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Business Management for the Healthcare Professional

2.5 Contact Hours
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This peer reviewed course is applicable for the following professions:
Advanced Practice Registered Nurse (APRN), Certified Nurse Midwife, Certified Nurse Practitioner, Certified Registered Nurse Anesthetist (CRNA), Certified Registered Nurse Practitioner, 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), Registered Nurse Practitioner, Respiratory Care Practitioner, Respiratory Therapist (RT)
This course will be updated or discontinued on or before Sunday, January 18, 2026

Nationally Accredited

CEUFast, Inc. is accredited as a provider of nursing continuing professional development by the American Nurses Credentialing Center's Commission on Accreditation. ANCC Provider number #P0274.


BOC
CEUFast, Inc. (BOC AP#: P10067) is approved by the Board of Certification, Inc. to provide education to Athletic Trainers (ATs).

FPTA Approval: CE24-1154890 . Accreditation of this course does not necessarily imply the FPTA supports the views of the presenter or the sponsors.
Outcomes

≥ 92% of participants will know some of the fundamental components of healthcare business management that can be applied at 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 achieve the following objectives:

  1. Identify the fundamental components of business management.
  2. Document how each component in the revenue cycle applies to the healthcare business manager.
  3. Identify how budgeting affects the revenue cycle.
  4. Document examples of ways to calculate staffing hours, staffing ratios, and other components of delivering quality healthcare.
  5. List the differences between the cash basis for accounting and the accrual basis for accounting for the healthcare business manager.
CEUFast Inc. and the course planners for this educational activity do not have any relevant financial relationship(s) to disclose with ineligible companies whose primary business is producing, marketing, selling, re-selling, or distributing healthcare products used by or on patients.

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Business Management for the Healthcare Professional
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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 healthcare business can be tough. 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 others. 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 and 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 (Liebler & McConnell, 2020). 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 deliver. For example, you may want to set up a sole proprietorship if you are a non-physician practitioner and wish to have a small independent practice to maintain total control. It is essential to check with your state regarding all independent non-clinician practitioners' scope of practice rules (Shi & Singh, 2019).

Sole Proprietor

Sole proprietor: someone who owns an unincorporated business by themselves.

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 resources, knowledge, and experience to help generate another revenue stream so your practice can continue operating and growing (Zelman et al., 2020).

The term partnership means a relationship between two or more people 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 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 and dispersed to the stockholders. The scenario can go much higher as mega-corporations are evident in healthcare. These significant players try to provide a large portion of healthcare services, if not the entire gamut (Barringer & Ireland, 2021).

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, and 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 distributing dividends to shareholders. Shareholders cannot deduct any of the corporation's losses (Hatten, 2019).

These main types of business structures can come in hybrid forms. For example, limited liability corporations can maximize tax advantages and reduce the burden on the owners (Kimmel et al., 2018).

Limited Liability Company

Limited liability company (LLC): This is a 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 with only one owner (Shi & Singh, 2019).

S Corporation

It is important to note that an S corporation in the United States can take a few different forms, depending on your state's laws. It is a closely held corporation, LLC, or partnership that makes a valid election and can be subject to taxes under the laws of 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 tax returns. There are several additional requirements, legislation, documentation, and state-specific rules surrounding the use of an S Corporation. An S corporation is not commonly utilized in larger healthcare entities' business structures. Still, it could be useful to independent clinicians 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 and 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. Your company's income will depend on your company's size, structure, location, and specialty (Shi & Singh, 2019).

"Revenue is the Engine that Funds All Our Innovation"

Larry Page (Google co-founder) once said that "revenue is the engine that funds all of our innovation (Beattie, 2023).

This fundamental concept mentioned is well-known in business; it takes money to make money (Liebler & McConnell, 2020). Starting a healthcare outpatient clinical practice from the ground up can cost $70,000 to $100,000 (Zelman et al., 2020). What is needed 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 comes from other sources related to the organization's existence, such as grants or donations (Barringer & Ireland, 2021).

Sources of Operating Revenue

Sources of operating revenue include the following (Zelman et al., 2020):

  1. Government programs such as 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 center around a somewhat different set of reimbursement rules, usually resulting in different billing practices.

For many 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 the number of patients served. The challenging aspect of predicting revenue sources is how frequent and consistent those sources of payment can be (Zelman et al., 2020).

Variations in Revenue Consistency

Variations in revenue consistency can include the following (Liebler & McConnell, 2020):

  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 are rendered. 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, it is seen as a payer tactic 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. It also includes fines and penalties arising from changing regulations.
      1. 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 medically indigent patients.
  11. Changes in reimbursement systems.
    1. 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: This is when 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 and what goes out, requires careful and often aggressive management (Barringer & Ireland, 2021).

