasibility of tying flexible budgets to productivity standards.
The setting of this study was the radiology department of
Northridge Hospital Medical Center.
A microcomputer model was developed for this process.
A flexible budget had to be created and tied to the department's current productivity standards.
This included deter-
mining which job codes should be fixed and which should
fluctuate with volume.
An analysis then had to be per-
formed, to measure the benefits of the new system, against
the older, fixed budget system.
into three categories:
The analysis was divided
revenue, labor expenses, and mate-
rial and services expenses.
Although the analysis was only performed on two months
of data, the results showed that this type of budget was
very worthwhile.
Under this budget, the department head
v
could be held accountable for accurate information.
In the
pages that follow, a step by step description of the model
that was developed is presented.
Also included is a history
of the current budget system and the events which led to the
development of a flexible budget tied to productivity
standards.
vi
(l
Introduction
Overview
With the turmoil in the health care industry today,
such as prospective payment and rate setting,, health care
executives are trying to better understand their operations.
At the same time they are trying to maximize their resourses, especially labor.
In order to survive and thrive
in this highly competitive and strictly regulated environment, administrators must be concerned with maintaining
productivity, which will control costs and maximize
revenues.1
Health care executives must be able to provide
necessary services, which meet the needs of the community,
at an acceptable level of quality, for the lowest possible
price.
Traditionally, health care institutions have used a
fixed budget against which to measure their actual performances.2
In a fixed budget, budgeted dollars are compared to
actual dollars.
If there is a variance between budgeted and
actual dollars, management can use the difference as a
measurement of performance.
The problem with this approach
is that it ignores variances that occur as a result of
differences between predicted and actual volume.
Volume
differences are usually beyond the control of the manager.
1
'
2
Background/History
In 1966, only 10% of hospitals in the United States
had any form of budget (Finkler, 1982).
The most common
approach to budgeting since that time has been the use of
fixed budget.
However, there are two major methods for
budgeting: fixed budgeting and flexible (variable) budgeting.
In a fixed budget, revenues and expenses are related
to time periods, rather than to a rendering of services;
volume is estimated by month and is then fixed.
Actual
performance is measured against these fixed standards.
Herkimer (1978) has stated that this type of budget has
been used for numerous reasons:
(a) it is simple and easy
to use, (b) the time required to prepare and monitor it is
somewhat less than a flexible budget, (c) it can be a meaningful tool for measuring performance if the actual level of
activity is reasonably near the budgeted level, and (d) it
is not revised periodically, thus saving both time and
money.
There are several disadvantages to using this type of
budget.
One disadvantage is it cannot be adjusted to re-
flect actual activity levels and therefore may not be a
good indicator against which to measure actual performance.
Another problem is that if the actual activity level varies
widely from the budgeted activity level, it becomes very
difficult to analyze the discrepancies caused by changes
3
in volume, price and efficiency.
(California Hospital
Association, 1977; Herkimer, 1978).
In recent years, with the advent of the prospective
payment system, hospitals have seen their census' plummet,
and it has become apparent that hospital administrators cannot depend on stable census' in their organizations.
In
this author's opinion, this stability was the· key ingredient
in substantiating the use of fixed budgets, because with a
stable census, the fixed budget could be predicted fairly
accurately.
No longer can an administrator take a budget
projection for a fiscal year, divide it by twelve and use it
to measure performance.
Variable budgeting is now replacing
the traditional, fixed budget approach.
Without a stable census, many hospitals have recently
turned to a flexible budget.
By relating revenues and costs
to changes in volume, management is given the opportunity to
isolate factors that effect variances between the budget and
actual results.
In a flexible budget, both revenues and ex-
penses are related to activity levels (actual performance).
Costs are classified as either fixed or variable because
some costs, such as depreciation, are not associated with
volume.
(Finkler, 1982; Houser, 1974).
A potential problem with flexible budgeting for
hospitals is that its focus is primarily on variable costs,
when in fact many costs may for the most part be fixed.
expense may be fixed to a point, but after that point, it
An
4
may fluctuate in direct correlation to volume.
vantages of a flexible budget are:
Other disad-
(a) it requires more
time and resources to develop and update, (b) it requires
additional training, and (c) a higher level of sophistication may be required on the part of the administrative,
financial, and operating personnel, if the budget is to be
utilized properly.
Also, (d) this may not be the most ef-
fective type of budget against which to measure performance.
(Herkimer, 1978; Houser, 1974).
With more payors turning to prospective payment, productivity in health care has been attracting increased attention (Betka and Lacusta, 1984).
Health care is labor
intensive (labor can account for 50% to 70% of the operating
costs of an institution), and hospitals can no longer be
indifferent to the labor cost of the care they render.
Although the flexible budget is very good in measuring
revenues and material costs, it is ineffective in measuring
labor costs, because there is no accurate method for measuring what amount of labor is appropriate for certain volume
levels.
The only way that labor costs can be measured ef-
fectively is by tying the labor budget to productivity
standards.3
If such were the case, accurate conclusions
could be drawn about whether or not the proper amount of
labor was being used.
The purpose of this project is to demonstrate the feasibility of using a flexible budget that is tied to productivity standards in a health care setting.
5
Study Design and Setting
The type of research that was undertaken in this study
was action oriented.
A new approach to solve the problem,
with direct applications to the setting was developed.
The
setting for this project was the radiology department of
Northridge Hospital Medical Center (NHMC).4
This department
was chosen because the Director of Radiology was unhappy
with the current, fixed budget system (D. Baca, personal
communication, November 12, 1985).
He felt that he often
appeared to be over budget even though in his opinion the
department's volume justified such.
He was unhappy because
the hospital's administration did not see things this way.
The director was also concerned because within the next
year, he will be faced with the competition of a freestanding imaging center.
Thus, he wanted to make sure that
he was operating as efficiently as possible, so that he
could try to achieve a competitive edge.
This department
was also chosen because the factors used to implement a
flexible budget tied to productivity in this department
could easily be applied to other departments in the
hospital.
Problems with Current System
Currently, Northridge Hospital Medical Center is using
a fixed budget.5
Although both the hospital and radiology
department are doing very well, in the sense that they both
6
make a profit, this study will attempt to show that the
fixed budget does not allow for the hospital's administrative staff to measure its financial performance accurately.
When comparing the radiology department's actual
performance to the fixed budget, it is possible that there
will be times when revenue will not meet expectations.
By
the same token, it is possible that actual expenses could
fall below the budget.
These results can be very discon-
certing to the hospital's administrative staff.
For example, consider a fixed radiology budget of
$10,000 for a month.
If actual costs incurred are $9,000,
this does not necessarily indicate cost-effective performance.
If the $10,000 cost were based on a presumption of
2,000 procedures, and the actual workload was 1,500 procedures, then it is possible that the $9,000 was too costly
for the number of tests performed.
The fixed budget is not a good standard against which
to measure the hospital's actual performance.
Under the
fixed budget, there is no incentive for the department manager to adjust staffing patterns, when volume is either up
or down.
As long as the department is only compared to what
was budgeted under the fixed budget, and if what was budgeted for expenses was based upon a high volume, then the
department manager would look good.
Stated another way -
when actual volume is lower than budgeted volume, there is
no incentive for the department manager to keep his expenses
7
down, because the manager is going to be compared to the
fixed budget, where a high volume has been projected.
The five major components to the budget process are as
follows:
1.
Forecasting units of service.
2.
Forecasting revenue rates.
3.
Forecasting expenses.
a.
Labor expenses.
b.
Material and services expenses (all expenses
other than labor).
Each one of these steps is called a cut.
The current procedure for budgeting is also both tedious and time consuming.
Department heads are required to
forecast each component, one at a time, and have these forecasts reviewed by their respective administrative director
and vice-president.
nance department.
The cut is then forwarded to the fiAfter the finance department has reviewed
the cut, it is submitted to the corporate budget office,
where the numbers are fed into the main computer system to
formulate the budget.
It is not until all of these steps
are completed that one can see the bottom line for his
department.
The process is laborious and the department
head keeps submitting numbers that may not mean anything to
him.
The process takes about three months.
It is not until
the completed version comes back from the corporate office
that the department head sees the bottom line.
At this
8
point changes can be made to the budget, so that the department head can meet his projected bottom line.
That process
takes another two months.
Besides the time constraints, there are several other
problems with the current system:
(1) productivity is not
tied to the budget, thus there is no accurate measurement of
how much labor is needed; (2) there are two different
standards, (the department's current productivity standard,
and their budgeted standard); and (3) analysis of variances
from the budget is difficult, because the budget does not
reflect actual volume.
Significance of Study
In a flexible budget, the budget is adjusted each
month, based upon the number of units of service that the
department performs during that month.
The budget process
requires a determination of activity levels for each department.
That is accomplished by selecting units of service
(i.e. -patient days, tests, visits, procedures, etc.) which
are representative of the output of the department.
The
success of the budget depends on selecting units of service
measures which best relate departmental production (output)
to direct costs (input) and applicable revenues.
The fore-
cast of units of service is a key factor in projecting staffing, certain expenses, and revenues for the budget period.
(California Hospital Association, 1977).
9
Flexible budgets are based upon an analysis of revenue
and expense items to determine how individual costs and revenues should vary with volume of output.
Conversely, in a
fixed budget, the monthly budget is determined a year in advance and does not vary with volume.
An area of opportunity with a flexible budget is that
it allows management to isolate the factors that affect variances between the actual and budgeted results; such as,
volume and/or rate variances.
Another area of significance
with a flexible budget tied to productivity is that labor
costs can be well measured.
The computer system that the corporate office is currently using for the budget is already programmed to run
flexible budgets, but this function of the computer has
never been fully utilized.
That available capacity will
reduce the costs of what could be a costly conversion process.
It is for these reasons that is proposed that the hospital switch to a productivity-linked flexible budget.
The
goals and objectives to be achieved in this study are as
follows:
1.
To develop a micro computer model, which will tie
productivity standards to flexible budgeting.
a.
Determine which expenses are fixed and which
are variable.
b.
Calculate the expense per unit of service for
variable expenses.
10
c.
Utilize current productivity standards in the
labor budget.
d.
Measure the radiology department's performance
more accurately and improve its profitability.
2.
To implement the model.
3.
To develop criteria to measure the effectiveness of
the computer model.
a.
Run a concurrent analysis of the current system
and the new model (a parallel test).
b.
Evaluate the length of time to complete the
budget process, tying it to productivity
standards.
Literature Review
Little has been written about tying flexible budgets to
productivity in health care settings.
Most of the litera-
ture focuses on one of two subjects:
productivity or flex-
ible budgeting.
Of the articles that did tie the two
subjects together (Betka and Lacusta, 1984; Lacusta, 1985;
Finkler, 1982), no mention was made of how the process
should take place.
Productivity - An Overview
"Because labor expense is, and will continue to be, the
most important component of the typical health care organization's operating budget, it seems logical it should also
receive the highest degree of operational control"
(Kelliher, 1985, p. 23).
Kelliher is also clear to point
out that the "new" concern with productivity and cost does
not mean a reduction in the quality of health care services.
