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Business Management for the Healthcare Professional

3 Contact Hours
This peer reviewed course is applicable for the following professions:
Advanced Registered Nurse Practitioner (ARNP), Athletic Trainer (AT/AL), Certified Registered Nurse Anesthetist (CRNA), Clinical Nurse Specialist (CNS), Licensed Practical Nurse (LPN), Licensed Vocational Nurses (LVN), Midwife (MW), Nursing Student, Occupational Therapist (OT), Occupational Therapist Assistant (OTA), Physical Therapist (PT), Physical Therapist Assistant (PTA), Registered Nurse (RN), Respiratory Therapist (RT)
This course will be updated or discontinued on or before Saturday, December 11, 2021
BOC
FPTA Approval: CE20-665743. Accreditation of this course does not necessarily imply the FPTA supports the views of the presenter or the sponsors.
Outcomes

Learners will understand fundamental components of healthcare business management that can be applied to any level across the healthcare continuum and in any area of healthcare administration.

Objectives

After completing this continuing education course, the participant will be able to meet the following objectives:

  1. Discuss the fundamental components of the revenue cycle.
  2. Identify how each component in the revenue cycle applies to the healthcare business manager.
  3. Document examples of ways to calculate staffing hours and staffing ratios.
  4. Discuss how staffing hours and staffing ratios affect the decisions of the healthcare manager.
  5. List the differences between cash and accrual basics of accounting for the healthcare manager.
CEUFast Inc. did not endorse any product, or receive any commercial support or sponsorship for this course. The Planning Committee and Authors do not have any conflict of interest.

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To earn of certificate of completion you have one of two options:
  1. Take test and pass with a score of at least 80%
  2. Reflect on practice impact by completing self-reflection, self-assessment and course evaluation.
    (NOTE: Some approval agencies and organizations require you to take a test and self reflection is NOT an option.)
Author:    Jeanna Winchester (PhD)

Introduction

The health care business can be a tough business. There is a constant back and forth struggle between the capitalistic goals of those who profit from healthcare services and the charitable objectives of helping those who cannot help themselves. In the administration and management of healthcare, this struggle can consume a healthcare business manager’s entire day. The truth is both objectives are equally essential if you are the person in charge. You must achieve your management and financial goals, but also provide a myriad of services in a safe setting to those who need your (healthcare entity’s) care. Several situations can result in bankruptcy, closings, lawsuits and wrongful death claims if fundamental business management principles are not maintained.1-3 It begins by understanding some fundamentals about management in the healthcare setting.

Business Management 101

The most fundamental concept in healthcare business management is structuring the business appropriately to reflect the type of healthcare service delivery you want to delivery. For example, if you are a non-physician practitioner and wish to have a small independent practice where you maintain total control, you may want to set up a Sole Proprietorship. Note, it is essential to check with your state regarding all independent non-clinician practitioner scope of practice rules! 1-6

Sole Proprietor

Sole Proprietor: someone who owns an unincorporated business by himself/herself.

However, if you plan to bring in another specialty practice to join your business, you may set up a partnership with that other clinician. The new venture can provide a partnered bundle of services to patients in your clinic. It can be beneficial if the partner brings with them resources, knowledge, and experience to help generate another revenue stream so your practice can continue to operate and grow.1-6

The term partnership means a relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor, or skill, and expects to share in the profits and losses of the company.

In looking ahead, let's say your partnership grew so much that you want to merge with another two specialty practices. In this scenario, your group can take in a more significant number of patients with a broader range of diagnoses. The business may require more space, equipment, and personnel. In planning for this, you may want to consider a more substantial form of an organization with a more complicated tax structure, such as a corporation. Here, stockholders own a stake in the corporation, and profits can be rolled back into the company as well as dispersed to the stockholders. The scenario can go much higher as mega-corporations are evident in healthcare, and these significant players try to provide a large portion, if not the entire gamut, of healthcare services.1-6

The corporation is a term in which prospective shareholders exchange money, property, or both, for the corporation's capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions. A corporation conducts business, realizes net income or loss, pays taxes as well as distributes profits to shareholders. The gain of a corporation is taxed to the corporation and the shareholders when distributed as dividends, which creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.1-6

These main types of business structures can come in hybrid forms, as well. For example, Limited Liability Corporations can maximize tax advantages and reduce the burden on the owners.1-6

Limited Liability Company (LLC)

Limited Liability Company (LLC): this is a form of hybrid business structure allowed by state statutes. Owners of an LLC are called members. Most states do not restrict ownership (check your state laws regarding LLCs!), and members may include individuals, corporations, other LLCs, and foreign entities. There is no maximum number of members. Most states also permit “single-member” LLC companies: those having only one owner. 1-6

S Corporation

It is important to note that an S Corporation in the United States can take a few different forms, depending on your particular state’s laws. It is a closely held corporation, LLC, or partnership that makes a valid election that can be subject to taxes under the laws of the Subchapter S of Chapter 1 of the Internal Revenue Code. In general, S Corporations do not pay income taxes. Instead, the income/loss is divided among the shareholders, who pass the profit/loss via their individual tax returns. There are several additional requirements, legislations, documentation, and state-specific rules surrounding the use of an S Corporation.1-6 The S corporation is not commonly utilized in larger healthcare entities' business structures but could be useful to the independent clinician looking to put their multiple contracts or traveling incomes into one place and simplify their tax situations. It can also bring the benefits of a corporate structure along with the benefits of the LLC.