Cash is King: Cash and the Revenue Cycle

There is a straightforward bit of wisdom to remember in connection with managing the revenue cycle: Cash is King (Spanos et al., 2013). The organization's cash budget for any given year sets the stage for controlling the revenue cycle. The budget addresses cash needs against cash projections received over the period covered by the budget, usually one year (Hatten, 2019).

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 owes impressive amounts of money and there is not enough cash in the bank to pay current bills or to meet payroll (Kimmel et al., 2018).

There can be circumstances when cash is in extremely short supply. The organization might become more aggressive in collecting accounts receivable (AR) or perhaps delay paying a few bills to match cash receipts more closely. A lack of cash can also lead to short-term borrowing, resulting in difficulties obtaining credit and creating more operating expenses because of interest rates (Liebler & McConnell, 2020).

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.

Case Study

Let's take a moment to explore a fictional case study scenario to incorporate these confusing terms into a "real-world scenario." We will keep it general here and call our company "Healthcare Entity #1." In the example below, 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 implement a healthy revenue cycle?

graphic showing revenue management steps

Revenue Management

Quality of care is of the utmost priority. It is prudent to continue to seek continuing education to improve the quality of care because it will enhance revenue (Barringer & Ireland, 2021). However, it is incumbent upon the qualified healthcare business manager/administrator to pay close attention to the company's financials and quality control. The healthcare business manager should stay on top of the revenue they are bringing in. An organization that does not keep on top of the revenue cycle could find itself scrambling to remain viable while other healthcare entities in their market are thriving (Hatten, 2019).

For this reason, it is important to understand the healthcare revenue cycle and its steps. Revenue cycle management is the term given to a financial process, encompassing the management of funds and collecting payments from the treatment you offer your patients (Kimmel et al., 2018).

The revenue cycle begins with the scheduling/pre-registration steps. Pre-registration can improve the patient's experience by collecting essential information to determine eligibility and benefits before patient arrival. Some software and technology expenses will be necessary to establish a good information technology (IT) team. The practice will need team members who are well-versed in using dedicated software for clinical practice and the community (Shi & Singh, 2019).

The consideration continues well into the registration, charge entry, and patient capture process. The pre-authorization step is key in the patient capture process and charge entry. This step can significantly improve Healthcare Entity #1's revenue cycle! The United States government defines pre-authorization as a decision by a health insurer or plan where 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 the insurer will cover its cost. 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 the companies get paid (Liebler & McConnell, 2020).

Verifying benefits eligibility is no fun; sometimes, it is a lot of struggle for a healthcare entity's front office staff. One way to improve this process and the revenue cycle might be to use medical office software that automatically checks patient eligibility via the internet over secure channels. By using the software, the office staff can better manage their day and hit their goals and the healthcare entity's goals (Zelman et al., 2020).

The next steps in the revenue cycle include providing the services and coding/submitting billing for those services. Payment will not be forthcoming until 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 to be fixed and immediately resubmit the claim (Shi & Singh, 2019). It can also be helpful for the healthcare business manager to seek a third-party consultant on coding, billing, scheduling, accounting, and corporate structure issues. There are wide ranges of coding/billing third-party systems out there, and there are virtual means to communicate with these experts. These experts can be available online, over the phone, via text/mobile chat, or video chat. These coding/billing systems can often 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 has tools to prevent 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" option to encourage them to pay more quickly. Billing over networks like this is done via Electronic Data Interchange or EDI (Liebler & McConnell, 2020). A prudent healthcare business management strategy could include collecting outstanding fees for services rendered before the patient exits the facility.

One of the toughest steps in the revenue cycle involves AR, denials management, payment posting, and patient billing. 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 show 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 been slow because of problematic claims. Including this denial management process in the revenue cycle can help 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 work together or billing problems for specific procedures (Zelman et al., 2020).

Any healthcare entity that exists without detailed reports is a healthcare entity that can have hidden problems that may be growing worse. 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 benchmarks are being met. A successful healthcare business manager who employs these types of software upgrades to help with the revenue cycle will see their healthcare practice work more productively (Barringer & Ireland, 2021).

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

Case Study Conclusions

The revenue cycle self-propels this healthcare entity's revenue cycle forward. The entity can evaluate and improve the process at each step, increasing its patient capture rates and 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 based solely on the quality of care rendered; revenue is a large part of this process.

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 organizations in today's healthcare climate have found themselves hand-to-mouth 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 business are subject to the same financial constraint; revenue must be sufficient to cover expenditures within a reasonable period.