What it does mean is that potential exists to maintain, or
increase quality, while improving the productivity of labor,
and at the same time reducing cost.
For productivity management to be successful, Kelliher
(1985) concludes that the following ingredients are required: (a) top management commitment of the concept and
11
12
goals, (b) adequate information, knowledge and policies
that support appropriate action, and (c) clearly defined
performance expectations.
These will be crucial to the
success of this study.
According to Betka and Lacusta (1984), productivity in
health care is attracting increased attention.
With more
payors turning to prospective payment, the need for accurate
management information has increased.
They go on to state
that hospitals can no longer be indifferent to the cost of
the care they render.
Labor may account for 50% to 70% of
the operating costs of an institution.
Health care is labor
intensive and thus mandates greater control and measurement
of the utilization of labor resources.
"Managing productivity is essential not only
for an institution to cope effectively with changing payment mechanisms, but for its survival in
an era of increasing competition; competition not
only with other hospitals, but with other structures of health care delivery which may offer
equivalent services at lower cost." (Betka and
Lacusta, 1984, p. 9)
Development and Use of Productivity Standards
In order to manage productivity effectively, it is
important to carefully select areas to be reviewed and to
establish overall goals for the productivity program.
Orifice and Jennings (1983) state that this selection
process should rely on measurable data, historical trends,
and instinct.
13
Managing productivity requires that standard productivity ratios be established (Orifice and Jennings, 1983).
To measure productivity, standards must be established and
performance determined.
Kelliher (1985) defines a labor
standard as the amount of output that can be produced by a
unit of input when trained personnel are working at a maximum sustainable pace throughout the day.
Keltiher goes on
to state that implicit in productivity improvement is the
use of flexible staffing, variable appointments, and staggered shifts.
The standards usually have both a fixed and
variable component because for most products certain resource requirements are not volume dependent.
An example of
a fixed staffing requirement would be the director of radiology, who is not directly responsible for patient care.
He
has administrative responsibility and is needed in the
department regardless of volume.
A variable staffing re-
quirement would be a radiology technician.
If there is no
work to do, this person could be sent home.
By the same
token, if volume were heavy, a second technician might have
to be called into work.
The technician's hours relate
directly to volume.
Betka and Lacusta (1984) state that a productivity
monitoring system is composed of three components: (a) workload indicators, (b) labor standards, and (c) payroll information.
Workload indicators are the output that comprise
the majority of a department's worked hours (i.e. -bills
14
processed, 15 minute treatment units, etc.).
Labor stand-
ards represent the average amount of time necessary under
average conditions to perform each workload indicator.
These standards include a factor for fatigue, personal time
and unavoidable delay.
Payroll information includes the
departmental hours worked (actual time on the job) and hours
paid (hours worked plus sick, vacation and holiday hours
paid).
Other payroll information that is useful includes
budgeted hours, overtime hours, and the ratio of paid to
worked hours.
This data will need to be gathered to set the
productivity standards for the radiology department.
Productivity and Case Mix Management
Orifice and Jennings (1983) also examine the link between productivity and case mix management.
They describe
productivity as a ratio between output and inputs.
The
outputs are goods or services that take the form of laboratory tests, patient bills, number of radiology procedures,
and so forth.
The inputs are resources which include labor,
facilities, capital, and material.
The resources are con-
verted into intermediate products through organizational
units, such as the ultrasound section or the radiology
department.
Case mix management focuses on the final product of a
health care institution, the case.
A case, "represents the
full provision of traditional services to a given individual
Q
15
for a specific episode of diagnosis and treatment" (Orifice
and Jennings, 1983, p. 45).
Of course, different resources
and intermediate products may be used to produce different
cases (i.e. - an orthopedic case would require different
resources and products than a gynecological case).
It ap-
pears though that case mix would not be as large an issue in
an ancillary unit, as in the nursing unit (Cleverly, 1976)
because a laboratory test or a radiology procedure should
take the same amount of time and resources, no matter what
the type of case.
Patient days are normally considered the
unit of service, in a nursing unit, and therefore different
amounts of time and resources will be needed, based upon the
severity of the patient's illness.
Flexible Budgeting and Staffing
According to Kelliher (1985), the natural outgrowth of
any successful productivity management effort is flexible
budgeting.
He states, "implicit in productivity management
is the use of flexible staffing, variable appointments, and
staggered shifts."
(Kelliher, 1985, p. 28)
In the past, it was possible to pass on through the
reimbursement system, the cost difference between the efficient use of labor and the actual use of labor (Kelliher,
1985).
It is obvious in today's environment that such can
no longer be the case.
The staffing plan should be related
to the level of activity in the department.
In developing a
staffing plan, the California Hospital Association (1977)
•
16
recommends: (a) selecting an appropriate volume measure,
(b) analyzing historical data to establish trends or operating ratios which can be used as a guide, (c) establishing
realistic departmental staffing objectives and
projec~ing
staffing needs to meet those objectives, (d) reviewing and
challenging those objectives in view of historical patterns,
and finalizing staffing projections.
Setting realistic objectives is important from both a
quality care and cost containment standpoint.
Since these
two concerns are somewhat conflicting, it is imperative that
department heads and administration agree on appropriate
staffing objectives which balance quality patient care with
economic viability.
(California Hospital Association, 1977;
Betka and Lacusta, 1984)
Both Betka and Lacusta (1984) and the California
Hospital Association (1977) cite several methods for
establishing staffing objectives.
(a) Management engineered
standards - these are developed using industrial engineering
work measurement techniques and provide the most objective
and appropriate bases for establishing staffing objectives.
These standards take into consideration both variable and
constant factors in determining proper staffing for each
department.
Periodic updating of the standards is necessary
due to technological improvements, changes in patterns of
care, patient mix changes, etc., (b) historical experience,
and (c) experiences of other hospitals.
17
Roberts (1979) states that the first thing one must do
in preparing a budget is to forecast units of service (also
known as volume or output).
Both Roberts (1979) and
Cleverly (1976) state that knowledge of how costs react
under various circumstances is vital to the development of
an effective flexible budget.
Roberts (1979) and Houser
(1974) state that there are four basic cost behavior
pat,
terns: (a) fixed - costs that do not fluctuate with the
level of activity, (b) variable - costs that vary in proportion to volume, (c) semivariable - costs that fluctuate in
direct proportion to volume after a minimum level of activity has been reached; and (d) semifixed - costs that change
with volume, but not in direct relation.
Roberts (1979) suggests that the steps used to determine cost behavior are: (a) to analyze the department's
chart of accounts to determine the type of expenses, historical behavior, and volume levels,6 (b) to review the unit of
service to determine whether or not it is an accurate
measure of volume and workload activity, and (c) to classify
each type of expense into one of the four categories listed
above (fixed, variable, semivariable, semifixed).
He states that the procedure for projecting fixed
labor hours and costs is relatively simple: (a) list each
employee, (b) project the non-productive hours for each
/
position (non-productive hours include vacation, sick, holiday and education), (c) subtract total non-productive time
from the total available time of 2,080 hours to arrive at
18
the regular paid productive hours, (d) estimate the paid
overtime hours based upon prior experience, (e) obtain current wage rates and dates of expected increases for each
employee from the personnel department.
The personnel de-
partment can also provide premium pay rates and shift differential, (f) allocate all costs and hours to the appropriate accounting period.
Roberts (1979) goes on to state that the following
steps should be used to project variable labor hours and
costs: (a) determine if previously developed standards are
accurate, (b) determine the relationship between the productive standard and non-productive time, (c) determine the
average hourly rates of pay, (d) allocate the labor hours
and costs to the appropriate accounting period based on the
unit of service projections.
The productivity standard only
includes productive time (regular time, overtime, doubletime).
The hours and costs for non-productive time must
also be calculated, because these are hours that will have
to be budgeted.
Another approach to develop a variable staffing plan is
to convert the department staffing objective (productive
hours per unit of service) into average daily staffing requirements (California Hospital Association, 1977).
A full
time equivalent (FTE) personnel ratio is then developed
using estimates of non-productive time, productive time and
total required time.
This ratio, multiplied by tbe average
19
daily staffing level, represents the paid staff required to
maintain the staffing level for full 24 hour coverage.
Flexible budgets take into account a budgeted amount
and an actual amount, focusing on what the budget would have
been, had the output or workload been forecasted perfectly.
There are three types of variances that can be looked at in
a flexible budget (Finkler, 1982):
1.
Price
2.
Quantity
3.
Volume
The price variance determines the extent to which more
is paid for each unit of input than is expected.
The quan-
tity variance assesses whether more of an input, to produce
a unit of output, was used than was expected.
The volume
variance determines whether actual volume was greater or
less than forecasted.
A potential problem with flexible budgeting for hospitals is its typical focus primarily on variable costs, when
in fact much cost might be mixed.7
A good example of this
is presented in the following staffing guide:
Registered Nurses
Patient Dals
4
0 - 12,000
5
12,001
6
14,001 - 16,000
7
16,001
8
18,001 - 20,000
9
20,001 - 22,000
- 14,000
-
18,000
The problem with this scenario is that another hour of
time cannot be added as needed.
increments of one FTE at a time.
The manager has to hire
Under this scenario, the
flexibility normally associated with variable costs does not
exist=
(This, of course, is an assumption - a large hospi-
tal may well be able to shift personnel between areas to
make a variable cost assumption reasonable.)
Finkler (1982)
further states that this complexity of flexible budgeting
has somewhat restricted its use.
Although it is clear that a productivity management
program and the staffing budget process should be integrated
(Lacusta, 1985), authors do not discuss how the two should
be tied together.
A proposal for tying the two together is
presented in the next chapter.
Methods
Goals
There are three major study goals to this project.
They encompass the development of a microcomputer model
which will tie flexible budgets to productivity standards,
implementation of the model, and lastly, the development of
criteria than can be used to measure the effectiveness of
the model.
The plans for recognizing these goals follow.
Development of the Computer Model8
In developing a microcomputer based model, several
factors were considered.
It was known that most depart-
ments in the hospital already had an IBM Personal Computer.
Second, the standard software for these computers is Lotus
1-2-3.9
This is an easy software program to learn to use.
Therefore, it was decided to develop a model that could be
operated on Lotus 1-2-3.
The model was developed to be simple enough for anyone
to put a copy of the diskette into his personal computer,
and to develop his own budget.
It was also decided that the
model would gain greater acceptance if only one component of
21
22
(l
the budget were dealt with on a single screen.
This would
also make the model easier to use.
Therefore, the model was broken into six major input
sections.
To keep the model as simple as possible, it was
decided that the user should only have to input data and not
have to worry about any calculations. 10
Any calculated
numbers do not appear on the screen, so as not to confuse
the user.
The six input sections are the unit of service forecast, revenue rate forecast, material and services expense
forecast, fixed labor expense forecast, flexible labor
expense forecast, and a summary of the current year's data.
1.
The unit of service forecast input section was
quite easy to develop.
units of services:
ous.