Once you choose what type of healthcare specialty you would like to practice, consider which of these company's organizational structures best fits your goals. A significant factor that could impact your decisions as you begin your business is what you expect your annual revenue to be. The income of your company will depend on your company's size, structure, location, and specialty. 1-3

Revenue is the Engine that Funds All of Our Innovation (Google Co-Founder, Larry Page)

Revenue is the Engine that Funds All of Our Innovation (Google Co-Founder, Larry Page)7

The fundamental concept mentioned is well known in business; it takes money to make money.1-6 It can cost upwards of $70,000 to $100,000 to start a healthcare outpatient clinical practice from the ground up.1-3 What you need is revenue. There are two broad categories of revenue: operating and non-operating. Of primary interest to any business owner is operating revenue: income generated by providing services for patients or clients. Non-operating revenue is revenue coming from other sources related to the organization's existence, such as grants or donations.1-6

Sources of Operating Revenue

Sources of Operating Revenue1-3:

  1. Government programs Medicare and Medicaid
  2. Insurers such as the not-for-profit Blue Cross and Blue Shield programs
  3. Commercial insurance carriers
  4. Contracts with managed care organizations
  5. Uninsured patient care pools
  6. Private-pay patients

It is important to note that private-pay patients are a small and shrinking source of revenue. The other issues regarding different third-party payers deal with a somewhat different set of reimbursement rules, usually resulting in different billing practices.

For most healthcare organizations, the most significant sources of revenue are Medicare and Medicaid, followed by Blue Cross and Blue Shield and managed care organizations. The most significant portion of reimbursement is related to the number of patients served. The challenging aspect predicting regarding sources of revenue is, naturally, how frequent and consistent those sources of payment can be.1-3

Variations in Revenue Consistency

Variations in revenue consistency can include1-3:

  1. Fluctuations in the number of patients served
  2. Seasonal changes due to a facility’s location, such as a coastal location or areas with warmer climates!
  3. Weather events or disasters
  4. Competition with other providers in the area
  5. In general, any event or circumstance that can cause the activity to increase or decrease
  6. Variable payment practices of the third-party payers
    1. Payment for providers' services arrives weeks or months after the services rendered
    2. Sometimes this lag is predictable, but occasionally it changes
  7. Some payers will reject a billing submission because of errors and require revision and resubmission
    1. Sometimes seen as a payer tactic used to delay payment in support of its cash-flow circumstances
  8. Fines and penalties assessed for billing errors
    1. Not unusual with governmental programs
    2. Also includes fines and penalties arising from changing regulations
      1. e.g., Readmission rates for specific categories of care under the Affordable Care Act
  9. Delays in collecting copays and deductibles from patients
  10. Revenue never received because of the treatment of uninsured, underinsured, and indigent patients
  11. Changes in reimbursement systems
    1. EG Changes in International Classification of Disease (ICD) coding from ICD-9 to ICD-10
  12. Problems associated with very late billing
  13. The practice of bundled care

Bundled Care

Bundled Care: a flat rate is applied (and known ahead of time) for pre-care, inpatient admission, and post-care.

The previous issues are some of the more commonly encountered factors affecting the receipt of revenue by a healthcare provider organization. The point to be stressed here is that an organization's cash flow, e.g., what comes in as well as what goes out, requires careful and often aggressive management. 1-6

Cash is King: Cash & the Revenue Cycle

There is a straightforward bit of wisdom to remember in connection with the management of the revenue cycle: Cash is King! 3-6 The organization's cash budget for any given year sets the stage for the control of the revenue cycle. This budget addresses cash needs against projections of cash that is received over the period covered by the budget, usually one year.1-6

The pattern of cash-in versus cash-out is critical because of the need to remain solvent in the short run. The illusion of looking good or solvent “on paper" does little good if the organization is owed impressive amounts of money, and there is not enough cash in the bank to pay current bills or to meet payroll.1-6

There can be circumstances when cash is in extremely short supply. The organization might become more aggressive in collecting accounts receivable or perhaps delay payment of a few bills to more closely match cash receipts. A lack of cash can also lead to short-term borrowing that sometimes results in difficulties in obtaining credit and creates more operating expense because of interest rates.1-6

A solvency ratio denotes a ratio that communicates whether a company’s cash flow is enough to meet its short-and long-term liabilities and expenses.

Let’s take a moment to explore a Fictional Case Study scenario to incorporate these confusing terms into a "real-world scenario." Here, we will keep it general and call our company, “Healthcare Entity #1.” In the below example, we have provided a sample fictional case study, where we have a typical revenue cycle for any healthcare practice. For the sake of argument, let us assume all marketing and other considerations are working sufficiently to bring patients in the door! To that end, how would a healthcare business manager assess and then implement a healthy revenue cycle?

revenue_cycle

Figure 1. Original Figure by J. Winchester Ph.D. Proposed Revenue Cycle for a Fictional Case Study of a Generic Outpatient Clinic or Small Healthcare Entity.