Helpful Tip #1

If your practice has issues with patients leaving due to waiting times, contributing to lost revenue opportunities, here are a few useful tips to improve your source(s) of revenue (Shi & Singh, 2019):

  1. Build an online presence
  2. Improve the patient collection strategy
  3. Offer after-hours virtual visits or consultations
  4. Motivate staff
  5. Use extenders and grow the brand through word-of-mouth
  6. Build a better appointment scheduler
  7. Renegotiate current contracts
  8. Reduce missing appointments

One primary way to ensure that enough revenue is 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 once said, "Money is a terrible master but an excellent servant" (Wilson, 2019).

Without understanding a healthcare company's finances, no sound business decision-making process is possible. The company finances include sources of revenue, the revenue cycle, and the ongoing expenditures the company is expected to incur. The company needs a detailed budget to understand the current expenses the company can expect to incur or is currently incurring (Hatten, 2019).

Budgets and Budgeting

Budget: This detailed operational management plan or schedule communicates the organization's financial expectations. The budget is 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 is 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 (Kimmel et al., 2018).

Helpful Tip #2

The budget can be dysfunctional and fail to facilitate organizational objectives when viewed as an end rather than a means. Poor perspectives of budgets may include the following (Barringer & Ireland, 2021):

  1. It is inflexible and permits no deviation from the established plan.
  2. It is viewed as being externally imposed by administrators who do not understand patient care.
  3. Healthcare 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 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 organization. Budgets help to do the following (Hatten, 2019):

  1. Identify costs
  2. Identify revenues
  3. Evaluating the financial dimensions of projects or investments

The basic organizational unit 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 incoming funds (revenue) and outgoing funds (expenses), it may be called a revenue center. If the center only handles expenses, it may be called a cost center. Cost centers usually provide services that do not directly draw revenue (Kimmel et al., 2018).

Value for money equates to a concept 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 (Barringer & Ireland, 2021).

Helpful Tip #3

A good budget should focus on simple, flexible, and balanced objectives! 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 vital in healthcare business administration (Hatten, 2019). For example, in the nursing department, budgetary planning helps ensure clients receive the nursing services they want and need from satisfied nursing workers.

The budgetary planning process entails the expense and revenue projections that are reviewed and compared together. 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 (Kimmel et al., 2018).

The master or operating budgets represent a series of interrelated budgets for all organization activities 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 one year corresponding to the organization's fiscal year (Barringer & Ireland, 2021).

Revenue budgeting is when a hospital determines revenues required to cover anticipated expenses and establishes prices sufficient to generate that revenue. To remain solvent, a hospital must make enough revenue to cover operating costs and generate a profit, as stated previously. 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 all the profits are returned to the business to improve the facility and services. The term for-profit hospital means the facility has owners or stockholders who receive a profit share. For-profit hospitals must pay standard business taxes (Hatten, 2019).

The revenue budget projects the earned income (revenues) that can be anticipated by the institution (Kimmel et al., 2018).

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. Advanced 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 (Shi & Singh, 2019).

The expense budget denotes the budget that funds the standard equipment and supplies needed to operate a nursing unit. All expenses are classified for budgeting purposes (Barringer & Ireland, 2021). For instance, paper and staples are put into the office supply category, while thermometer covers and bedpans are in the medical supply category.

Expenses and Reporting

Expenses mean the cost of providing services to patients. Expenses are frequently called overhead (Hatten, 2019).

Examples of expenses can include the following (Kimmel et al., 2018):

  1. Wages and salaries
  2. Fringe benefits
  3. Supplies
  4. Food services
  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 (Barringer & Ireland, 2021).

Capital equipment is the term that includes expensive equipment that is expected to be useful over many years (new beds or monitors), not part of the day-to-day unit expenses (Hatten, 2019).

The expense budget is a commitment to the planning decisions. It is a balancing act, and managers gain stature by achieving 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 organization's objectives for quality care and staff satisfaction. To provide 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 to 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 (Kimmel et al., 2018).

A report of expenses acts 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 must also be adjusted for inflationary impact (Liebler & McConnell, 2020).

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 variance noted. If the difference is due to improper utilization of supplies, then a plan to correct the situation should be developed. Sometimes, it may be necessary for the healthcare business manager to make staff aware of budget overruns and ask for assistance in conserving supplies (Barringer & Ireland, 2021).

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 directly from the manager or a staff member (Hatten, 2019).

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, must be reviewed (Kimmel et al., 2018).

