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Key Aspects of Financial Management

Intro

Welcome

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Instructor

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Hello, this is Matthew Stefanak. In this key aspects of financial management course, we're going to discuss budgeting and some of the sources of revenue and expenditures associated with health services organizations, including those that provide clinical services. The course will provide a high level introduction to Financial Management concepts and skills like managing a budget, and will also expose you to financial performance improvement tools in more depth. During the course, you'll have the opportunity to complete two exercises that will help you improve your ability to modify a budget for a health services organization to accommodate changes in projected revenue, and to complete a cost analysis for health services to assure that your organization can fully recover the cost of providing services. You will need to have some basic skills in Excel or some other spreadsheet software in order to complete the module exercises.

Learning Objectives

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The learning objectives for this course are to list the key steps in the budget development process, identify expenses that must be accounted for in line item budgets, utilize budget reports to track and manage financial performance, identify relevant recoverable costs for health services programs, and apply basic cost analysis tools to assure that health services organizations can recover their costs for providing services.

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1. Financial Management and Budgeting Basics

1.1 Financial Management

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1.2 What is Financial Management?

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So let's begin with a definition of financial management. It's a process of providing oversight of the health service organization's day-to-day financial operations. Planning the organization's long range financial direction, both internal and external, and increasing the organization's revenues and decreasing its cost, the bottom line, essential for sustaining

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organizational growth in both for-profit and not-for-profit health services organizations, including health departments.

1.3 Major Objectives of Financial Management

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The objectives of financial management of health services organizations are to generate a reasonable net income, that is, assure that revenues exceed expenses, set prices for services by conducting cost analyses, and sometimes through negotiation with third-party payers, such as private health insurers, or employers seeking services from your organization. Record and analyze cost information that's used in budgeting, and cost analyses. Prepare audit and disseminate the organization's financial reports for the governing body, managers, external stakeholders like grant-making organizations, and the public for public sector organizations. And also invest in long-term capital assets. This objective is less relevant for public health agencies, which have fewer physical assets.

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1.4 More Basic Objectives

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Several more basic objectives of financial management are to ensure that payroll is covered and that suppliers are paid. In other words, make sure the bills are paid. Protect the organization's tax status by documenting the organization's community benefit. This applies to private not-for-profit organizations. This is an important function but we will not be discussing it in detail in this course. Respond to external stakeholders such as government regulators, external auditors, accrediting agencies, and grant-making agencies, and control and reduce financial risk to the organization through internal controls. Internal controls are the mechanisms, rules and procedures implemented by an organization to ensure the integrity of financial and accounting information. It promotes accountability and prevents fraud.

1.5 Tax Status of Health Services Organizations

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Notes:

Health services organizations may be public or private, and may be for-profit or not-for- profit. For-profit investor-owned health services organizations serve private interest and pay taxes. Their goal is to maximize profits for the owners. You may have observed that many hospitals in the United States have transitioned from not-for-profit to for-profit status in recent years in response to health care cost containment pressures and the increasing cost of new health care technology that smaller community hospitals have been unable to bear. Not-for-profit health services organizations serve public interests and are tax exempt. Their goal is to provide community benefit and optimal patient care including care to the indigent. There are two types of not-for-profit health services organizations. Business-oriented or private and public, or government-owned. Although they are not-for-profit they must also turn a profit. In other words, their revenues must exceed their expenditures in order to sustain themselves and grow.

1.6 The Budget as a Plan

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So, let's turn to the definition of a budget. A budget is basically a plan. It's expressed in terms of planned activities and projected revenues and expenses. The budget is statement of anticipated results, for example, expected revenue, a basis for future or continuing plans and a statement of intended accomplishments. It's more than a forecast or a guess.

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1.7 The Budget as a Control Tool

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The budget is also a control tool. As a control tool, the budget provides accountability to those in the organization who have fiduciary responsibility. It's a basis for monitoring the use of resources and a basis to measure actual performance against the budget plan.