The hospital tracks three types of
inpatient, outpatient, and miscellane-
The miscellaneous category represents contracts with
outside companies, such as a physician's office.
tients are never seen in the hospital.
These pa-
The physician draws
the blood and sends it to the hospital, where the test is
performed.
The input section for the unit of service forecast was
developed so that the months of the year would appear on the
left side of the screen.
The next three columns were for
the inpatient, outpatient, and miscellaneous forecasts, respectively.
The user need only enter these numbers.
The
model is programmed to add the three categories together and
'
23
put their total in a column on the right hand side of the
screen.
2.
The model also gives a total for each category.
The revenue rate input section was also quite easy
to develop.
This screen required the development of only
three lines; for the input of the average revenue rate for
each of the three types of service.
3.
The material and service input screen was more of a
challenge.
Northridge Hospital has approximately 112 sub-
accounts for these expenses, and each subaccount represents
a different type of expense, such as depreciation, rent, and
travel.
However, only 14 subaccounts can be fit on one
screen.
This necessitated the development of eight screens
for this section.
The bottom of each screen includes
directions on how to get to the screen.
The problem of determining which expenses should be
fixed, and which should fluctuate with volume, was solved by
looking back at several years worth of data and determining
the relationship each expense had in relation to volume.
Those expenses which were found to have a direct correlation
to volume were identified on the screen, i.e. other Medical
Care Materials, Surgical Packs and Sheets.
Once that problem was solved, another problem evolved.
This was the matter of computing the expense per unit of
service for variable expenses.
The obvious solution seemed
to be to take the actual expenses, by subaccount, incurred
in previous years and divide these numbers by the number of
units of service in those years.
That would provide the
24
dollar ratio that would be needed for each unit of service
performed.
However, the hospital had recently revised its chart of
accounts, and many items which were previously booked to one
subaccount were now booked to another, thus contaminating
the old data.
data base.
The problem was solved by developing a new
The dollar amount the department bead wanted
to budget for each subaccount could be keyed directly into
the model.
For those expenses which were previously deemed
variable, the model would automatically take the amount and
divide it by the total number of units of service that were
being forecasted.
This would provide the user with an ex-
pense per unit of service.
Although this number may not
have been an accurate number, at least it was a starting
point.
As actual information is gathered throughout the
year, a more accurate ratio can be computed and used for
the following year's budget.
4o and 5.
The next two input sections provided the
biggest challenge of all.
input labor sections.
These were the fixed and flexible
The first problem encountered was the
fact that these worksheets required so many input fields
that they would not all fit on one screen; thus two input
screens were developed.
Although the department head cannot
see all input fields simultaneously, it was felt that it
made sense to do this, than to split the screens, as had
been done with the material and services portion of the
25
budget.
When the end product is printed out, it will be
easier to read with this format.
The major problem that had to be dealt with in this
section was how to tie the labor budget to the department's
productivity standard.
Another problem was determining
which job codes should be fixed and which should be flexible.11
It was decided that only management level positions
should be fixed because these positions are needed
regardless of the unit of service volume in the department.
All of the other positions were deemed to have a direct relationship to volume; if volume in the department is down,
the employees who are flexible could be sent home early, and
if volume increases, these same employees would be needed
for more hours.
Following is the procedure for tying the budget to the
productivity standard:
a.
Total the maximum number of approved productive
hours for each job code.
b.
Determine the percentage of productive hours that
each job code comprises of the total.
c.
Divide the productivity standard (which was
determined previously by HealthWest's, Center on
Performance Enhancement) by job code, based on
the percentage in the step above.
That gives the
department head a productivity standard by job
code.
26
d.
Key the productivity standard for each job code
into the computer model.
Those pertaining to the
flexible job codes should be keyed into the flexible labor screen.
e.
Key in each job code, its corresponding productivity standard, and the average hourly wage rate
to the flexible labor screen.
f.
The productivity standard does not need to be
keyed into the fixed labor screen.
It is
calculated by the model.
g.
Key the job codes for the fixed job codes and
then key in the number of productive and nonproductive hours.
h.
Key percentages into the flexible labor screen
rather than productive hours.
In other words,
regular productive hours may be equivalent to 95%
of the productive hours the employee works, and
the remaining 5% may be equivalent to overtime
hours.
The total is 100%.
Percentages were used
because the number of hours that are needed will
be determined by multiplying the units of service
by the productivity standard.
This number is
then allocated based upon the percentages that
are determined for the various productive hours.
i.
Key in the nonproductive hours after the percentages have been keyed in.
These are whole num-
bers as they will be paid regardless of volume.
27
6.
The last section developed in the model was the
input section for the current year's data.
This section was
written so that last year's data could be analyzed against
the data which is being budgeted for the coming fiscal year.
The greatest emphasis in this section is placed on labor.
It was felt that since this expense composes the majority
of the hospital's expenses, it should be given the highest
priority.
The user is prompted to key in the current year
to date numbers for salaries and wages, premium pay (overtime, doubletime, and call-back), employer FICA, vacation
pay, holiday pay, and sick pay.
The user is also prompted
to key in the current year-to-date revenue and material and
services expenses.
The model will automatically annualize
these numbers so they can be compared to the numbers that
are being budgeted for.
If the variance is large, adjust-
ments can be made.
Directions on how to use the computer model, and a
printout of the model, can be found in Appendix C.
Explanation of Calculations
The calculations on the computer model are very simple.
They are as follows:
Revenue - Revenue is determined by multiplying the unit of
service forecast by the revenue rate forecast.
Material and Service Expenses - The expense per unit of
service for flexible expenses is calculated by taking the
28
expense the
depart~ent
head is requesting, and dividing it
by the total units of service.
Labor Expense - The amount of labor that is needed (in
hours) is determined by multiplying the unit of service
forecast by the productivity standard for each job code.
To translate these hours into dollars, the unit of service
forecast is multiplied by the productivity standard and then
multiplied by the average hourly wage for the job code.
Criteria for Evaluating the Model
To determine whether or not the computer model was
useful, several items were taken into consideration.
parallel test was run.
A
Data for the radiology department's
budget were entered into the model and calculated.
The same
data were calculated by hand to assure the results were the
same.
Once it appeared that the model was correct, test
data were submitted to the budget department at HealthWest.
The data were then entered into the mainframe computer.
If the end result was not the same as appeared on Table 18
of the printout (Appendix C), further analysis would be
needed.
After all of these tests were run and the results
were the same, the model was ready for use.
Testing of the
model took almost two months.
Data Collection
Most of the data that were needed for this study were
provided directly by the Director of Radiology.
This
29
included information such as the unit of service forecast,
revenue rates and material and services expenses.
Much of
this information was based on historical data that the director keeps.
Data that he was not able to provide, such as
payroll and benefit data, were gathered from the personnel
department.
Procedures
Testing of the computer model began in January 1986.
A meeting was held with the Director of Radiology to attain
his budget information for the fiscal year, beginning July
01, 1986.
The budget information which was attained in-
eluded forecasted units of service, revenue rates, material
and services expenses, and the decision of which job codes
should be fixed and which should be variable.
The unit of service and revenue rate forecasts were
very easy to develop.
The assumption was made that neither
volume nor revenue rates would change during the coming
fiscal year.
Therefore, the actual units of service for the
first six months of the current fiscal year were annualized
and used as the forecast for the coming year.
The revenue
rates were determined by taking actual in and out patient
revenue for the first six months of the fiscal year and
dividing it by the number of in and out patient units of
service for the corresponding time period.
This resulted in
the gross revenue rates for the radiology department. 12
30
Since it had already been decided which material and
services expenses would be fixed and which would fluctuate
with volume, the director of radiology needed only to determine how much money he thought he would need for the year,
by subaccount, based upon historical experience.
That was
not as easy as was originally envisioned because of a recent
revision in the chart of accounts.
Deciding which job codes should be fixed and which
should be variable was quite simple, as this had already
been decided previously.
were fixed.
Only management level positions
The productivity standard for each job code was
allocated in the manner discussed in the methods section.
After the meeting with the director of radiology, the
data were entered into the microcomputer model.
Once all
the data were entered, the model was calculated.
All of the raw data were manipulated at this point in
time (see Appendix C).
Units of service were multiplied by
the revenue rates to attain revenue.
Material and services
expenses that had been deemed variable were divided by total
units of service to calculate the expense to be budgeted for
each unit of service.
To determine the amount of labor
which would be need (based upon the forecasted units of
service), the unit of service forecast was multiplied by the
productivity standard for each job code.
This resulted in
the number of hours each job code would be needed for the
year, if the actual units of service were the same as
31
budgeted.
The end result of these calculations appears on
Table 18 of Appendix C.
The data were then calculated by hand so that the
results could be compared.
disparities.
and wages were
The comparison showed some
The totals for revenue and regular salaries
n~t
the same.
After rechecking the hand
calculations and ascertaining that they were correct, the
formulas of the model were checked and errors were found.
Once it was felt that all the errors were found and corrected, the model was recalculated.
The results were still
not the same.
The formulas were rechecked and more errors were found.
After the formulas were corrected, the model was once again
recalculated.
This time the results were the same as those
which were calculated by hand.
Before reviewing the results with the director of
radiology, the model was printed out and sent to the budget
department at HealthWest so that the data could be keyed
into the main computer system and the results compared to
the microcomputer's results.
The results were excellent.
The data that came back from HealthWest matched the figures
which were generated on the microcomputer.
At the same time, the budget department made some recommendations on how to improve the worksheets which were
generated by printing the model.
appear in Appendix C.)
(These are the pages that
The budget department requested
these changes because they felt that this would make them
32
easier to read and to use as input documents for entering
data into the hospital's main computer; the people who key
the data into the mainframe are not trained professionals they are data entry clerks.
Also the mainframe asks for
data in a certain order and presenting the data in that
order would save both time and results in more accurate
results.
The changes that were requested pertained solely to
the labor portion of the model.
These changes included -
requesting that the computer (mainframe) line number for
each component be printed on the worksheet and that for the
fixed job codes that there be a column for total position
control hours. 13
The test data then had to be re-entered into the model
and sent to HealthWest to insure that the results were still
the same.
They were.
After the model had been completed
and the test results verified, it was time to legitimize the
use of the model.
Heretofore, this was unachievable because
the model could not be fully tested until the fiscal year
began.
It was decided to test the model with data from the
current fiscal year.
The fixed budget for fiscal year 1985
-1986 was plugged into the model.
Calculations were per-
formed and the rates for revenue and expenses were developed.
Testing was performed on data for the months of
December 1985 and February 1986.
Actual data are provided,
in Appendix F, along with the volume adjusted data and fixed
33
budget data.
Variances are shown between the actual data
and the volume adjusted data and also between the actual
data and fixed budget.
The results are summarized in the
next chapter.
Limitations of Study
One limitation to this study will be the accuracy of
the productivity standards currently used by the radiology
department.
However, this should have no effect on the
outcome of this study.
The purpose of this project is to
show that flexible budgets can be tied to productivity
standards.
Whether or not those standards accurately mea-
sure the department's performance is another subject.
main hurdle to this study will be the acceptance of its
process and results by the hospital's management staff.