Quality of care is of the utmost priority, and it is prudent to continue to seek continuing education on the way to improve the quality of care because it will enhance revenue.1-6 However, it is incumbent upon the qualified healthcare business manager/administrator to pay close attention to the company’s financials as well as quality control. The healthcare business manager needs to stay on top of the level of revenue they are bringing in. The organization that does not keep on top of the revenue cycle could find themselves scrambling to remain viable while another healthcare entity in their market are thriving.1-6

It is for this reason why it is so important to understand the healthcare revenue cycle and the steps it entails. Revenue cycle management is the term given to a financial process, encompassing the management of funds as well as collecting payments from the treatment you offer your patients. 1-6

The revenue cycle begins with Scheduling/Pre-Registration steps (see Figure 1). The pre-registration can improve the patient's experience, collect essential information before patient arrival to determine eligibility and benefits. Some software and technology expenses will be necessary to establish a good IT team. The practice will need team members who are well versed in using dedicated software for your clinical practice, your community, and your needs.1-3

This consideration continues well into the Registration, Charge Entry, and Patient Capture Process. A key element in the Patient Capture Process and Charge Entry is the pre-authorization step (See Figure 1). This step can significantly improve our Fictional Case Study/Healthcare Entity #1’s revenue cycle! Pre-authorization is defined by the US government as a decision by a health insurer or plan that prescription medication, procedure, service, or equipment is medically necessary. The exception to pre-authorization would be in cases of a medical emergency. It is important to remember that pre-authorization for a procedure or medicine does not necessarily mean that the insurer will cover its cost, though. Patients and providers have to double-check if there is any doubt about coverage. Going through this process before the patient's arrival improves their experience and improves wait times and efficiency of patient flow. The method also helps ensure that the healthcare entity gets paid.1-3

The process of verifying benefits eligibility is no fun, and sometimes it is a whole lot of the drudgery by a healthcare entity’s front office staff. One way to improve this process and improve the revenue cycle might be in use of medical office software will include automatic checking of patient eligibility via the internet over secure channels. By using the software, the office staff is better able to manage their day, hit their goals, and overall, your department or healthcare entity's goals.1-3

The next steps in the revenue cycle include providing the services and coding/submitting billing for those services (see Figure 1). Payment will not be forthcoming until our Fictional Case Study/Healthcare Entity #1 properly submits claims for the work its clinical staff provided for the patients. Practice management software is invaluable in this situation. It is used to submit claims automatically, including the option to do this in batches. Since human error is always a factor in submitting claims, a healthcare business manager may want to deploy software with an option to detect mistakes. The manager can explain the errors to the staff so they can be fixed and immediately resubmit the claim.1-3 It can also be helpful for the healthcare business manager to seek a third-party consultant on issues related to coding, billing, scheduling, accounting, and corporate structure. There are wide ranges of coding/billing third-party systems out there, as well as virtual means to communicate with these experts. These experts can be available to you online, over the phone, via text/mobile chat window, or video chat. In many instances, these coding/billing systems can include electronic medical record (EMR) software and ways to better communicate with your patient!

Accelerating the flow of revenue within the healthcare entity's organization will be easier when the healthcare business manager gains tighter control over claims and have tools in place to weed out common errors. After the claim is successfully submitted and reviewed, the payment is posted and can be paid by the patient. The practice management software, as well as coding and billing software, can help generate billing statements. The software can also help by sending messages to patients electronically with a "click here" to pay the option to encourage them to pay more quickly. Billing over networks like this is done via Electronic Data Interchange (EDI).1-3 A prudent healthcare business management strategy could include collecting any outstanding fees that may be related to the services rendered before the patient exiting the facility.

One of the toughest steps in the revenue cycle is the Accounts Receivable/Denials Management/Payment Posting and Patient Billing (see Figure 1). For example, a healthcare business manager may ask how often claims are denied for services rendered out of Healthcare Entity # 1? If Healthcare Entity #1’s quarterly reports are showing a downturn in revenue because of too many denied claims, it’s time to investigate the matter! Properly executed denial management will boost earnings if money has lately been slow because of problematic claims. Including this process of denial management in the revenue cycle can help to recover revenue that might otherwise have remained overlooked because of insurance information filed incorrectly. A savvy healthcare business manager/administrator might uncover patterns, such as denied claims when certain people are working together or billing problems for specific procedures. 1-3

Any healthcare entity that exists without detailed reports is a healthcare entity that can have hidden problems that may be growing worse.1-3 The healthcare business manager/administrator needs to generate a range of customized reports. These reports should include financial data, management information, and key performance indicators to see if the team is meeting benchmarks. A successful healthcare business manager that employs these types of software upgrades to help with the revenue cycle will see their healthcare practice work more productively as a result! 1-6