Indirect expenses are apportioned or allocated costs for services necessary for the unit's operation that are not controlled by the manager (Barringer & Ireland, 2021). 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 a maintenance department incurs. The difficult problem here is that the operation of the nursing service requires that a boiler in the heating plant be maintained. Still, every other department of the institution also requires boiler 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 other departments (Hatten, 2019).

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 (Kimmel et al., 2018).

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 the 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 (Barringer & Ireland, 2021).

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 (Hatten, 2019).

Personnel and Understanding Staffing Needs in Healthcare Business Management

Personnel budget is a term that includes the 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 (Kimmel et al., 2018). 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 finding the patient days by the acuity level from historical data. The 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 nursing time necessary for each patient (American Nurses Association, 2017).

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

PATIENT TYPESTANDARD HOURS OF CARE
Type I (self-care)2
Type II (Minimal care)4
Type III (Moderate care)8
Type IV (Extensive care)16

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.

The following example assumes the data presented to you as 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 TypeAverage Patients per DayHours of CareHours of Care per DayDays in a YearAnnual Required Hours
I92183656,570
II1044036514,600
III584036514,600
IV2163236511,680
Totals26 130 47,450

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

Personnel Mix

A personnel mix is a factor that includes the staff currently available, such as a registered nurse, licensed practical nurse, and certified nursing assistant, and the skill level recommended due to patient acuity.

The work hours, 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

The 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 is calculated by multiplying the shifts' hours 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-half times the hourly rate. When historical trends are used to predict overtime, 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, with the accumulation of data for the personnel, the budget should be complete!

Two Heads Are Better than One

Once the overall budget has been drafted, the higher authorities 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 (Shi & Singh, 2019).

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 responsibility center manager is responsible for seeing that expenditures in the center are made only under the approved budget (Liebler & McConnell, 2020).

Constant monitoring ensures that expenses remain within the projected budgetary limits. Monthly expense statements, which include the amount budgeted for the month, can be used to monitor the budget. When a healthcare business manager receives feedback on actual expenses, the data will show 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 should be 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 (Zelman et al., 2020).

The next-level manager should be involved when variances become significant, 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 the hiring of additional staff or change the nursing care delivery system (Shi & Singh, 2019).

Budgeting and revenue are essential. However, we need a method to track what is coming in and going out. Therefore, we must have "books" (Barringer & Ireland, 2021).

"I Have No Use for Bodyguards, but I Have a Very Specific Use for Two Highly Trained Certified Public Accountants"

Elvis Presley once said, "I Have No Use for Bodyguards, but I Have a Very Specific Use for Two Highly Trained Certified Public Accountants" (Gaar, 2017).

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 (Hatten, 2019).

With these two books, the healthcare organization has 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. Still, the accrual basis of accounting focuses on the flows of resources and the revenues those resources help to generate (Kimmel et al., 2018).

The cash basis of accounting means focusing on the cash basis, for it is more intuitive. The focus then turns to the flow of resources and the revenues those resources helped generate. Cash basis is the standard method used today and records transactions similarly to what people use to keep their checkbooks. On a cash basis, revenues are recorded when cash is received, and expenses are recorded when paid out (Barringer & Ireland, 2021).

Accrual basics of accounting entail 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(Hatten, 2019).

Healthcare Entity #1 Statement of Operations for Years Ended December 31, 2024, and 2025
Operating RevenueDecember 31, 2024December 31, 2025
Net Patient Revenues
Other Operating Revenues
$10,778,272.00
$233,749.00
$10,556,176.00
$253,517.00
Total Operating Revenues$11,012,021.00$10,809,693.00
 
Operating ExpensesDecember 31, 2024December 31, 2025
Salaries & Benefits
Supplies
Insurance
Depreciation/Amortization
Interest
Other Operating Expenses
$5,644,880.00
$1,660,000.00
$1,536,357.00
$383,493.00
$500,000.00
$956,382.00
$5,345,498.00
$1,529,680.00
$1,551,579.00
$420,238.00
$276,379.00
$624,133.00
Total Operating Expenses$10,681,112.00$9,747,507.00
Net Operating Income
Non-operating Income
Excess of Revenues Over Expenses
$330,909.00
$185,000.00
$515,909.00
$1,062,186.00
$165,000.00
$1,227,186.00
 
Increase or Decrease in Unrestricted Net Assets$515,909.00$1,227,186.00
(Kimmel et al., 2018)

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. 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 influence the subsequent two years' budget proposal. As you can see, we are beginning to incorporate all those terms and concepts we've covered, and they can directly affect the company's solvency. At first, it can seem like a lot of different concepts, but when you combine them into "books," statements, and balance sheets (as you see here), it all starts to come together! Cash is king (Barringer & Ireland, 2021). The revenue cycle is real! Expense management and organizing your books can be the critical business management skills that keep Healthcare Entity #1 solvent; this will be updated each year to create an accurate projection for the next year.

balance sheet assets

The above example of a balance sheet for Healthcare Entity #1 includes total assets, liabilities, and long-term liabilities. 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 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 work closely with quality accounting and reliable business management. Errors in accounting can contribute significantly to a healthcare entity being unsuccessful in the long run (Hatten, 2019).