The
Results
Revenue
In December 1985, actual results were $1,633 under the
volume adjusted budget, but $20,343 over the fixed budget.
Thus, under the fixed budget, the director or radiology
would have been held accountable for $20,343 less in revenue.
Several conclusions can be reached about why the
department was $1,633 under the volume adjusted budget:
(a) charge tickets may have not been submitted, or (b) the
average revenue rates that were used in the budget calculations may have been a little high (that is, a greater percentage of tests which brought in less revenue may have been
performed than what was forecasted).
case.
In fact, this was the
Under the volume adjusted budget $63.11 was antici-
pated to be the average revenue for each unit of service.
This number is attained by dividing the volume adjusted
revenue by the actual units of service.
$62.80 is being generated for every unit.
In actuality, only
Appendix F also
shows that the units of service performed were greater than
had been budgeted under the fixed budget.
It is important to note that if the volume adjusted
budget had not been used, the department would have looked
34
35
Q
great.
It would have appeared as though they had brought in
much more revenue than anticipated.
The test results for February 1986 show some interesting results pertaining to revenue.
Actual revenue was
$23,157 less than the fixed budget, but $1,883 greater than
the flexible budget.
Under the fixed budget, the radiology
department would have looked terrible.
An analysis shows
that actual units of service were 374 less than budgeted.
At the same time, it appears that a greater percentage of
tests were done which brought in more revenue than had been
anticipated.
The reason being that the actual revenue rate
was $63.48 as opposed to a volume adjusted rate of $63.04.
This accounts for more actual revenue than forecasted under
the flexible budget.
Labor Expenses
The results for December's data show that actual salaries were $15,053 less than the volume-adjusted (tied to
productivity standards), but only $10,585 less than the
fixed budget.
This shows that tying the flexible labor
budget to productivity standards can reward the department,
because when volume is increased, more hours (and correspondingly) dollars are allocated to the department.
It must
be remembered that a productivity standard defines the
amount of output that can be produced by a unit of input
when trained personnel are working at a maximum sustainable
pace throughout the day (Kelliher, 1985).
These results
'
36
show that the personnel in the department worked extremely
hard; they performed much better than their standard.
Several items must be analyzed in reviewing this data.
One is that if the department is constantly performing
better than their standard, the standard may be outdated.
That can be caused by new technologies or changes in the
types of procedures that are being performed.
Another item
that must be researched is how many vacant positions there
are in the department.
This could be a reason for less
people doing the same amount of work, and could be dangerous.
If the problem continues for a long period of time, it
may lead to overworked personnel who would burn out and
start looking for another job.
In researching this variance, it was found that there
is a combination of problems.
There are a couple of vacan-
cies in the department and the productivity standard appears
as though it needs to be reviewed.
The important item -to
note in this review is the fact that the department benefits
from a flexible budget tied to productivity standards.
If
the department had all positions full and salaries were over
the fixed budget, they would be justified under the volume
adjusted budget.
The results for February's data show an interesting
contrast to those of December.
The volume adjusted budget
allocated $4,561 less for labor than the fixed budget did
because fewer units of service were performed than forecasted.
Thus, if the director had been held accountable to
37
the fixed budget, he could have used more labor than actually needed and not been penalized.
Material and Services Expenses
December's test data shows that the volume adjusted
budget allocated $1,025 more than the fixed budget.
It must
be remembered that only several subaccounts fluctuate with
volume.
Since actual volume was greater than projected,
more dollars were allocated.
Actual dollars spent were much
less than under either budget method.
If this continues to
be a trend, an analysis would need to be performed to determine whether or not the budgeted figures were realistic or
not.
February's data reveals that the volume adjusted budget
allocates $3,430 less than the fixed budget.
This is
directly related to volume being less than budgeted; actual
dollars expended were much more in line with the flexible
budget than the fixed.
After this process had been completed, a meeting was
held with the director of radiology to look at the preliminary results.
He was very pleased with the findings.
He
was able to see very clearly the relationship between units
of service and how they affect the entire process.
If units
went up, so did his revenue, variable expenses and labor.
He could also see that the reverse was true.
38
At this point in time, the preliminary findings of this
study were reported to the hospital's management committee.
They were very pleased with what they heard.
In fact, they
gave the green light to proceed with this process for every
department in the hospital.
Discussion, Conclusions, and Recommendations
Discussion
Flexible budgets tied to productivity are long overdue
in health care institutions.
There is no reason that the
health care industry cannot be doing what other industries
learned long ago - the notion of a 40-hour work week must be
dropped.
For health care industries to operate efficiently
and effectively, especially in light of the trend toward
decreasing reimbursement, they must be willing to adapt to
change.
It is becoming clear that health care institutions
must operate more and more like traditional businesses.
This project showed the benefits of a flexible budget
tied to productivity.
true meaning.
Variances can be analyzed and have
The organization can become efficient and
more productive, and utilize resources to their maximum
extent.
The model that was developed can be easily applied to
all other departments in the hospital as well as by other
facilities in the HealthWest network.
This budgetary
process has the possibilities to revolutionize the financial
operations of Northridge Hospital.
39
The model saves both
40
time and money.
Department heads can formulate their bud-
gets in a matter of hours, rather than months.
Unfortunately, because of the time constraints of this
project, the model could not be fully tested during the year
in which it will go into effect.
However, the analysis of
data for fiscal year 1985 provides a glimpse of the opportunities that lie ahead.
As with the radiology department, departments will be
monitored based upon specific criteria.
Not only will the
model benefit the departments, but it will benefit the hospital as well.
All affected will become more involved with
the hospital's day-to-day operations and decisions will be
able to be made with more sound judgment.
The model has also been submitted to the Innovators
Catalog, which is published by HEALTHWEST Forum magazine.
This publication sheds light on the concerns that are common
to health care institutions, and the variety of successful
approaches which have been used to solve these problems.
Conclusions and Recommendations
In order to fully analyze the data, the volume adjusted
budget will need to be evaluated for a one-year period.
It
will take that long to see if the standards that have been
developed are accurate or not.
The productivity standards
will also need to be evaluated.
It is possible that they
are outdated and do not measure what they were set up to
measure.
A study of how well the current productivity
41
standards measure performance would be another valuable
project in itself.
If the model is applied to the whole hospital, an
extensive education campaign will need to be implemented
because Northridge Hospital's department heads are reluctant
to accept anything new.
The department heads will need to
be trained how volume adjusted budgets work and they must
also be shown the advantages.
They will need to be shown
that this type of budget does not necessarily work to their
disadvantage.
It is important to remember that the director or
radiology will be a key player in the education process.
He has already readily accepted the results; and as a peer
to the other department heads, he can help alleviate their
worst fears.
The hardest part in gaining the department
head's acceptance will be their agreement on the idea that a
40-hour work week may no longer be feasible in their department.
They will need to investigate the possibilities of
cross training and job sharing.
Employees will probably be reluctant to accept this
notion, but they must be shown the alternatives.
If the
hospital does not implement this change, they could possibly
find themselves out of business.
Financial management is
crucial to the survival of any hospital in today's environment.
If they do not, they may be faced with the prospect
of no job at all.
The knowledge that they will gain by
42
being cross-trained can only enhance their marketability in
the employment arena.
Lastly, it should be noted that the fixed budget will
not be eliminated.
When the budget is developed, that
budget becomes the fixed budget.
As the year progresses,
actual units of service will be fed into the mainframe
computer.
The computer will multiply these units by the
standards that were developed.
volume adjusted budget.
This will result in the
Thus, each department's performance
can be measured against both the fixed and variable budget.
If the volume adjusted budget was formulated correctly and
the department head does a good job of managing, actual
results should closely fall within the range of the variable
budget.
,,
Footnotes
1Productivity is a concept that expresses the
relationship between the quantity of goods and services
produced (the output) and the quantity of labor, capital,
land, energy and other resources that produce it (the
inputs). (Herkimer, 1978; Orifice and Jennings, 1983)
2 A budget is a plan for the future, and is the vehicle
by which management plans are translated into financial
terms and then evaluated in relation to financial and
statistical criteria. If done appropriately, budgeting can:
(a) assist in setting realistic goals; (b) aid in coordinating activities and responsibilities of personnel; (c)
provide an objective standard of performance, against which
actual results can be measured; (d) stimulate cost awareness; and (e) assist the hospital in meeting its financial
responsibilities. (Herkimer, 1978)
3A productivity standard is defined as the amount of
output that can be produced by a unit of input when trained
personnel are working at a maximum sustainable pace
throughout the day (Kelliher, 1985). In this case of a
radiology department, this would be the ratio between the
units of service performed by the radiology department and
the number of productive hours spent on performing those
units.
A productive hour represents an hour of time that an
employee actually works (i.e. - overtime, doubletime,
regular time). A nonproductive hour is an hour that an
employee earns based upon a certain number of productive
hours worked. These are fringe benefits, such as: va.cation,
sick, holiday, and education. A labor standard is the
amount of output that can be produced by a unit of input
when trained personnel are working at the maximum sustainable pace throughout the day (California Hospital
Association, 1977).
4Appendices A and B provide background on both the
hospital and radiology department.
5The hospital began implementation of a crude
flexible budget in 1985, but it was abandoned after a short
43
'
44
time. The main reason for this failure was because the hospital was trying to do too much in too short a time frame.
6A chart of accounts is a listing of-categories into
which economic data relating to a hospital's financial
position and operating results are to be accumulated in the
accounting process. Enterprises within a particular industry, such as hospitals, have sufficient characteristics
in common to produce basic similarities in their chart of
accounts. Each account in the chart of accounts is assigned
a numerical code to facilitate the completion of various
operations in the accounting process (Seawell, 1975).
7A mixed cost is one that is fixed over a range of
volume, and then increases in a discrete fashion to a new,
higher fixed cost. (Finkler, 1982)
8The data summary and analysis that were used in the
development of this model can be found in Appendix E.
9Lotus 1-2-3 utilizes a spreadsheet format.
rows and columns on the worksheet.
There are
10A calculation is a formula on the spreadsheet to the
computer. The formula is written by the person who develops
the model, but it does not appear on the screen. When the
user depresses a certain key on the computer, all of the
calculations are performed. These formulas can add, divide,
subtract and multiply numbers.
11 A job code is a number that is assigned to each
position in the hospital. All equivalent positions have the
same job code number. (i.e. - all Registered Nurses have
the same job code)
12Northridge Hospital does not book contractuals in the
individual departments - thus at this point in time, net
revenues are not a concern to department heads.
13Position control hours represent the number of hours
that the job code is approved for by the personnel department. An FTE is approved for 2,080 hours. Actual hours
paid can differ from approved position control hours for a
variety of reasons. For example, if an employee does not
take the sick time that he is entitled to and chooses to
work those hours, he will actually be paid for more than
2,080 hours.
(This is because at the end of the year, he
will be paid for any sick time he has not taken). In a
flexible labor budget - the notion of an FTE being paid for
2,080 hours must be forgotten. An employee will only be
paid for the hour that he is needed. This may be more or
less than 2,080 hours.