Key Points About our Fictional Case Study/Healthcare Entity’s Revenue Cycle:

  1. Revenue cycle management is a complicated process that we need to be familiar with to run Healthcare Entity #1 successfully.
  2. There are some necessary revenue cycle management steps Healthcare Entity #1 will need to take, with options to accomplish this with a third party or taking care of it in-house with our software system.
  3. Managing the revenue cycle in a healthcare environment begins with pre-authorization of patients since we cannot offer services without taking care of this crucial task.
  4. We can avoid billing issues after providing services by having a policy to verify eligibility and benefits as a golden rule in the pre-registration process.
  5. It’s best to submit claims using a system that has a denied claims manager, so Healthcare Entity #1 can fix errors quickly and get paid in a more timely manner.
  6. Healthcare Entity #1’s revenue cycle management software should make it easy to customize financial reports for the organization so it can get an overview of the state of our practice.

Case Study Conclusions

Case Study Conclusions: the revenue cycle self-propels this healthcare entity's revenue cycle forward. At each step, this entity can evaluate and improve the process, thereby increasing their Patient Capture rates and increase revenue. Consistency with this cycle is the key to success! It does not matter how excellent a job your team is doing in your medical practice/healthcare entity/etc., you can't keep the lights on, and the doors open just based on the quality of care rendered.

Now that you have a good overview of the steps in healthcare revenue cycle management, you'll need to apply what you know toward improving the flow of money at your practice. The more knowledge you have, the greater the insight you can gain into billing and getting paid promptly.

Many an organization in today’s healthcare climate has found itself in a hand-to-mouth existence in managing cash flow. Cash is King because it is the ultimate necessity for organizational solvency. Organizations of all sizes and in all lines of businesses are subject to the same financial constraint; revenue must be sufficient to cover expenditures within a reasonable period.

Helpful Tip #1

If your practice is having issues with patients leaving due to wait times, contributing to lost revenue opportunities, here are a few useful tips to improve your source(s) of revenue1-3:

  1. Build an Online Presence
  2. Improve Your Patient Collection Strategy
  3. Offer After-Hours Virtual Visits or Consultations
  4. Motivate Your Staff
  5. Use Your Extenders and Grow Your Brand through Word of Mouth!
  6. Build a Better Appointment Scheduler
  7. Renegotiate Your Current Contracts
  8. Reduce Missing Appointments

One primary way to ensure that there is enough revenue available to cover expenditures sufficiently in a reasonable period (such as a year) is to have a budget.

Money is a Terrible Master, but an Excellent Servant (P.T. Barnum)

Money is a Terrible Master, but an Excellent Servant (P.T. Barnum) 8

No sound business decision-making process is possible without an understanding of a healthcare company’s finances. The company finances include sources of revenue, the revenue cycle, as well as the ongoing expenditures the company is expected to incur. To understand the current expenses the company can expect to incur or is currently incurring, the company needs a detailed budget.1-6

Budgets & Budgeting

Budget: This is a detailed, operational management plan or schedule that communicates the organization’s financial expectations. The budget stated in terms of income and expense. The budget is used to compare expectations to actual results. It is a tool that can aid healthcare administrators in evaluating operating performance and projecting what future operations might produce

Budgeting defined as an ongoing activity in which revenues and expenses are managed to maintain fiscal (financial) responsibility and fiscal health. It is the process of planning and controlling future operations by comparing actual results with planned expectations.1-6

Helpful Tip #2

The budget can be dysfunctional and fail to facilitate the attainment of organizational objectives when viewed as an end rather than a means1-6:

  1. It is inflexible and permits no deviation from the established plan
  2. and viewed as being externally imposed by administrators who do not understand patient care
  3. Health care providers feel left out of budget decisions
  4. There is an over-emphasis on staying within the budget, leading to a decrease in interdepartmental communication and cooperation
  5. Managers are held accountable without being given authority

Some basic business finance activities can provide the necessary background information needed to make reasonable and realistic decisions. Understanding the financial aspects of these activities allows a company's budgeting tools to increase productivity, expand the healthcare company's achievement, and expand the manager's power within the organization1-6:

  1. Identifying costs
  2. Identifying revenues (see Cash & the Revenue Cycle above)
  3. Evaluating the financial dimensions of projects or investments

The basic unit of organization for financial purposes is commonly called the responsibility center. It may be a department/division or other operating unit or a grouping of operating units. The responsibility center is an entity for purposes of monitoring flows of funds. If a responsibility center handles in-coming funds (revenue) and out-going funds (expenses), it may be called a revenue center. If the center only handles expenses, it may be called a cost center. Cost centers are usually departments that provide services that do not directly draw revenue.1-6

Value for money equates to a concept that is related to budgeting. This concept means that the unit or the organization is getting full value for the money expended. It includes factors like the turnover of personnel, waste of supplies, ineffective use of clinical skills, and inaccurate staffing standards.1-6

Helpful Tip #3

A good budget should focus on objectives, be simple, flexible, and balanced! It is important to use available resources, first, to reduce expenses. Planning needs to provide contingencies by indicating what programs or activities can be reduced or eliminated if costs exceed budget goals. Budgetary planning is a vital concept in the healthcare business administration.1-6 For example, in the Nursing Department, budgetary planning helps ensure that clients will receive the nursing services they want and need from satisfied nursing workers.