1.8 For Sound Budgeting

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There are certain conditions necessary for sound budgeting in a health services organization. First, there has to be a sound organizational structure with clear budget responsibility. A consistent defined budget period, it's based on a fiscal year, which may be different from the calendar year. The collection of adequate data to track performance. A reporting system that reflects the organizational structure. In other words, the appropriate persons in the chain of

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command share these reporting responsibilities. There's a uniform chart of accounts developed by Health Services Management Professionals, and widely used in the industry. A UCA or Uniform Chart of Accounts is the standardized system to measure and report the cost of health services. You'll have the opportunity to learn more about a uniform chart of accounts for public health agencies in another course. Finally, there's an audit system for timely explanation of variances that's been implemented.

1.9 Test Your Knowledge

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Account codes used in a uniform chart of accounts are typically developed by: C. National Associations of Healthcare Financial Management Professionals, such as the Healthcare Financial Management Association. A. Uniform chart of accounts for public health agencies is under development.

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2. The Budgeting Process

2.1 The Budgeting Process

2.2 Budget Periods

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Budget periods are operating budget cycles, often referred to as periods. They're usually for a 12-month period. Organizations may have multiple budget periods depending on the funding source. Capital or special project budgets may be for longer periods than 12 months.

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2.3 Budget Designations

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The operating budget is what you're most likely to be responsible for, if you work as a Health Services Program Manager. As such, you will be responsible for projecting and tracking revenue and expenses for your program or department within the organization. You may also be responsible for obtaining costs for capital expenditures such as equipment. Most health departments do not have capital budgets.

2.4 Budget Process: Initial Preparation

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The budgeting process usually begins with direction from organizational leadership or an external funder such as a grant-making organization about what are the budget priorities and overall resources available for the next budget period. Program managers are then

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responsible for developing detailed projections of revenues and costs based on these priorities and projected resources.

2.5 Budget Process: Review and Approval

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Budgets proposed by department or program managers are reviewed by senior management who may make changes based on the need to fairly allocate limited resources among the organization's programs and services. In public organizations such as local health departments, the budget will be subject to public review by appointed or elected officials serving on or overseeing the organization's governing body.

2.6 Budget Justification

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Notes:

Budget proposals must be accompanied by supporting documentation, usually including a narrative that justifies particular line items in the budget. Grant making organizations will often demand these kinds of budget justifications from grant-seeking organizations.

2.7 Budget Process: Implementation

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Once a budget is approved, it is then subject to monitoring and reporting requirements. Budgets may need to be cut or frozen if revenue or expense projections vary significantly from the budget plan. Different audit requirements also apply, depending on the amount and the source of revenue and the type of health services organization.

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2.8 Major Budget Revenue Categories

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In any budget, there are major budget revenue categories. Not-for-profit, governmental health services organizations, such as local health departments, will depend on revenue from multiple sources, including property taxes, state and local government appropriations, for example, general revenue funds, as they're sometimes called, voter lab base, fees for clinical services, including reimbursement from third-party payers, like Medicare, Medicaid and private insurance and out-of-pocket payments from clients, license and permit fees for regulatory programs, such as food service licenses. State and federal categorical block ran and contracts such as those for maternal and child health services, or a public health emergency preparedness, private foundations often provide funding, and other not-for- profit health services organizations may also receive revenue from many of these same sources. Revenue sources are usually categorized as restricted or unrestricted revenue depending on conditions placed on their expenditure by the revenue source.

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2.9 Test Your Knowledge

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A Federally Qualified Health Center, or FQHC, is an example of a city not-for-profit, private health services organization. An FQHC is a private not-for-profit healthcare provider that receives federal funding and bills both public, that is Medicaid and Medicare, and private health insurers as well as its patients paying out of pocket.

3. Budget Expenses

3.1 Budgeting Expenses

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3.2 Major Budget Expense Categories

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Here are the major budget expense categories you will see in an operating budget. In health services organizations like health departments, the largest category for budget line item by far is personnel, accounting for 85% of expenditures in many organizations. Capital and indirect costs may also be significant in a larger organizations. In addition to personnel- related expenditures, there are a budget line items for supplies, contracts, travel, training and these are all typical line items found in a budget.