References
Appelbaum, Steven H. and Rohrs, Walter F. Time Management
for Health Care Professionals. Rockville, Maryland:
Aspen Systems Corporation, 1981.
Baca, Demetrius. Northridge Hospital Medical Center.
Northridge, California, Interview 12 November 1985.
Betka, Robert D. and Lacusta, Michael P.
"Productivity
Monitoring Systems: Their Use in Management Planning,
Forecasting and Labor Budgeting," Health Care
Strategic Management.
(January 1984): 8-12.
Broyles, Robert W. and Lay, Colin M. Mathematics in Health
Administration. Rockville, Maryland: Aspen Systems
Corporation, 1980.
California Hospital Association, Budgeting Manual.
Sacramento, California: California Hospital
Association, 1977.
Cerveny, Robert P. and Sanders, G. Lawrence. "Office
Management: Increasing productivity in the workplace,"
Healthcare Financial Management.
(June 1985): 60-64.
Charns, Martin P. and Schaefer, Marguerite J. Health Care
Organizations: A Model for Management. Englewood
Cliffs, New Jersey: Prentice-Hall Inc., 1983.
Cleverly, William 0. (ed.) Financial Management of Health
Care Facilities. Germantown, Maryland: Aspen Systems
Corporation, 1976.
Cleverly, William 0. "One Step Further - A Multi-Variable
Flexible Budget," Hospital Financial Management.
(April 1976): 147-153.
Dowling, William L.
"Prospective Reimbursement of
Hospitals," Inquiry.
(September 1974): 163-180.
Finkler, Steve A.
"Increasing the Usefulness of Flexible
Budgeting," Hospital Financial Management.
(February 1982): 30-39.
45
46
Guntley, Gregory G. "You Can't Have a Good Budget Without a
Budgeting Philosophy," Hospital Financial Management.
(October 1974).
Herkimer, Allen G. Understanding Hospital Financial
Management. Germantown, Maryland: Aspen Systems
Corporation, 1978.
Herzog, Thomas P. "Productivity: Fighting the Battle of the
Budget," Nursing Management. (January 1985): 30-34.
Horngren, Charles T. Cost Accounting - A Managerial
Emphasis, 5/E. Englewood Cliffs, New Jersey: PrenticeHall, Inc., 1982.
Houser, Richard. "How to Build and use a Flexible Budget,"
Hospital Financial Management. (August 1974).
Kelliher, Matthew E. "Managing productivity performance,
and the cost of services," Healthcare Financial
Management. (September 1985): 23-28.
Kohlman, Herman A. "Productivity: An Idea Whose Time Has
Come," Healthcare Financial Management. (July 1985):
10.
Lacusta, Michael. "Productivity Systems Help Control Labor
Utilization," Hospitals. (July 16, 1978): 72.
Lomastro, James A. "The Budget Memorandum: Recording Fiscal
and Program Objectives," Healthcare Financial
Management. (June 1985): 66-72.
McCormick, Robert. "Standards Setting and Evaluation,"
Topics in Health Care Financing. (Summer 1979): 33-52.
Newton, Robert L. "Establishing a "rolling" budgeting
process," Hospital Financial Management.
(May 1981): 54-56.
Orifice, John J., and Jennings, Marian C. "Productivity- a
Key to Managing Cost Per-Case," Healthcare Financial
Management. (August 1983): 30-34.
Roberts, Robert D. "Preparation of the Budget and the
Flexible Operating Plan," Topics in Health Care
Financing. (Summer 1979): 19-32.
Seawell, L. Vann. Hospital Financial Accounting Theory
and Practice. Chicago: Hospital Financial Management
Association, 1975.
47
Scott, Terrence J. "Variable Budgeting: To Accurately
Measure a Hospital's Performance," Hospital Financial
Management. (May 1980): 42-45.
Appendix A
History of Northridge Hospital Medical Center
Northridge Hospital Medical Center (NHMC) is a nonprofit, non-sectarian, 345 bed major tertiary-level teaching
hospital and ranks with the most comprehensive and well developed tertiary services in Southern California.
NHMC is
the flagship hospital of the not-for-profit HealthWest
multi-hospital network, which is based in Chatsworth,
California.
The original 49 bed community hospital opened in
September 1955 as the first general acute care hospital in
the West San Fernando Valley.
Numerous additions have been
undertaken during the ensuing years.
All construction, renovation and remodeling projects
undertaken at NHMC, since 1971, are part of a multi-phased
(master designed) expansion plan, designed by Medical Planning Associates, of Malibu.
The philosophy behind this
master-planned expansion program involves the total commitment of the Board of Trustees and Medical Staff.
The hospital currently offers a myraid of services,
including:
- Cardiology
48
49
- Neonatal Intensive Care Unit
- Pediatrics
- Critical Care Unit
- Intensive Care Unit
- Drivers Safety Awareness Program
- Program for Problem Dependencies
24 hour emergency services
- Los Angeles County Level II Trauma Center
- Gastro-Intestinal Laboratory
- Hyperbaric Chamber
- CT Scanner
- MRI
- Tox Center
- Life Flight Helicopter Service
- Spinal Cord Injury Center
- Mental Health Institute
- Maternal and Child Health Pavilion
- Rehabilitation Center
- Family Practice Center
- Physical Therapy
- Pharmacy
- Eating Disorder Program
- Recreational Therapy
- Occupational Therapy
- Medical Photography
- Communication Disorders Program
- Laboratory
Q
50
- Radiology
- Electrophysiology
- Patient Relations Department
- Progressive Care Unit
- Nuclear Medicine
- Surgery and Recovery Rooms
- Orthopedic Ward
- Invitro Fertilization Laboratory
- Dietary Services
- Dietary Counseling
Philosophy
Northridge Hospital Medical Center was founded in the
spirit of volunteerism to extend and expand a dedication to
excellence of health care.
The following guiding principles
direct the organization in performing its mission.
- NHMC is dedicated to the philosophy that each human
being is unique, valued and respected.
The organiza-
tion will deliver health care services to patients
and their families with compassion, consideration and
dignity.
- NHMC is committed to delivering quality health care
services, at a reasonable cost in accordance with
each community's needs and consistent with the financial soundness of the organization.
'
Q '
50
- Radiology
- Electrophysiology
- Patient Relations Department
- Progressive Care Unit
- Nuclear Medicine
- Surgery and Recovery Rooms
- Orthopedic Ward
- Invitro Fertilization Laboratory
- Dietary Services
- Dietary Counseling
Philosophy
Northridge Hospital Medical Center was founded in the
spirit of volunteerism to extend and expand a dedication to
excellence of health care.
The following guiding principles
direct the organization in performing its mission.
- NHMC is dedicated to the philosophy that each human
being is unique, valued and respected.
The organiza-
tion will deliver health care services to patients
and their families with compassion, consideration and
dignity.
NHMC is committed to delivering quality health care
services, at a reasonable cost in accordance with
each community's needs and consistent with the financial soundness of the organization.
51
The organization recognizes that its growth and success depends on the development of its people and the
encouragement of their professional growth and creative energy.
NHMC is committed to decentralized management whereby
professional leadership will provide a climate for
communication, innovation, high expectations, trust
and integrity.
Mission
- To provide quality, full spectrum, health care
services that best meet the needs of communities
served and strengthen the financial integrity of the
hospital.
- To provide the standards of health care in the communities in which Northridge Hospital operates by
providing superior facilities, necessary services,
and competent management.
- To attain a leadership role in the health care field
through the extension and expansion of financially
able programs and services to areas where they are
needed.
52
- To enhance and extend the strengths of the voluntary
health care system by providing a network of linkages
among independent non-profit health care organization
(HealthWest facilities) that achieve economies of
scale, superior access to scarce and/or expensive
resources, and other strengths of diversified health
care systems.
To develop programs and services that enhance the
financial capacity of the organization to pursue its
essential mission of providing high quality health
care services.
Appendix B
Overview of the Radiology Department
The department chosen for this graduate project was
Northridge Medical Center's, diagnostic radiology department.
This department generates approximately $3.5 million
in revenue each year.
The radiology area has state-of-the-
art medical equipment and is staffed 24 hours a day, 7 days
a week.
The department performs approximately 55,000 proce-
dures annually, and it is staffed with 36 paid full time
equivalents.
(A full time equivalent is paid for 2,080
hours a year).
Titles of positions in the department
include:
- Director of Radiology Services
- Office Coordinator
- Chief X-Ray Technician
- Coordinator Diagnostic Radiology
- Radiology Technicians I and II
- Dark Room Technicians
- Medical Transcriber
- Secretary
- Intermediate Clerk Typist
53
54
Budget
The fixed budget for the radiology department (for the
fiscal year ending June 30, 1986) can be found in Appendix
D.
The total payroll for the department averages about
$880,000 per year.
For the fiscal year ending June 30,
1986, the radiology department has chosen to meet the hospital's goal of expanding its image as a quality, state-ofthe-art medical facility by setting the objective of developing a marketing brochure to include all of the department's imaging capabilities.
Performance Index
Currently, the performance of both the radiology and
the hospital as a whole is determined by measuring actual
performance (on a monthly basis) against the fixed budget.
Managerial Technique
Under the director of radiology, the type of management
style which is practiced is that from the Human Relations
School.
He is very effective in creating and sustaining
effective work groups, and an atmosphere of openness, trust
and supportiveness and above all gives everybody the opportunity to participate in decision making issues, which
affect all in the department.
This is one of the reasons
that this department was chosen for this study.
It is felt
that this type of managerial technique will be helpful in
implementing a new process.
Appendix C
Step-By-Step Description of the Computer Model
The purpose of this model is for the user to be able to
develop their budget on their own personal computer.
This
model is menu driven; that is, only one screen appears at a
time, and each screen has explicit directions.
A printout
of each screen is presented in the following pages.
Expla-
nations of each of these screen (or worksheets) are provided
below.
The data that are entered onto these worksheets
will later be entered into the main computer system at
HealthWest.
TABLE 1 - This is a diagram of an IBM personal computer keyboard.
This page can be used as a quick reference guide to
familiarize oneself with the keyboard.
At this point in time, the user is ready to insert
their budget model diskette into their personal computer.
Before this is done, make sure that the computer is off.
The diskette should be placed in the "B" drive of the computer.
Make sure that the "LOTUS System Disk" is in drive
"A".
The computer can now be turned on.
prompted for the current date and time.
55
The user will be
It is important
9
56
that the date is entered, as it will appear on the budget
model.
When the prompt for the time appears, the carriage
return key can be depressed.
the time for this model.
It is not necessary to enter
A screen entitled Lotus Access
System will now appear on your screen.
cursor is on top of the 1-2-3 option.
return key.
Make sure that the
Hit the carriage
The next screen that appears prompts the user
to hit any key to continue.
Hit the carriage return key.
The user is now in "LOTUS."
By following the keystrokes
that appear below, the user will bring the budget model to
the screen:
\F
R
The user is now asked for the name of the file they
want to retrieve.
return key.