Budgetary Planning Process entails the expense and revenue projections that are reviewed together and compared. If they are out of balance, the expense budgets will be reviewed to seek ways to reduce costs without impairing the services that support revenues. The revenue budget may also be examined to identify ways of increasing revenue without significantly increasing expenses or diminishing the quality of services.1-6

The Master Budget or the Operating Budget represents a series of interrelated budgets for all activities of the organization for the budget period. The master budget is a summary of all the other budgets. It is the end outcome of the budgeting process. The operating budget is usually developed to cover a one-year period that corresponds to the organization’s fiscal year.1-6

Revenue Budgeting is the process in which a hospital determines revenues required to cover anticipated expenses and to establish prices sufficient to generate that revenue. As we stated previously, to remain solvent, a hospital must make enough revenue to cover operating costs and generate a profit. All hospitals have to make a profit to maintain their services. The term non-profit hospital identifies a facility for tax exemptions only. It means that all the profits are put back into the business to improve the facility and services. The term for-profit hospital means the facility has owners or stockholders who receive a share of the profit. For-profit hospitals must pay standard business taxes.1-6

The revenue budget projects the earned income (revenues) that can be anticipated by the institution.1-6

Helpful Tip #4

The costs of nursing services have been identified for years; the income earned from provisions of nursing services has been bundled into the "bed and board" charges for the hospital. Advance practice nurses may generate a direct charge for their services. Nursing divisions/departments can obtain direct income from grants, selling staff development programs, consultation services, home health care, wellness programs, computer software, and many other products! 1-3

The Expense Budget denotes the budget that funds the routine equipment and supplies needed to operate a nursing unit. All expenses get classified for budgeting purposes.1-6 For instance, paper and staples are put into the office supply category, while thermometer covers and bedpans into the medical supply category.

Expenses & Reporting

Expenses mean the cost of providing services to patients. Expenses are frequently called overhead. 1-6

Examples of Expenses can include1-6:

  1. Wages and salaries
  2. Fringe benefits
  3. Supplies
  4. Foodservice
  5. Utilities
  6. Office and medical supplies

The expense budget is part of the operating budget. It does not include capital equipment and supplies charged directly to patients as revenues.1-6

Capital equipment denotes the term to include expensive equipment, expected to be useful over many years, is not a part of the day-to-day unit expenses (e.g., buying new beds or monitors in a hospital).1-6

The expense budget is a commitment to the planning decisions. It is a balancing act, and managers gain stature by the extent to which they can achieve the balance through their skills. They are respected and sometimes rewarded if they can control expenses, running a "taut ship." So, healthcare business managers have an incentive to submit low budgets. However, they must also achieve the objectives of the organization for quality care and staff satisfaction. To provide for the care and staff satisfaction, managers view this as an incentive to pad the budget to ensure that they will have enough resources. The best managers strive to know their costs as accurately as possible so that they can achieve the organization's goals for their units. When skilled managers submit higher budget proposals than expected, the budget reflects expanded goals, not padded expense figures. 1-6

Report of Expenses warrants as an essential tool used in developing this budget and should be available for each expense category. Changes in supply requirements or utilization can result from changes in the number of patients, a change in the degree of severity of patient's conditions, a change in the type of patients, or changes in equipment needs. This budget also must be adjusted for inflationary impact.1-6

A monthly expense statement helps monitor this budget. In determining causes for variations, the activity level of the department/division/unit in a healthcare company should be examined for any relationship to the expense’s variance, noted. If the difference is due to improper utilization of supplies, then a plan to correct the situation should be developed. At times it may be necessary for the healthcare business manager to make staff aware of budget overruns and ask for assistance in conserving supplies.1-6

Direct expenses translate to those items under the direct control of the healthcare company. The term can include salaries and benefits of the staff, supplies used, outside services contracted (e.g., agency nurses used to fill staffing gaps), or any other expense incurred as a direct result of the manager or a staff member.1-6

Because these are expenses that the manager is expected to control, they must be estimated as thoroughly as possible. It is vital to consider any changes in supplies used that might affect supply costs. In looking at costs, all staff development costs and any realistically estimated costs due to staff turnover, particularly in overtime and fees for agency staff.1-6

Indirect expenses are apportioned or allocated costs for services necessary for the operation of the unit that is not under the direct control of the manager.1-6

The most general example of this would be expenses for building maintenance and utilities such as heat and light. These are not direct expenses but are costs that are incurred by a maintenance department. The difficult problem here is that the operation of the nursing service requires that a boiler in the heating plant be maintained, but every other department of the institution also requires boilers maintenance. Most institutions have a formula for allocating specific costs. Such a method will be designed to comply with the guidelines of third-party payers on how costs can be assigned to be accepted for reimbursement. In some large hospitals, indirect costs may be allocated by complex computer programs that consider how each department interacts with and supports or draws support from each other department.1-6