3.3 Direct vs. Indirect Costs

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It's important to distinguish between direct and indirect costs in budgeting. Direct costs are those that would not otherwise be incurred by the organization if the program did not exist,

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such as program salaries, services and contracts, dues and subscriptions, and equipment. Indirect costs are associated with the entire organization that are prorated by program or department. For example, telephone or internet charges and housekeeping.

3.4 Test Your Knowledge

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Which of the following is an example of an indirect cost for healthcare services? A: Water used during a clinic visit. This is a cost that the organization would incur even if the program didn't exist. It is pro-rated to the program on some basis, such as the number of program employees as a percentage of total employees in the organization.

3.5 Test Your Knowledge

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Notes:

Direct costs include, which of the following. C. Both salaries and program equipment. These are costs that the organization would not incur if the program did not exist.

3.6 Controlling Costs

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Importance of controlling costs as a responsibility of health services administrators cannot be over-emphasized. The ability to control costs enables the organization to make sound decisions about what services to offer. Cost accounting provides managers with information needed to estimate and manage costs, to set fees, and other charges, and to make decisions regarding adding, enhancing, or eliminating services. It provides a method for classifying allocating and determining costs.

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3.7 Factors in Personnel Cost Calculations

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As I mentioned earlier, personnel costs are usually the largest line item in the budget. Health services administrators must be able to calculate, track and make changes to personnel cost line items in the budget. These are some of the factors that must be taken into consideration including minimum wage laws, union contract stipulations, the organization's wage and salary scale and the full-time equivalent or FTE hours worked for non-management employees usually based on a 40-hour work week, cost of living increases anticipated, area wage and salary considerations, that is the need to stay competitive by paying well, merit raises or bonus pay, special adjustments such as longevity pay and fringe benefits, including health insurance, retirement contributions, unemployment insurance, Medicare taxes. These are usually applied to the salary wage line items as a fringe benefit rate.

3.8 Test Your Knowledge

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Notes:

A 0.2 full-time equivalent FTE part-time employee works how many hours each week based on a 40-hour full-time work week? A: 8 hours. A 0.2 FTE times 40-hour work week is equal to 8 hours.

3.9 Test Your Knowledge

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Part time employees in your health services organization receive fringe benefits at a rate of 29% of their earnings. How much must you budget in a 12-month budget for fringe benefits for a 0.5 FTE part-time employee who earns $20 an hour? A: $6,032.

3.10 Budget Variance Analysis

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Notes:

Budget variance analysis is the process of periodically comparing revenues and expenditures with the budget plan in order to make changes or corrections if needed. Administrators rely on a monthly revenue, and expenditure report for variance analysis. We sometimes refer to these reports as the general ledger.

3.11 The Budget Cut

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All too often in health services organizations, administrators must make budget cuts in response to declining grant funds or reductions in demand for services. This sometimes requires them to reduce or eliminate specific expenditures or make cuts to personnel costs to repay phrases, reductions in work hours, or lay offs. In making these decisions, it is important to identify essential and non-essential but desired expenditures. For example, travel for continuing education versus supplies for patient care. It's also important to identify expenditures that cannot be cut. Such as union-negotiated hourly rage rates, or a software license agreement fee.

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3.12 Budgeting Summary

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To summarize our discussion about budgeting, creating and managing budgets is a complex process that requires an understanding of the inter-relatedness of multiple revenue sources, the interplay of other internal programs that contribute to an organization's indirect cost, and the importance of external influences, especially changes in grant and reimbursement revenues. You will be expected to master these skills in your career as a Health Services Administrator. Additional continuing education in financial management will help you enhance your knowledge, skills and job readiness for advancement in a Health Services Organization.

3.13 Exercise: Adjusting Your Department Budget

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3.14 Adjusting Your Department Budget Tutorial

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Hello, this is Matthew Stefanak. In this tutorial, I'm going to show you how to set up a program budget and use Excel to make changes to that budget to adapt it to changing circumstances for your program. We're gonna start with an original budget scenario that foresees or projects a 5% pay raise halfway through the fiscal year for the program staff. And what I've done here in this tab of the spreadsheet that's open in front of you is to list all of the personnel who are paid by the program through the program. This is a personnel budget, mind you, along with their their current salaries. You can see the list here of all of the employees, their current salary, annual salaries, totaled to close to $630,000. So how do we account for a 5% pay raise halfway through the fiscal year?