·Type in BUDMODEL and depress the carriage
The first screen of the budget model will now
appear on the screen.
This screen corresponds to Table 2.
TABLE 2 - This screen prompts the user for their department number.
After entering the department number, the date
will automatically appear a few lines below the department
number.
To continue, the F5 key on the left hand side of
the keyboard must be depressed and then the coordinate A21
must be keyed in.
The user can now depress the enter key
and move to the screen that is equivalent to Table 3.
'
57
TABLE 3 - On the screen the user of the model is required to
enter their unit of service forecast onto the screen.
The
Mediflex stat number is a computer number (on the hospital's
main computer) that corresponds to the unit of service being
entered.
Mediflex is the name of the computer company that
the hospital currently uses to perform its budget.
The user
is required to break out the unit of service forecast into
inpatients, outpatients and miscellaneous, by month.
There
is no need to enter the grand totals, as this will automatically be calculated by the computer.
When the user is fin-
ished with their input, they can move on to the next screen
by hitting the F5 key and entering the coordinate A24.
Depress the carriage return to continue.
TABLE 4 - This screen prompts the user of the model to enter
their average revenue rates.
In other words - the average
revenue that is charged for performing one unit of service.
To move on to the next screen, depress the F5 key and enter
A66.
Press the carriage return key to continue.
TABLES 5, 6, 7, 8, 9, 10, 11, 12 -These pages represent
the screens that appear prompting the user to budget their
material and service expenses.
For each category (sub-
account) that the user wants to budget for, they just have
to enter the dollar amount.
able.
The F/V denotes fixed and vari-
If the subaccount is fixed, the user needs to enter a
"1" under the "Fix" heading.
If it is variable (flexible),
58
he needs to enter a "1" under the "Var" heading.
The A/M/S
portion of the worksheet denotes Automatic, Monthly, Statistic.
This is used so that the user can identify whether or
not they want the expense to be budgeted evenly throughout
the year (automatic), block budgeted in certain months
(monthly), or based upon budgeted volume (statistic).
By
entering a "4", "5", or "6" under the "spreadr heading, the
user can select the method which best fits their needs.
TABLE 13 - This is the input worksheet for flexible labor.
Each job description in the hospital has been assigned a job
code number.
For job codes that are determined to be vari-
able (which should be all job codes in the revenue producing
departments, other than for those employees who are salaried) the user is required to enter the job code numbers,
their corresponding pay rates and productive hours per unit
of service.
(The information for productive hours per unit
of service can be retrieved from historical data.)
Because
actual productive hours will vary based upon actual units of
service, the user is asked to put the percent of time that
the employee normally spends in each of the categories.
total of all these categories should equal 100%.
The
The user
is then prompted to enter the non-productive hours for each
job code.
Non-productive hours will not vary as productive
hours do.
These non-productive hours (fringe benefits) are
fixed based upon the number of years that the employee has
59
worked at the hospital.
Non-productive hours do not
fluctuate with actual volume.
TABLE 14 - This is the input worksheet for fixed job codes.
The format is similar to Table 13, with the exception of the
fact that the productive hours are entered as whole numbers,
rather than in percentages.
TABLE 15 - This is the calculated worksheet for variable job
codes.
TABLE 16 - This worksheet is exactly the same as the one
on Table 15, with the exception of the fact that it is a
calculated worksheet for dollars, rather than hours.
TABLE 17 - This worksheet is the conversion worksheet which
translates fixed hours into dollars.
TABLE 18 - This worksheet compares this year's budget to
last years'.
60
I
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--
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~-
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tl •• I
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g
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ia
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~ ~ .,:...;.. .:.: .ll I
I
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.:.....
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t
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;::;;;;;;;;;:....
&
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t;-: ~ ~ ;....
r
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.:..... .:..
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-=-
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F~
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ao
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61
TABLE 2
FV 1'387 BUDGET INSTRUCTIONS
1.
ENTER DEPARTMENT tDIBER HERE
7140
2.
INPUT DATA INTO THE HIIR.IBHTED FIELDS ONLY
3.
FURTHER INSTRUCTIONS APPEAR AT THE BOTTOM OF EACH SCREEN.
4.
PLEASE ENTER TODAY' S DATE
06-Mar-86
,, '
62
TABLE 3
06-Mar-85
FORECASTED UNITS OF SERVICE FOR DEPT I
fliCINlH
MEDIFLEX STAT I
JLlY
AUGUST
SEPTEMBER
OCTOBER
NOVEMBER
DECEMBER
JAtUIRY
FEBRUARY
MARDi
APRIL
MAY
JUNE
GRAND
TOT~
IN PT
390
1176
1428
1291
1388
1274
1388
1413
1301
140il
1336
1390
1268
16057
OUT/PT
M!SC
7140
TOT~
394
3346
0
39'5
0
3859
0
0
0
0
0
0
4522
5287
4781
5142
4717
5139
523-\
4818
5199
4947
5148
0
4696
0
59630
J.\90
3154
3443
3751
3821
3517
3795
3511
3758
3428
43573
0
0
0
0
63
TABLE 4
05-Mar-86
REVENUE RATES
DEPT t
INPATIENT RATE
S59. 78
OUTPATIENT RATE
S73.44
MISCELL.At£0US RATE
SO. 00
7140
64
TABLE 5
A::it
06-Mar-86
MATERIAL AND SERVICES EXPENSES
SUB-ACCT
DESCRIPTION
11
110
130
131
132
135
138
140
150
1E.Ct
161
162
163
164
FAMILY PRACTICE SALARIES
SUI AND FUI
GROOP INSURAta
SRP HLTH REINS PREM
GRP HLTH REINS REIMB
HOSP PORTION EJIIPL BILLS
GRP INS ADMIN ADM FEE
GRilJP LIFE INSURANCE
PENSION AND RtiiREJiiENT
WORKMEN' 5 COJIIPENSATION
WKRS CQiliP X-RAY
WKRS COMP OIP FIRST AID
lf<RS COMP EXP
WKRS COfllP REINS PREM
M=S
S=G
s
Fix
Var
Rate
Spread
4
4
4
1
0
0
0
$0
1
0
4
$0
$0
1
1
1
1
1
0
0
0
0
4
4
4
4
4
4
4
0
0
4
0
4
$0
so
so
$0
$0
$0
so
so
so
$0
$0
1
1
1
1
1
1
0
0
0
4
65
TABLE 6
06-Mar-86
MATERIAL AND SERVICES EXPENSES (CQNTINLEDl
SUB-ACCT
DESCRIPTION
170
200
210
220
230
240
250
310
320
330
340
350
360
370
Fix
$
OTHER !NON+P/R RELATED>
MEDICAL PHYSICIANS
MED THERAPIST/OTHER
COOJLTING/MGMT FEES
LESAL
AUDIT
OTHER PROF FEES
PROSTHESIS
SUTURES AND SURGICAL NEEDLES
SURS PACKS AND SHEETS
SURSICii. SUPPLIES - GENERAL
ANESTHETIC MATERIALS
OXYSEN AND OTI£R MEDICAL BAS
IV SCLUTICJ.IS
Var
Rate
M=5
S=6
Spread
$0
$76,000
1
0
4
1
0
4
$0
$2,600
1
1
1
1
0
4
4
4
4
4
6
$0
$0
0
0
0
$0
$0
so
$2,868
$0
$0
$0
$0
1
0
0
1
0
1 0.048096
1
0
1
0
0
1
0
1
6
6
6
b
6
6
66
TABLE 7
06-Mar-86
MATERIAL AND SERVICES EXPENSES !CONTINUED)
SUB-OCCT
DESCRIPTION
371
372
373
374
380
383
384
385
400
410
420
430
440
450
$
$0
IV SETS
$0
IV NUTRITIONAL
$0
IV ONCOLOSICS
$0
IV BLOOD DERIVATIVES
$46,242
PHilRMACEUTI CALS
$0
PHARM DIRECT
$0
CONTROLLED SUBSTANCES
$0
ORAL NUTRITIONAL
$240,000
RADIOLOGY FILM
OTHER MEDICAL CARE MATERIALS $19,798
$0
FISH/MEAT/POULTRY
FOOD: OTHER
$2,276
$13,000
LAUNDRY AND LINEN
$0
Cl.BWING Sli'PLIES
M=5
S=6
FiJ<
Var
Rate
1
0
0
1
1
1
0
0
1
o. 775482
1
0
1
0
0
1
1 4.024819
1 0.332014
0
1
1 0.038168
1 0.218011
0
1
Spread
6
6
6
6
6
6
6
6
6
6
6
6
6
6
67
TABLE 8
06-JIIar-86
MATERIAL AND SERVICES EXPENSES !CONTINUED>
SUB-oct:T
DESCRIPTION
460
461
470
CFFICE SUPPLIES
FORMS
EMPL. WEARING APPAREL
MINOR MEDICAL EGUIPl'4ENT
OTHER MINOR EQUIPMENT
OTHER NON MEDICAL SUPPLIES
PRINTED MATERIALS
BOOI<S AND MANUALS
ENVIRONMENTAL SUPPLIES
PATIENT RELATED SUPPLIES
MAINTENANCE SUPPLIES
PSYCH SUPPLIES
ALLOCATED EXPENSES
LOST REVENLE <COST>
480
490
500
501
502
510
520
530
540
580
590
....