A Capital Expenditure Budget is established to fund the purchase of major equipment or projects like expansion, improvement, or replacement of the physical plant and equipment.1-6

The Capital Budget entails projects and investments needed or desired in a facility and identifies sources of the required funds. Each item of a capital budget is defined in terms of the dollar. Criteria for the capital budget are that the item must be above a specific dollar cost and have a life expectancy greater than a set time. The budget provides for depreciation of each capital budget item. The depreciation of an object is an accounting tool that allows the company to allocate the expense of an item over its useful life. It is intended to give a realistic picture of month-to-month operating expenses concerning the income generated by the capital equipment.1-6

Capital Budgets can also include land purchase, buildings (maintenance, renovations, remodeling, and replacement) and replacement of existing equipment. The need for each item in the capital budget needs documentation. All proposals for capital equipment need an evaluation for the amount of use, payment methodology, safety, replacement, depreciation of service, and every conceivable angle, including the need for space, personnel, and renovation.1-6

Personnel & Understanding Staffing Needs in Healthcare Business Management

Personnel Budget is a term that includes salary/human resources budget for a particular unit or cost center. Besides salaries, it includes compensation for vacation, sick leave, holidays, overtime, and merit increases.1-6 When computing the personnel budget, consider the following factors:

  1. Patient census or unit activity indicator
  2. Mixed patient acuity
  3. Changes in medical practice
  4. Clinical service or change in service
  5. Support services
  6. Plans for the next year

Required Hours of Nursing Care denotes a unit of measure to help estimate staffing needs in budget planning. The first step in calculating staffing is to find the patient days by the level of acuity from historical data. This information can be obtained from the census reports and patient classification system data.

A Patient classification system is a system that uses criteria to measure patient acuity of illness and links the acuity to the level of care required for that patient.

These patient classification systems generally capture nursing procedures or tasks that can correlate to the amount of nursing time required for patients who need those common procedures or tasks. Nursing time is called standard hours of care. The standard hours of care required by each acuity level is a determination that was established and validated when the patient classification system was developed. A standard hour is management’s best estimate of the amount of nursing time necessary for each kind of patient.

The following is an example of one type of patient classification system measurements:

PATIENT TYPESTANDARD HOURS OF CARE
Type I2
Type II4
Type III8
Type IV16

The next step is to determine the hours of nursing care required for the unit’s mix of patients. To determine the daily hours of nursing care required, multiply the number of patients of each type by the standard hours of care for that type.

The following example assumes the data presented to you in the form of an average per day.

This form would require you to forecast for the year by multiplying the average per day by 365 as follows:

Patient Type Average Patients per DayHours of CareHours of Care per 24 hrsDays in a Year Annual Required Hours
I 9218365 6,570
II 10440365 14,600
III 5840365 14,600
IV 21632365 11,680
Totals 26 130  47,450

Using the recommended hours of care as a guideline, the manager can distribute those hours overall shifts by developing a staffing grid. When using a staffing grid, all factors, such as personnel mix, hours of work, distribution of workload, delivery system, and support staff, must be considered.

Personnel Mix

Personnel Mix is a factor that includes the staff currently available (RN, LPN, CNA) and skill level recommended due to patient acuity.

The hours of work, whether 8-hour, 10-hour, 12-hour or other flexible scheduling work shifts will also affect the staffing pattern.

Distribution of Workload

Distribution of Workload: this factor requires analyzing the workload distribution over the shifts and determining how the staffing should be distributed.

Delivery System

Delivery system is a term that refers to the method of delivering care, such as primary, team or functional.

Support Staff

Support staff refers to staff who would not count in the direct care hours, but who do provide essential support often referred to as indirect hours.

Once unit-staffing requirements have been determined, the hours must convert to dollars by multiplying the hourly rate for each employee. You should estimate the salary rates for those positions that may be empty.

Merit increases also need to be considered and included in the budget. To calculate the amount to include for merit increases, multiply the amount of the increase by the number of hours to be paid at the new rate. Budgeting for differentials for evening and night shifts are calculated by multiplying the hours for that shift by the differential rate.

It is important to note that an overtime budget is established to cover unanticipated situations, such as fluctuations in workload or temporary shortages. Overtime should be calculated by determining the average number of overtime hours worked and multiplying by one- and one-half times the hourly rate. When historical trends are used to predict over time, the manager should consider whether the amount of overtime used in the past year was justified and whether the level predicted is appropriate. It may be possible to reduce overtime by adjusting the staffing schedule. At this point, the accumulation of data for the personnel, the budget should be complete!

