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14.5 OPERATING REVENUE FORECASTS Operating revenue forecasts are inputs into the operating budget. Forecast types and their assumptions are discussed in this section.

Types of Revenue Forecasts

Forecasts of revenue will cover varying time periods. Longer-range multi-year forecasts are useful for executive decision making regarding the future of the organization. Figure 14–1 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch14_sect1_5#ch14_fig1) illustrates a multi-year forecast.

Figure 14–1 Five-Year Operating Revenue Forecast.

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A single-year forecast is generally for the coming year and is thus a short-range forecast. Reliable forecasts of revenue are a vital part of the organization’s planning process and are an input into the operating budget. Figure 14–2 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch14_sect1_5#ch14_fig2) illustrates a short-range forecast. Note that the graph in Figure 14–2 (http://content.thuzelearning.com/books/Baker.6866.18.1/sections/ch14_sect1_5#ch14_fig2) could be by month instead of by quarter as shown.

Figure 14–2 One-Year Operating Revenue Forecast.

Building Revenue Forecast Assumptions

Five important issues regarding revenue forecast assumptions are discussed here.

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Utilization Assumptions

In health care, significant changes in utilization patterns can be occurring that need to be taken into account in the manager’s forecast assumptions. The inexorable shift to shorter lengths of stay for hospital inpatients over the last decade is an example of a basic shift in utilization patterns.

Patient Mix Assumptions

It is important to specify anticipated patient mix as well as his or her anticipated utilization or volume. By “patient mix” we mean whether the individual is a Medicare patient, a Medicaid patient, a patient covered by private insurance, or a private pay patient. When payers are thus identified, this information allows the appropriate payments to be associated with the service utilization assumptions.

Contractual Allowance Assumptions

The forecasted utilization of a service (or its volume) assumption is multiplied by the appropriate rate, or charges, in order to arrive at forecasted revenue stated in dollars. A word of warning, however: revenue forecasted at “gross charges” is not a valid figure. Instead, revenue stated at “allowed charges” is the proper figure to use. Virtually all payers, including Medicare, Medicaid, and private insurers, will pay a stipulated amount for a particular service. But the amounts these different payers have agreed to pay for the same service will vary. How to handle the issue? Through a contractual allowance, as defined here:

■ Gross Charge: Amount for a service as shown on the claim form; a uniform charge generally greater than most expected payments received for the service.

■ Allowed Charge: Net amount that the particular payer’s contract or participation agreement will recognize, or “allow,” for a certain service.

■ Contractual Allowance: Difference (between the gross charge and the allowed charge) that is recorded as a reduction of the gross charge within the accounting cycle.

(It should also be noted that part of the payer’s allowed charge is generally due from the patient, and the remaining portion of the allowed charge is actually due from the payer.)

Trend Analysis Assumptions

One of the basic purposes of performing trend analysis is to compare data between or among years and to see the trends. If such trends are found, then it makes sense to take them into account in your forecast. A word of warning, however: the manager must determine whether the data used for comparison in the trend analysis are comparable data.

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Payer Change Assumptions

Trend analysis is retrospective; that is, it is using historical data from a past period. Forecasting is prospective; that is, it is projecting into the future. If changes, say, in regulatory requirements for payment are made this year, then that fact has to be taken into account.