Well, there's more than one way to do that, of course, but the way I find easiest is to use input tables; that's these four cells up here along the top, because they will prove useful later when you go through different budget revision scenarios as we will do in this tutorial. So one-half of the fiscal year, July through January, these employees are paid at this current base rate of pay. Up here in the input table, percent time elapsed to the current rate, we could enter 0.5. And that's for the six months of the 12 months of the year at which they would be paid at this current base rate. So down here in this column, we would answer, the current base rate from column B times this 50% figure. Now, in order to carry forward, carry down through all the positions in the program, we would anchor that cell by entering a dollar sign in front of both of the cell components, so being cell C5. So carry that down through.

And here we have what the program will expend on salaries for its program staff for six months of the fiscal year, July through the end of December. The original budget proposes a 5% pay raise halfway through the fiscal year. So up here in this input cell, we would enter that figure, enter it as a fraction, I formatted that as a percentage here. And so likewise, we would come down here into the column, enter the base salary rate, B8 [03:41] ____ times that 5% increase. Again, anchoring that cell for carrying it forward by entering dollar signs. That shows you what that 5% pay raise will add onto

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the top of the current base salary for that individual. By having anchored the cell to the input cell, we're able to carry these pay raises down through the entire staffing of the program. So here in column E, we show the new base. And that's simply the current base plus the amount of the increase in column B. So the director's new salary, once the 5% pay raise takes effect, is $79,800. And we carry those figures down through. And do that again and make sure it's done correctly.

Now, we need to calculate the personnel costs for each of these individuals for the second half of the budget period, January through June, so that it includes that 5% salary increase. How do we do that? Well, again, we can go to this input cell up here, and this represents the time remaining at the new rate. The time remaining, of course, is the time in the first half of the fiscal year minus one, and it's 50%. So this may seem obvious to you, but you will... You see the value of using these input cells later when we cost out other budget scenarios. So down here, in this column, then we'll do as we did earlier for the first half of the fiscal year. We will take the new base salary and multiply it, times the time remaining in the budget. Again, anchoring that cell so that it can be carried down through all the positions. And that figures the second half of the year's salary for the director and all program staff.

So what's the total cost for the entire fiscal year? Well, that's simply the sum of the first and the second half payments for the fiscal year, and that is sum of January through... July to January, I'm sorry, plus January through June. Sorry, that's F8. And then we carry these values down through all the positions. And then down here, we have inputted a sum formula here for the current base salary, and we're able to drag that across the columns here to show the totals for all these figures. So you can see that the 5% pay raise in January increases the personnel wage and salary budget from about $630,000 to $645,000.

And I probably should have corrected this here. This is actually, the first six months of a fiscal year beginning in July is actually through the end of December, not through the end of January, so I'll correct that there. And this would be... The second six months, of course, would be January 1st through June 30th. Now, if you look down here, you can see I've created a small summary table that... It just copies this total wage and salary figure from column G into this little table here. And your program, in this scenario, it has a fringe benefits rate of 29% of the total wages and salaries. And that, likewise, is calculated based on this $645,000 wage and salary figure.

So now that we've created an original budget for the program, at least, for the personnel cost portion of the budget, it doesn't include the other line items, let's assume that changing financial conditions for the organization and for the program, perhaps a decline in revenue, is forcing you as the program manager to begin developing cost-cutting scenarios. How do you do that? How do you use the original budget data to do so? Well, here, we'll start by using these tools, these input tables in Excel that we've created to make that a fairly easy process. And the way I start is by simply copying these values and these formulas from the original budget into a new tab in the Excel spreadsheet. Let's paste it there.