Two Heads are Better Than One (PROVERB)

Once the overall budget has been drafted, the high authority must approve it. Generally, in a non-profit healthcare organization, the board of directors or trustees will approve the overall budget. The components of that budget will be approved in finer and finer detail by the responsible administrators down the line of authority from the board.1-3

Let’s imagine our Pretend Healthcare Entity #1 is a hospital. In this example, the hospital administrator would approve the nursing-service budget within the overall budget; the nursing director would approve the nursing unit budgets, and so on. Once the budget is approved, the managers must implement it. The manager of the responsibility center is responsible for seeing that expenditures in the center are made only under the approved budget.1-3

Constant monitoring is necessary to ensure that expenses remain within the projected budgetary limits. The use of monthly expense statements, which include the amount budgeted for the month, can assist in monitoring the budget. When a healthcare business manager receives feedback on actual expenses, the data will show where there are differences between budget projections and the actual results. These differences are called variances. The report should be analyzed for significant deviations. Most budgeting systems include policies on the amount of variations accepted without investigation or remedial action. The causes for the variances should be determined, and corrective action initiated when indicated. It is acceptable to be under budget. The areas of variation that require the most effort in problem identification are those that are significantly over budget.1-3

When variances become significant, the next level manager should be involved, especially if adjustments are needed. It may be necessary to add additional staff if significant variations are due to increased salaries incurred with overtime or agency staff. If the need appears to be relatively enduring, it may be recommended to increase the budget to permit hiring additional staff or change the system of nursing care delivery.1-3

Budgeting and revenue are essential. However, we need a method to keep track of what is coming in and what is going out. Therefore, we must have "books.”1-6

I Have No Use for Bodyguards, but I Have a Very Specific Use for Two Highly Trained Certified Public Accountants (Elvis Presley)

I Have No Use for Bodyguards, but I Have a Very Specific Use for Two Highly Trained Certified Public Accountants.(Elvis Presley) 9

As the transactions of a healthcare organization occur (such as the purchase of supplies), they are recorded chronologically in a “book” called a journal. Today, this book is more likely to be a computer than a paper journal requiring manual entries. Periodically (simultaneously when using most computer programs), these transactions are summarized by account (i.e., cash, equipment, revenues, etc.) into another book called a ledger.1-6

With these two books, the healthcare organization has both a chronological listing of transactions and the current balance in each account. There are two main ways to account for your healthcare business. The cash basis of accounting focuses on cash flow in and out of the organization, but the accrual basis of accounting focuses on the flows of resources and the revenues those resources help to generate.1-6

Cash Basis of Accounting means a focus on the cash basis of accounting, for it is more intuitive. The focus then turns to the flow of resources and the revenues those resources helped to generate. Cash basis is the standard method in use today and records transactions in a way similar to what people use to keep their checkbooks. In cash basis, revenues are recorded when cash is received, and expenses are recorded when money is paid out.1-6

Accrual Basis of Accounting entails a method that overcomes the disadvantages of the cash basis of accounting by recognizing revenues when they are earned and expenses when resources are used.1-6

statement_of_operations

Table 1. Adapted from an example in Kimmell, Weygandt & Keiso (2019)6, showing a Fictional Statement of Operations for a non-existing Healthcare Entity #1; representing one of the key financial statements for a healthcare entity or organization.

Using our previous Case Study as an example, here is a fictional Statement of Operations for Healthcare Entity #1, over a pretend two-year period (see Table 1). The use of this kind of statement can help a healthcare business manager estimate what may happen in the following two years and provide some possible projections. The report can circle back and even influence the budget proposal for those subsequent two years. As you can see, we are beginning to incorporate all those terms and concepts we've covered, and they can directly affect our company's solvency. At first, it can seem like a lot of different concepts, but when you start to put them together into "books," statements, and balance sheets (as you see here), it all starts to come together! Cash is King!1-6 The revenue cycle is real! Expense management and organizing your books can be the critical business management skills that keep Healthcare Entity #1 solvent! Each year, this will be updated, so an accurate projection for the next year can be created.

balance_sheet

Table 2. Adapted from an example in Kimmell, Weygandt & Keiso (2019)6, showing a Fictional Balance Sheet for a non-existing Healthcare Entity #1; representing another one of the key financial statements for a healthcare entity or organization.

The above example of a Balance Sheet for Healthcare Entity #1 includes Total Assets, Liabilities, and Long-term Liabilities (see Table 2). It provides a more accurate and complete view of Healthcare Entity #1’s solvency and even projects growth in the following year. The revenue cycle influences line items such as Accounts Receivable (AR) and cash. Expense management and staffing decisions can affect Salaries Payable. Each line item in this balance sheet has its statement, and that is the job of an excellent accounting department! As a savvy healthcare business manager/administrator, you should have an overall understanding of these concepts, and you should work closely with quality accounting and business management that are reliable. Errors in accounting can contribute significantly to a healthcare entity being unsuccessful in the long run.1-6

Conclusion

This course began by showing you that healthcare can be a tough business to manage. In healthcare administration and management, this struggle can consume a healthcare business manager's entire day. The truth is, both objectives are equally important if you are the person in charge. The news is littered with examples where a healthcare entity’s fate resulted in bankruptcy, closings, lawsuits, and wrongful death claims because some fundamental business management principles were not maintained.

