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15.4 USES OF COMPARATIVE DATA Four common uses of comparisons that the manager will find helpful are discussed in this section.
Compare Current Expenses to Current Budget
Managers are most likely to be responsible for comparing the current expenses of their department, division, unit, or program to their current budget. Of the four types of comparisons discussed in this section, this is the one most commonly in use.
Table 15–1 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_3#ch15_tbl1) illustrates a comparison of actual expenses versus budgeted expenses. This format reflects both dollars and percentages, as is most common. Table 15–1 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_3#ch15_tbl1) shows the grand totals for each department (Dietary, Maintenance, etc.) contained in General Services expense for this hospital. There is, of course, a detailed budget for each of these departments that adds up to the totals shown on Table 15–1 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_3#ch15_tbl1) . Thus, for example, all the detailed expenses of the Laundry department (labor, supplies, etc.) are contained in a supporting detailed budget whose total actual expenses amount to $45,000 and whose total budgeted expenses amount to $50,000.
The department manager will be responsible for analyzing and managing the detailed budgets of his or her own department. A manager at a higher level in the organization—the chief financial officer (CFO), perhaps—will be responsible for making a comparative analysis of the overall operations of the organization. This comparative analysis at a higher level will condense each department’s details into a departmental grand total, as shown in Table 15–1 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_3#ch15_tbl1) , for convenience and clarity in review.
The CFO may also convert this comparative data into charts or graphs in order to “tell the story” in a more visual manner. For example, the total General Service expense in Table 15–1 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_3#ch15_tbl1) can be readily converted into a graph. Figure 15–1 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_4#ch15_fig1) illustrates such a graph.
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Figure 15–1 A Comparison of Hospital One’s Budgeted and Actual Expenses.
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Compare Current Actual Expenses to Prior Periods in Own Organization
Trend analysis, as explained in the preceding chapter, allows comparison of current actual expenses to expenses incurred in prior periods of the same organization. For example, consider total general services expenses of $800,000 for year 1 and $900,000 for year 2. The CFO could easily convert this information into a graph, as shown in Figure 15–2 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_4#ch15_fig2) . This information might be even more valuable for decision-making input if the CFO used five years instead of the two years that are shown here.
Figure 15–2 A Comparison of Hospital One’s Expenses Over Time.
Compare to Other Organizations
Common sizing, as explained in the preceding chapter, allows comparison of your organization to other similar organizations. To illustrate, refer to the table in a preceding chapter (Table 14–1
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(http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch14_sect1_1#ch14_tbl1) ) entitled “Common Sizing Liability Information.” Here we see the liabilities of three hospitals that are the same size expressed in both dollars and in percentages. Therefore, our CFO can convert the percentages into an informative graph, as shown in Figure 15–3 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_4#ch15_fig3) .
Figure 15–3 A Comparison of Three 100-Bed Hospitals’ Long-Term Debt.
Be warned that the basis for some comparisons will be neither useful nor valid. For example, see Figure 15–4 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_4#ch15_fig4) . Here we have a graph of the grand totals from the table in a preceding chapter (Table 14–2 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch14_sect1_1#ch14_tbl2) ) entitled “Common Sizing Expense Information.” The percentages shown are for the General Services departments of each hospital and have been common sized to percentages, as is perfectly correct. However, Figure 15–4 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_4#ch15_fig4) attempts to compare the total General Services expense (the total of all four general services departments) in
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dollars. As we can see here, hospital 1 and hospital 3 are both 100 beds, while hospital 2 is 400 beds. Obviously a 400-bed hospital will incur much more expense than a 100-bed hospital, so this graph cannot possibly show a valid comparison among the three organizations.
Figure 15–4 A Comparison of Three Hospitals’ Total Expenses.
Instead, the CFO should find a standard measure that can be used as a valid basis for comparison. In this case, he or she can choose size (number of beds) for this purpose. The resulting graph is shown in Figure 15–5 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_4#ch15_fig5) . As you can see, hospital 1’s cost per bed is $8,000, computed as follows. The total expense of $800,000 for hospital 1 is divided by 100 beds (its size) to arrive at the $8,000 expense per bed shown on the graph in Figure 15–5 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_4#ch15_fig5) . Hospital 2 ($3,000,000 total expense divided by 400 beds to equal $7,500 per bed) and hospital 3 ($900,000 total expense divided by 100 beds to equal $9,000 per bed) have the same computations performed
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on their equivalent figures.
Figure 15–5 A Comparison of Three Hospitals’ Expenses per Bed.
In actual fact, another step in this computation should be performed in order to make the comparisons completely valid. A per-bed computation implies inpatient expenses incurred, because beds are occupied by admitted inpatients. (Outpatients, on the other hand, use a different mix of services.) Therefore, a more accurate comparison would adjust the overall total expense using one subtotal for inpatients and another subtotal for outpatients. Let us assume, for purposes of illustration, that the CFO of hospital 1 has determined that 70% of General Services expense can be attributed to inpatients and that the remaining 30% can be attributed to outpatients. Let us further assume that hospital 1’s General Services expense of $800,000 as shown, is indeed a hospital-wide expense. The CFO would then multiply $800,000 by 70% to arrive at $420,000, representing the inpatient portion of General Services expense.
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Compare to Industry Standards
In the example just given in the paragraph above, the CFO has computed his or her own hospital’s percentage of inpatient versus outpatient utilization of General Services expense. But this CFO may not have any way to know these equivalent percentages for hospitals 2 and 3. If this is the case, computing the per-bed expense using overall expense, as shown in Figure 15–5 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_4#ch15_fig5) , may be the only way to show a three-hospital comparison.
The CFO, however, can use the 70% inpatient and 30% outpatient expense breakdown for another type of comparison. It should be possible to find industry standards that break out inpatient versus outpatient expense percentages. The use of industry standards is of particular use for decision making because it positions the particular organization within a large grouping of facilities that provide a similar set of services.
Healthcare organizations are particularly well suited to use industry standards because both the federal and state governments release a wealth of public information and statistics regarding the provision of health care. Figure 15–6 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch15_sect1_4#ch15_fig6) illustrates the CFO’s graph using such a standard. (The figures shown are for illustration only and do not reflect an actual standard.)
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Figure 15–6 A Comparison of Hospital One’s GS Inpatient Expenses with Industry Standards.