Now, suppose one of the first scenario, cost-cutting scenario, that you are going to consider is postponing that 5% pay raise that was slated for January 1st of the budget year until March 1st. And further reducing that 5% increase to 2.5%. Well, with the way we've set up the budget, that is a fairly easy process, and I'll show you how. We do that by using these input cells or tables here. So in this scenario, instead of the pay raise kicking in on January 1st, it would kick in on March 1st, two

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months later. Instead of 50% of the budget year at the current salary, the current salary for the program staff would be paid for eight out of 12 of the months. That is July through the end of February. That didn't go quite right, but we can show that as a percentage here, those two-thirds of the budget year at the current salary. And you can see over here in this input table, the remaining time at the new rate has been automatically calculated. And here, instead of 5% pay raise, this scenario calls for a 2.5% pay raise, you can move the decimal points here to show that as 2.5% rather than rounding it up to 3%.

And by doing so, by using these input sales, all the salaries including the increase of the new rate are calculated for you here. And you can see that total wage and salary cost are under this cost cutting scenario, total to $635,000 as opposed to $645,000. So you're saving about $10,000 in direct salary cost there. And down here in the summary table, that figure, that reduced figure is reflected as is the 29% fringe benefit rate.

Now, another budget scenario you might consider is reducing the length of the work week for the hourly workforce. Suppose you wanna model the impact on the budget of reducing all the hourly staff from a work week of 40 hours to 35 hours, how would you do that? Well, it turns out it's fairly easy. We go back to the original budget. Again, copy the values and the formulas, paste them into a new tab in the spreadsheet here. And then here, we use this input cell up here to re-calculate the base salary for those hourly staff. In here, we would simply put 35/40, that's the fraction of the reduction. And then we need to apply that to the current base salaries. Now, we're assuming that these first three positions are salaries, so they will be unaffected by the cut in the work week. But beginning with the medical records coder, we need to apply that cut. Let's clear these cells on the copy first, then let's change the current base. How do we do that?

Well, we can go up here, copy this, and then multiply it by the original salary. So we're carrying over the original salary figure from the original budget there. And let's format it properly, and then carry it down through all the positions. I don't need orders there. Go down all these remaining columns.

Now, in this scenario, we are assuming that the 5% pay raise will continue to go forward, but that the hourly staff will receive this reduction in the length of their work week. And we... Here, we see what the impact is on the total wages and salaries and the fringe benefits here. The cost savings reduce those line items, so the wage and salaries line items to $586,000 from the original budget of $645,000.

Now, suppose you want to cost out the impact of a combination of these previous two budget revision strategies. How would you do that? Well, there are different ways to do that. What I would do is go back to the first budget revision scenario where you're postponing their pay raise until March 1st and reducing it to 2.5%, and copy that data here onto a new tab in the spreadsheet. This is where you're going to calculate the impact of delaying the pay raise until March 1st from January 1st, reducing it from 5% to 2.5%, and cutting the hourly workers' work week from 40 hours to 37.5 hours. By copying it over, we've solved the first part of the question.

Now, all we need to do is apply the base hourly reduction to this new tab to come up with the solution that combines all these cost-cutting scenarios. And you will remember how we did that. We used this input cell to reduce the work week from 40 to 35 hours. And then, copy that formula into

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the columns or the positions, went back to the original budget. And... Sorry, what I did was wrong there. These hourly rate cuts do not apply to the first three positions, recall that, these are management positions, so we start down here with the medical records coder. Let's do this again. Copy that formula, [20:34] ____ cell, then multiply it by the salary from the original budget. Copy and hit enter and there we have it. Make sure it's formatted correctly. Let's carry that... The reduction down through all the hourly positions.

So then in this combined cost-cutting budget scenario, we've reduced our wage and salary line items to $576,000 and the amount of fringe benefits down here in the summary table accordingly. So how do we make sense of these different budget revision scenarios and how do we use these data for decision making? Well, what I've done here, in this final tab in the spreadsheet is to create a summary that compares the three cost-cutting options. I'm not gonna go through this for you, it's a matter of cutting and pasting these salary and wage and benefits totals from each of the three budget revision scenarios that we've just worked through, but you can see here that the cost- cutting savings range from $13,500 to $89,000. And this is the kind of information that juxtaposed in this way, can help you in decision-making with your management team and your staff if you are faced with the need to make budget revisions in the face of declining revenue or other changes in your organizational picture.