We continued our discussion by showing you the variety of business structures available to get your healthcare entity going! Then we showed you what is central to a company's future is a company's size, structure, location, and specialty, which can all affect the company's expected revenue. Start-up costs can range from $70,000 to $100,000 for a healthcare outpatient clinical practice, requiring both operating and non-operating revenue. Of primary interest to any business owner is operating revenue: income generated by providing services for patients or clients. Non-operating revenue is revenue coming from other sources related to the organization’s existence, such as grants or donations.

There is a straightforward bit of wisdom to remember in connection with the management of the revenue cycle: Cash is King! The organization's cash budget for any given year sets the stage for the management of the revenue cycle. This budget addresses cash needs against projections of cash received over the period covered by the budget, usually one year. The pattern of cash-in versus cash-out is essential because of the need to remain solvent in the short run. It does little good to appear rich "on paper" if there is not enough cash in the bank to pay current bills or to meet payroll.

We also provided you with a Case Study example that highlighted some key points to remember about any Healthcare Entity’s Revenue Cycle:

  1. Revenue cycle management is a complicated process that you need to be familiar with to run your healthcare entity successfully.
  2. There are some basic revenue cycle management steps your healthcare entity will need to take. You have an option to accomplish this with a third party or by taking care of it in-house with your software system.
  3. Managing the revenue cycle in a healthcare environment begins with pre-authorization of patients since you cannot offer services without taking care of this crucial task.
  4. You can avoid billing issues after providing services by having a policy to verify eligibility and benefits.
  5. It’s best to submit claims using a system that has a denied claims manager, so you can fix errors quickly and get paid in a more timely manner.
  6. Your revenue cycle management software should make it easy to customize financial reports for your organization so you can quickly get an overview of the state of your practice.

These key points can help a healthcare manager/administrator make sound business decisions. Understanding a healthcare company’s ongoing expenditures and what the company is expected to incur, a healthcare company needs a detailed budget. Once the overall budget is presented, the high authority must approve it. Constant monitoring is necessary to ensure that expenses remain within the projected budgetary limits. Monitoring calls for the use of monthly expense statements, which include the amount budgeted for the month.

When a healthcare business manager receives feedback on actual expenses, the data will show where there are differences between budget projections and the actual results. These differences are called variances. The report should be analyzed for significant variances. Most budgeting systems include policies on the amount of variance that can be accepted without investigation or remedial action. The causes for the variations should be determined, and corrective action should ensue when indicated. It is acceptable to be under budget. The areas of variance that require the most effort in problem identification are those that are significantly over budget.

As the transactions of a healthcare organization occur (such as the purchase of supplies), they are recorded chronologically in a “book” called a journal. Today, this book is more likely to be a computer than a paper journal requiring manual entries. Periodically (simultaneously when using most computer programs), these transactions are summarized by account (i.e., cash, equipment, revenues, etc.) into another book called a ledger. With these two books, the healthcare organization has both a chronological listing of transactions and the current balance in each account. Generally, the Cash Basis of Accounting is the standard method of accounting used by most people today. The method records transactions in a way that is similar to people in use to keep their checkbooks. In Cash Basis, revenues are recorded when cash is received, and expenses are recorded when money is paid out.

Additional continuing education courses are available to facilitate understanding of the finer details of healthcare business management. However, this beginning course provides the healthcare professional a fundamental understanding of the basics needed to seek their healthcare clinical practice in any setting. If this has inspired you to become a healthcare business manager, helped with your healthcare business management goals or possible to begin your healthcare entrepreneurial journey, good luck! It is an exciting journey and one packed with many forms of success and fulfilling ventures!

Select one of the following methods to complete this course.

Take TestPass an exam testing your knowledge of the course material.
OR
Reflect on Practice ImpactDescribe how this course will impact your practice.   (No Test)

References

  1. Shi L, Singh DA (2019) Delivering Health Care in America: A Systems Approach. Kindle Edition. Jones & Bartlett Learning. Burlington, MA.
  2. Leibler JG, McConnell CR (2017) Management principles for health professionals. Kindle Edition. Jones & Bartlett Learning. Burlington, MA.
  3. Zelman WN, McCue MJ, Glick ND, Thomas MS (2019) Financial Management of Health Care Organizations: An Introduction to Fundamental Tools, Concepts and Applications. Kindle Edition. Wiley Higher Ed. San Francisco, CA.
  4. Barringer BR, Ireland RD (2018) Entrepreneurship: Successfully Launching New Ventures. Kindle Edition. Pearson. Boston, MA.
  5. Hatten TS (2018) Small Business Management: Entrepreneurship & Beyond. Kindle Edition. Cengage Learning. Boston, MA.
  6. Kimmel PD, Weygandt JJ, Keiso DE (2019) Accounting: Tools for Business Decision Making, Kindle Edition. Wiley Higher Ed. San Francisco, CA.
  7. Beattie A (2018) The Story Behind Google’s Success. Investopedia. Retrieved on October 1, 2019. Visit Source.
  8. Wilson R (2019) Barnum: An American Life. Simon & Schuster. New York, NY.
  9. Gear GG (2017) Elivs the Legend: The Authorized Book from the Graceland Archives. Kindle Edition. Carlton Books. Dubai.