Conclusion

This course showed you that healthcare could be a tough business to manage; this struggle can consume a healthcare business manager's entire day in healthcare administration and management. 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 that the size, structure, location, and specialty are central to a company's future, which can affect its expected revenue. Start-up costs for a healthcare outpatient clinical practice can range from $70,000 to $100,000, requiring 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 comes 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 revenue cycle management: Cash is king! The organization's annual cash budget sets the stage for managing the revenue cycle. A budget addresses cash needs against projections of cash received over the period covered by the budget. The pattern of cash-in versus cash-out is essential because of the need to remain solvent in the short run. Appearing rich "on paper" does no good if the bank has insufficient cash to pay current bills or 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 you must be familiar with to run your healthcare entity successfully.
  2. Your healthcare entity will need to take some basic revenue cycle management steps. There are a few ways this can be accomplished.
  3. Managing the revenue cycle in a healthcare environment begins with the pre-authorization of patients.
  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 with a denied claims manager so you can fix errors quickly and get paid more promptly.
  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. To understand a healthcare company's ongoing expenditures and what the company is expected to incur, a healthcare company needs a detailed budget. Constant monitoring ensures that expenses remain within the projected budgetary limits. 

When a healthcare business manager receives feedback on actual expenses, the data will show differences between budget projections and the actual results, often referred to as variances. The report should be analyzed for significant variances, identifying the causes and determining corrective actions. Most budgeting systems include policies on the amount of variance that can be accepted without investigation or remedial action. It is often acceptable to be under 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, which is often electronically based. Periodically, 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 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 today. On a cash basis, revenues are recorded when cash is received, and expenses are recorded when paid out.

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

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Implicit Bias Statement

CEUFast, Inc. is committed to furthering diversity, equity, and inclusion (DEI). While reflecting on this course content, CEUFast, Inc. would like you to consider your individual perspective and question your own biases. Remember, implicit bias is a form of bias that impacts our practice as healthcare professionals. Implicit bias occurs when we have automatic prejudices, judgments, and/or a general attitude towards a person or a group of people based on associated stereotypes we have formed over time. These automatic thoughts occur without our conscious knowledge and without our intentional desire to discriminate. The concern with implicit bias is that this can impact our actions and decisions with our workplace leadership, colleagues, and even our patients. While it is our universal goal to treat everyone equally, our implicit biases can influence our interactions, assessments, communication, prioritization, and decision-making concerning patients, which can ultimately adversely impact health outcomes. It is important to keep this in mind in order to intentionally work to self-identify our own risk areas where our implicit biases might influence our behaviors. Together, we can cease perpetuating stereotypes and remind each other to remain mindful to help avoid reacting according to biases that are contrary to our conscious beliefs and values.

References

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  • Barringer, B. I., & Ireland, R. (2021). Entrepreneurship: Successfully Launching New Ventures. Pearson.
  • Beattie, A. (2023). The Story Behind Google's Success. Investopedia. Visit Source.
  • Gaar, G. G. (2017). Elvis: the Legend: The Authorized Book from the Graceland(r) Archives. Carlton Books.
  • Hatten, T. S. (2019). Small business management: Creating a Sustainable Competitive Advantage. SAGE Publications, Incorporated.
  • Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2018). Accounting: Tools for Business Decision Making. John Wiley & Sons.
  • Liebler, J. G., & McConnell, C. R. (2020). Management principles for health professionals. Jones & Bartlett Learning.
  • Shi, L., & Singh, D. A. (2019). Delivering Health Care in America: A Systems Approach (7th ed.). Jones & Bartlett Learning.
  • Spanos, A., Seal, M., & Kasparian, N. (2013). Sharing the Wealth. Simon and Schuster.
  • Wilson, R. (2019). Barnum: An American Life. Simon & Schuster.
  • Zelman, W. N., McCue, M. J., Glick, N. D., & Thomas, M. S. (2020). Financial management of health care organizations: An Introduction to Fundamental Tools, Concepts and Applications. John Wiley & Sons.