$
Rate
1
0
4
1
1
0
4
4
6
6
6
4
4
4
6
4
4
4
4
Fix
$3,400
$12,300
$0
M=S
S=6
Spread
Var
$3,000
$301 000
0
1 0.083850
1 0.050310
1 0.503102
$600
0
ss,coo
$900
0
$400
$2,700
$0
$0
$0
$0
0
1 0.045279
1
1
0
0
0
0
il
'
68
Q
TABLE 9
06-Mar-86
MATERIIl. AND SERVICES EXPENSES !CONTIMJEDl
SUB-ACCT
DESCRIPTION
610
620
625
626
040
641
642
043
644
651
652
653
654
655
$
PURCH SERVICE-MEDICAL
$3,400
$0
SRV CONTRACT /REPAIR BLDG
SRV COOTRACT /REPAIR EQUIPMEN $122,000
so
PURCH SRV I R & M - AUTO
$0
INTERCOMPANY PURCH SRV
$0
INTERCOMPANY MGMT FEE
$0
CAREPLUS CHARGES
$0
ELDERMED CHARGES
$0
DP OPS/DE SRVCS
$0
ctllECTION AGENCY
$0
COLL AGENCY - LA/ORANGE
$0
C!ll AGENCY GESS
$0
Cll.L AGENCY SEC
$0
COLL AGENCY MDSB
Fix
M=5
Var
Rate
1
1
0
0
0
1
1
0
0
1
4
It
4
4
4
0
4
0
4
4
4
4
4
0
0
0
0
1
1
S=6
Spread
0
0
4
0
4
4
'
69
TABLE 10
06-Mar-86
MATERIAL AND SERVICES EXPENSES !CONTINUED)
SUB-ACCT
DESCRIPTION
658
659
660
661
664
f.G7
668
669
670
690
710
720
740
750
COLL AGENCY SBB
COU. AGENCY CBB
OTHER PURCH SRV
PURCH SVC AMI
PURCH SVC B OF A
PURCH SRV - MEDIFLEX
PURCH SRV MCAUTD
PURCH SRV - OTHER EDP
RECORD STORAGE
TEMPORARY HELP
AMORT-LAND IMPROVEMENT
DEPRN-BLDS & IMPROV
DEPRN-EatJIPMENT
RENTAL-BLDG
s
Fix
$0
so
1
1
Var
Rate
(I
$5,000
$0
$0
1
0
0
1
0
0
$0
1
0
so
$0
$13,000
0
1
$0
$0
$0
$0
$()
0
0
0
0
1
1'1=5
5--6
Spread
4
4
4
4
4
4
4
4
4
4
4
0
4
0
0
4
4
70
TABLE 11
06-Mar-86
MATERIAL AND SERVICES EXPENSES !CONTINUED>
SUB-ACCT
DESCRIPTION
760
765
770
780
790
810
820
830
850
860
870
875
880
89"2
RENTAL-EQUIPMENT
RENTAL-VEHICLE
UTILITIES-ELECTRIC
UTILITIES-GAS
UTILITIES-WATER
INSUR-PROF LIABILITY
· INSURANCE-OTHER
LICENSES & TAXES
TELEPHONE/TELEGRAPH
SUBSCRIPTIONS
OUTSIDE TRAINING
MEETINGS/CONVENTIONS
TRAVEL
B OF A DISCOUNT
M=5
Rate
S=6
Spread
$1,200
1 0.0201::!4
6
$0
0
$0
0
0
0
s
Fix
$0
so
$0
so
$3,000
S100
$170
1
1
1
1
1
$()
$1,600
$1,200
$0
1
1
1
Var
0
4
4
4
4
4
4
4
1 0.001677
6
0
0
0
4
4
4
4
4
0
0
0
0
71
TABLE 12
06-Mar-86
MATERIAL AND SERVICES EXPENSES !CONTINUED>
SUB-ACCT
DESCRIPTION
894
8'35
896
897
898
899
953
955
s=.m
958
959
966
970
975
980
985
RECRUITMENT
ADVERTISING
POSTAGE
DUPLICATING
FREIGHT IN
GAS/OIL AUTO
INT TEACH iiETIIiE 2ND
INT HEITNER DEBENTURE
BNK [f A!ERICA DISCOUNT
INT UNION MUTUAL NOTES
INT ~SE OBLIGATION
SALES TAX
MISCELLANEOUS EXPENSES
NON OPERATING EXPENSE
MISC REV
NON OPERATING INCOME
Fix
$
M=5
Var
Rate
1
1
1
1
0
0
0
0
0
$0
$0
1
0
0
$0
1
1
1
$0
$7,000
so
$2,500
$2,000
so
$0
$0
$4,000
$200
$0
$0
$(!
1
1
1
0
0
0
0
0
0
0
0
0
S=5
Spread
4
4
4
4
4
b
4
4
4
4
4
4
4
4
4
4
TABLE 13
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TABLE 15
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TABLE 18
....
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APPENDIX D
FIXED BUDGET FOR THE RADIOLOGY DEPARTMENT
FYE 06/30/86
BUDGET
FYE 06/30/84
BUDGET
FYE 06/30/85
1702862
0
28633
69331
616882
743712
271
1750992
247188
27048
87468
678996
833772
3180
3161691
3628644
REVENUE
200
210
230
280
400
500
630
INPATIENT ANCILLARY
INPATIENT TRAUMA
INPATIENT PSYCH
INPATIENT REHAB
OUTPATIENT E.R.
OUTPATIENT REFERRED
OUTPATIENT PSYCH
TOTAL REVENUE
DEDUCTIONS
Northridge Hospital does not budget for deductions
from revenue in the individual departments
EXPENSES
10
12
100
121
122
123
SALARIES AND WAGES
PREMIUM PAY
FICA
VACATION
HOLIDAY
SICK PAY
563794
38828
47644
34179
17668
26157
670322
67342
58267
36919
22228
29681
TOTAL LABOR
728270
884759
78
79
APPENDIX D
FIXED BUDGET FOR THE RADIOLOGY DEPARTMENT
FYE 06/30/86
BUDGET
FYE 06/30/84
200
220
330
340
380
400
410
430
440
460
461
480
490
500
501
502
510
520
530
610
625
660
670
830
850
860
875
880
895
897
898
966
980
MEDICAL PHYSICIANS
CONSULTING AND MGMT FEES
SURGICAL PACKS AND SHEETS
SURGICAL SUPPLIES
PHARMACEUTICALS
RADIOLOGY FILM
OTHER MED. CARE MATERIALS
FOOD
LAUNDRY AND LINEN
OFFICE SUPPLIES
FORMS
MINOR MEDICAL EQUIPMENT
OTHER MINOR EQUIPMENT
OTHER NON-MEDICAL SUPPLIES
PRINTED MATERIALS
BOOKS AND MANUALS
ENVIROMENTAL SUPPLIES
PATIENT RELATED SUPPLIES
MAINTENANCE SUPPLIES
PURCHASED SVC - MEDICAL
SERVICE CONTRACT/REPAIRS
OTHER PURCHASED SERVICE
RECORD STORAGE
LICENSES AND TAXES
TELEPHONE AND TELEGRAPH
SUBSCRIPTIONS
MEETINGS AND CONVENTIONS
TRAVEL
ADVERTISING
DUPLICATING
FREIGHT IN
SALES TAX
MISCELLANEOUS REVENUE
62000
800
3200
500
37000
0
12000
1261
23434
2178
10350
20000
6000
270000
0
456
0
2500
12239
12400
125325
12600
8815
6400
0
0
1000
1600
3900
0
505
8017
-256
BUDGET
FYE 06/30/85
76000
2600
2868
804
45440
279864
19799
1716
26290
2544
8321
20736
3036
14256
600
560
402
2748
4132
3456
144026
5201
27570
0
3326
170
1630
1200
7126
2600
996
4068
0
TOTAL EXPENSES
1372494
1598880
CONTRIBUTION
1789197
2029764
APPENDIX E
Data Summary and Analysis
In the pages that follow, a data analysis is presented.
This analysis was compiled so that problems with the current
system could be seen and conclusions drawn to help develop
and format the new computer model.
The fixed budget for
fiscal year 1984 (July 01, 1983 -June 30, 1984) is compared
to a flexible budget for the same time period.
The
standards that were used to calculate the flexible budget
are based upon actual data for fiscal year 1984.
In the data analysis, it can be seen that actual volume
was 6.3% higher than budgeted (Table 1).
Table 2 shows the
average revenue that is expected from both inpatients and
outpatients, for each procedure performed.
It must be
remembered that these are only average rates.
Table 3
illustrates that under the fixed budget, the department head
would have only been held accountable for $3,161,691 in
revenue for the year, when in fact, he should have been
responsible for $3,365,145.
If the actual revenue was not
equal to the flexible budget, conclusions could be drawn
about lost charge tickets, or low revenue rates.
Under the
fixed budget, the director of radiology, in theory, would
80
81
only be responsible for the $3,161,691.
This example shows
how, with a flexible budget, the profitability of the
radiology department could be increased by making the
director more accountable and thus, in the long run, a
better manager.
Table 4 outlines which expenses are variable.
This was
determined in conjunction with the director of radiology.
(D. Baca, personal communication, November 12, 1985).
The
standards are based on actual data for fiscal year 1984.
Table 5 illustrates the variances between the fixed budget
and flexible budget for expenses.
The conclusion that can
be drawn from this example is a bit misleading.
It appears
as though the flexible budget allocates $1,093 more in
expenses than the fixed budget.
In reality, this is
justified, because volume is 6.3% higher than budget.
Based on the evidence presented herein, it is apparent
that the costs of staying on a fixed budget do not outweigh
the benefits of switching to a flexible budget.
82
APPENDIX E
TABLE 1
DATA ANALYSIS
VOLUME
FYE 06/30/85
Actual
Volume
(in units)
Budgeted
Volume
(in units)
Variance
(in untis)
INPATIENT
36189
34380
1809
OUTPATIENT
23483
27746
1737
TOTAL
59672
56126
3456
NOTE:
Each unit is equal to one test
0
•
83
APPENDIX E
TABLE 2
DATA ANALYSIS
REVENUE RATES
FYE 06/30/85
INPATIENT
OUTPATIENT
NOTE:
===============
===============
$52.38
$62.58
For each unit of service performed, the above
represents the average revenue that is expecteed.
84
APPENDIX E
TABLE 3
DATA ANALYSIS
REVENUE
FYE 06/30/85
FLEXIBLE
BUDGET
FIXED
BUDGET
VARIANCE
INPATIENT
$1,895,580
$1,800,826
$ 94,756
OUTPATIENT
$1,469,565
$1,360,865
$108,700
$3,365,145
$3,161,691
$203,454
85
APPENDIX E
TABLE 4
DATA ANALYSIS
FLEXIBLE EXPENSES
FYE 06/30/84
It was determined, in conjunction with the Director of
Radiology, that the following expenses are flexible. For
each unit of service performed, it was determined that
$XX.XX is spent. This number appears in brackets after
the name of the expense category •
• 330 Surgical Packs and Sheets ($.05)
.340 Surgical Supplies ($.01)
.430 Food ($.03)
.480 Minor Medical Equipment ($.36)
.490 Other Minor Equipment ($.05)
.500 Other Non-Medical Supplies ($.25)
.520 Patient Related Supplies ($.05)
86
APPENDIX E
TABLE 5
DATA ANALYSIS
EXPENSES
FYE 06/30/85
SUBACCT
200
220
330
340
380
400
410
430
440
460
461
480
490
500
501
502
510
520
530
610
625
660
670
830
850
860
875
880
895
897
898
966
DESCRIPTION
MEDICAL PHYSICIANS
CONSULTING AND MGMT FEES
SURGICAL PACKS AND SHEETS
SURGICAL SUPPLIES
PHARMACEUTICALS
RADIOLOGY FILM
OTHER MED. CARE MATERIALS
FOOD
LAUNDRY AND LINEN
OFFICE SUPPLIES
FORMS
MINOR MEDICAL EQUIPMENT
OTHER MINOR EQUIPMENT
OTHER NON-MEDICAL SUPPLIES
PRINTED MATERIALS
BOOKS AND MANUALS
ENVIROMENTAL SUPPLIES
PATIENT RELATED SUPPLIES
MAINTENANCE SUPPLIES
PURCHASED SVC - MEDICAL
SERVICE CONTRACT/REPAIRS
OTHER PURCHASED SERVICE
RECORD STORAGE
LICENSES AND TAXES
TELEPHONE AND TELEGRAPH
SUBSCRIPTIONS
MEETINGS AND CONVENTIONS
TRAVEL
ADVERTISING
DUPLICATING
FREIGHT IN
SALES TAX
DIFFERENCE
FLEXIBLE
BUDGET
2984
597
1790
21482
2984
14918
2984
FIXED
BUDGET
76000
2600
2868
804
45440
279864
19799
1716
26290
2544
8321
20736
3036
14256
600
560
402
2748
4132
3456
144026
5201
27570
3076
286
170
1630
1200
7126
2600
996
4068
VARIANCE
116
-207
74
746
-52
662
236
1036
APPENDIX F
ANALYSIS OF DATA FROM FISCAL YEAR 1985 - 1986
TABLE 1
DECEMBER 1985
SUBACCT
TITLE
ACTUAL
VOL-ADJ
FIXED
VARIANCE VARIANCE
VOL-ADJ
FIXED
REVENUE
200
210
230
280
400
500
630
INPT ANCILLARY
INPT TRAUMA
INPT PSYCH
INPT REHAB
OP ER
OP REFERRED
OP PSYCH
$158,721 $167,949 $145,916 ($ 9,228)
(619)
23,090
23,709
20,599
(1,022)
1,572
2,594
2,254
(2,825)
5,564
8,389
7,289
5,105
59,624
54,519
56,583
74,159
66,947
69,481
7,212
(256)
256
265
$12,805
2,491
(682)
(1,725)
3,041
4,678
(265)
TOTAL REVENUE
$322,730 $324,363 $302,387 ($ 1,633)
$20,343
EXPENSES (LABOR)
10
12
100
121
122
123
SAL AND WAGES
PREMIUM PAY
FICA
VACATION
HOLIDAY
SICK PAY
$ 47,435 $ 59,673 $ 55,895 ($12,238) ($ 8,460)
6,010
5,614
(2,151)
(1,755)
3,859
4,135
5,160
4,866
(1,025)
(731)
2,420
( 649)
( 649)
3,069
3,069
3,854
1,968
1'886
1'886
1'968
(876)
(876)
2,474
2,474
1,598
TOTAL LABOR
$ 63,301 $ 78,354 $ 73,886 ($15,053) ($10,585)
EXPENSES (MATERIAL AND SERVICES) (NOTE: V denotes variable expenses)
200
220
330
340
380
400
410
430
440
460
461
480
490
MEDICAL PHYSICIANS
$ 3,800 $ 6,333 $ 6,333 ($ 2,533) ($ 2,533)
(217)
CONSULT/MGMT FEES
(217)
217
217
( 165)
(147)
SURG PACKS (V)
92
257
239
(61)
(66)
SURGICAL SUPPLIES (V)
6
72
67
1,101
4,101
7,888
6,787
PHARMACEUTICALS
3,787
RADIOLOGY FILM
24,915 23,322
23,322
1'593
1'593
( 187)
(187)
OTHER MED CARE MATL/SUPP 1 '463
1,650
1'650
FOOD (V)
186
43
154
143
32
(1,525)
666
LAUNDRY AND LINEN
2,191
2, 191
( 1'525)
( 154)
( 154)
OFFICE SUPPLIES
212
212
58
(6,030)
240
FORMS
6,963
693
933
(1,728)
MINOR MED EQUIP (V)
(1,860)
1, 728
1'860
48
29
MINOR EQUIPMENT (V)
272
301
253
87
88
(1
APPENDIX F
ANALYSIS OF DATA FROM FISCAL YEAR 1985 - 1986
TABLE 1 (Continued)
DECEMBER 1985
SUBACCT
TITLE
ACTUAL
VARIANCE
VOL-ADJ
VARIANCE
FIXED
1' 188
50
47
33
229
344
288
0
2,002
433
0
2,297
0
(419)
(50)
503
(28)
47
50
(288)
0
(8,918)
( 313)
0
(1,273)
137
( 1)
256
24
14
136
100
594
256
24
14
136
100
594
(256)
(24)
(14)
( 137)
(100)
659
(327)
(50)
503
(28)
- 65
50
(288)
0
1,082
( 313)
0
(1,273)
137
( 1)
1
(256)
(24)
(14)
(137)
( 100)
659
217
83
339
217
83
339
(191)
361
(339)
0
(1,125)
(191)
361
(339)
0
(1,125)
VOL-ADJ
FIXED
EXPENSES (MATERIAL AND SERVICES) (Continued)
(NOTE: V denotes variable expenses)
500
501
502
510
520
530
610
620
625
660
669
670
690
750
760
830
850
860
875
880
895
896
897
898
966
970
980
NON MED SUPPLIES (V)
861
PRINTED MATERIALS
BOOKS AND MANUALS
550
ENVIRONMENTAL SUPPLIES
5
PT RELATED SUPPLIES (V)
294
MAINTENANCE SUPPLIES
294
PORCH SVC - MEDICAL
SVC CONTRACT
SVC CONTRACT-EQUIP
3,084
120
PURCHASED SERVICES
PURCHASED SVC - EDP
1,024
RECORD STORAGE
TEMPORARY HELP
137
( 1)
BUILDING RENTAL
1
EQUIPMENT RENTAL
LICENSES/TAXES
TELEPHONE
SUBSCRIPTIONS
1
MEETINGS/CONVENTIONS
TRAVEL
ADVERTISING
1,253
POSTAGE
26
DUPLICATING
444
FREIGHT IN
SALES TAX
MISC EXPENSES
(1,125)
MISC REVENUE
TOTAL M/S EXPENSE
CONTRIBUTIONS
UNITS OF SERVICE
TOTAL
INPATIENT
OUTPATIENT
1,280
50
47
33
247
344
288
12,002
433
2,297
1
$ 47,274 $ 59,804 $ 58,779 ($12,530) ($11,505)
$212,155 $186,205 $169,722
5,139
3,316
1 '823
5,139
3,316
1,823
4,773
1, 892
1'892
$25,950
$42,433
'
89
APPENDIX F
ANALYSIS OF DATA FROM FISCAL YEAR 1985 - 1986
TABLE 2
FEBRUARY 1986
SUBACCT
TITLE
ACTUAL
VOL-ADJ
FIXED
VARIANCE VARIANCE
VOL-ADJ
FIXED
REVENUE
200
210
230
280
400
500
630
INPT ANCILLARY
INPT TRAUMA
INPT PSYCH
INPT REHAB
OP ER
OP REFERRED
OP PSYCH
$141,192 $146,524 $145,916 ($ 5,332) ($ 4,724)
18,651
20,685
20,599
(2,034)
(1,948)
3,774
2,263
2,254
1' 511)
1' 520
2,642
2,612
9,931
7,319
7,289
48,667
45,039
56,583
(7,916)
3,628
57,015
55,306
69,481
( 12, 466)
1'709
211
265
(211)
(265)
TOTAL REVENUE
$279,230 $277,347 $302,387
$ 1,883
($23,157)
EXPENSES (LABOR)
10
12
100
121
122
123
SAL AND WAGES
PREMIUM PAY
FICA
VACATION
HOLIDAY
SICK PAY
$ 45,824 $ 51,418 $ 55,260 ($ 5,594) ($ 9,436)
5,208
(2,047)
(2,466)
3,161
5,627
4,823
(636)
3,887
4,523
(936)
(1,941)
(1,941)
3,075
3,075
1 '134
(125)
(125)
1, 847
1, 972
1'972
(754)
(754)
1,725
2,479
2,479
TOTAL LABOR
$ 57,578 $ 68,675 $ 73,236 ($11,097) ($15,658)
EXPENSES (MATERIAL AND SERVICES
200
220
330
340
380
400
410
430
440
460
461
480
490
(NOTE: V denotes variable expenses)
MEDICAL PHYSICIANS
$ 6,944 $ 6,333 $ 6,333 $ 611
(217)
CONSULT/MGMT FEES
217
217
(220)
220
SURG PACKS (V)
239
(61)
62
SURGICAL SUPPLIES (V)
1
67
(1,901)
PHARMACEUTICALS
3,787
3,787
1'886
RADIOLOGY FILM
1,178
24,500
23,322
23,322
( 175)
OTHER MED CARE MATL/SUPP 1'463
1,650
1'650
(81)
FOOD (V)
51
143
132
(1,285)
LAUNDRY AND LINEN
2,191
906
2,191
416
212
OFFICE SUPPLIES
628
212
FORMS
679
6,963
1, 372
693
( 1, 591)
MINOR MED EQUIP (V)
1
1'728
1'592
686
MINOR EQUIPMENT (V)
253
919
233
$
611
(217)
(239)
(66)
(1,901)
1' 178
( 175)
(92)
(1,285)
416
(5,591)
(1,727)
666
,,
'
90
APPENDIX F
ANALYSIS OF DATA FROM FISCAL YEAR 1985 - 1986
TABLE 2 (Continued)
FEBRUARY 1986
SUBACCT
TITLE
ACTUAL
VOL-ADJ
FIXED
VARIANCE
VOL-ADJ
VARIANCE
FIXED
363
(50)
(47)
( 31)
( 130)
(272)
360
0
4,170
(297)
(1)
(797)
1' 013
0
906
(256)
(24)
(14)
(91)
(80)
(594)
34
(216)
(84)
(339)
80
(144)
270
(50)
(47)
(30)
( 148)
(272)
360
0
14,170
(297)
EXPENSES (MATERIAL AND SERVICES) (Continued)
(NOTE: V denotes variable expenses)
500
501
502
510
520
530
610
620
625
660
669
670
690
750
760
830
850
860
875
880
895
896
897
898
966
970
980
NON MED SUPPLIES (V)
1,458
PRINTED MATERIALS
BOOKS AND MANUALS
ENVIRONMENTAL SUPPLIES
3
81
PT RELATED SUPPLIES (V)
MAINTENANCE SUPPLIES
72
648
PURCH SVC - MEDICAL
SVC CONTRACT
SVC CONTRACT-EQUIP
16,172
PURCHASED SERVICES
136
( 1)
PURCHASED SVC - EDP
RECORD STORAGE
1'501
TEMPORARY HELP
1'013
BUILDING RENTAL
EQUIPMENT RENTAL
906
LICENSES/TAXES
TELEPHONE
SUBSCRIPTIONS
MEETINGS/CONVENTIONS
45
20
TRAVEL
ADVERTISING
POSTAGE
34
1
DUPLICATING
( 1)
FREIGHT IN
SALES TAX
80
MISC EXPENSES
(144)
MISC REVENUE
TOTAL M/S EXPENSE
CONTRIBUTIONS
UNITS OF SERVICE
TOTAL
INPATIENT
OUTPATIENT
1,095
50
47
34
211
344
288
12,002
433
2,298
1,188
50
47
33
229
344
288
0
2,002
433
0
2,297
0
256
24
14
136
100
594
256
24
14
136
100
594
217
83
339
217
83
339
{1)
(796)
1,013
0
906
(256)
(24)
(14)
(91)
(80)
(594)
34
(216)
(84)
(339)
80
(144)
$ 60,707 $ 59,209 $ 55,779
$ 1'498
$ 4,928
$160,945 $149,463 $173,372
$11,482
($12,427)
4,399
2,893
1'506
4,399
2,893
1, 506
4,773
2,881
1,892