In the exercise for this part of the module, you'll have the chance to use this budget template that I've created and demonstrated for you, to work through a similar exercise. And I look forward to moving on to the next part of the module with you now.

4. Cost Analysis

4.1 Cost Analyses for Health Services

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4.2 Why Knowing Costs is Important

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Why is it important to know the cost of providing services? The ultimate goal of managing costs, is that a minimum to break even and not run a deficit. Many public health services depend on user fees or reimbursements from other sources in order to continue operations. Accurate cost accounting is necessary to assure that as much of the cost of providing these services is recovered by your organization as possible. Often these sources of revenue are insufficient to recover the entire cost of these services. In this case, it's important to know if and how much your organization is subsidizing these services with revenue from other sources.

4.3 Why Aren’t Cost Analyses Done?

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So why are these cost analyses done? In the governmental public health and not-for-profit health services sector, we aspire to assure that all people receive the services they need, regardless of cost or their ability to pay. This attitude might help to explain why cost analyses are not often routinely conducted by our organizations. Also, Public Health and Health Services professionals often have a little prior experience with budgeting and cost accounting.

4.4 Why Cost Analysis is Essential

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In order to deliver public health services in today's environment, it's very important to understand your cost so that you can continue to deliver these services. A budget can quickly turn upside down if you don't understand what is driving your costs. As is sometimes said, "No margin, no mission". If we have no margin, that is, we aren't taking in at least a little more money than we spend, then we won't be able to fulfill our mission.

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4.5 Cost Analyses

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Cost analyses that follow a set methodology assure that costs are being accounted for consistently across all the programs in your organization. Knowing your costs now allows you to be nimble in responding to requests for services from prospective funders, such as grant-making organizations, or agencies or businesses willing to pay for services that you're able to provide them.

4.6 Examples of Services

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Earlier we had identified some of the typical revenue sources for health services organizations, including fees for services. Here are some examples of the health services that a typical health services organization such as a local health department might charge

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for. Immunization programs are among the most frequently offered reported fee-for-service program in local health departments. According to the National Association of County and City Health Officials profile of local health departments, health departments also receive reimbursement for services such as newborn home visits and work site wellness programs.

4.7 Your Organization

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What are some services that your organization provides that are funded by fees or contracts?

4.8 To Calculate Costs Accurately…

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Ideally, it's best not to calculate costs. So you have first documented the number of staff hours spent in the program. Recall that staff time or personnel costs, account for most expenses in public health agencies. However, if the program is new, you will not be able to know the exact amount of time involved in delivering the service and so you'll need to make estimates of the staff time required to deliver a service based on similar services that are currently offered. All staff who contribute time to a program, must keep accurate daily activity or time sheets to track their time commitment. There are many activity or time- tracking software tools available and in use by health departments and other health services organizations, including HDIS, Easy Clocking, Kronos, Time Clock Plus, Enfal, Paycor, SD Insight or Excel spreadsheets. Recall our earlier discussion of direct versus indirect costs. If for example, you need to buy syringes to do immunizations. This is clearly a direct cost to the program you are analyzing and you will want to put these costs into your calculations. If the program is going to use equipment shared with other programs in your organization, it's important to allocate some of that equipment cost to the program as an indirect cost. This is a much trickier task that we'll talk a little more about later.

4.9 Frequently Used Methods of Classifying Costs

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We've discussed direct and indirect costs, and examples of each previously. It's important to make you aware that this is only one method of classifying costs used in managerial accounting. Managerial accountants often combine other methods of cost accounting shown here that add further complexity to cost analysis in health services organizations. As an example of this complexity, the salaries of program managers in a Health Services Organization are both direct and fixed, the wages of part-time staff are direct, but variable and the salaries of senior executives are fixed, but indirect. In this course, we'll only be employing the second method. It is by traceability to identify and quantify program cost.

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4.10 Accounting for Staff Time and Activity

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As I said before, it's important to have accurate records of staff time dedicated to each program in your organization. Many times people will underestimate the time they dedicate to a program and only think of the time they actually spend at a site delivering services. Neglecting to account for travel time, record-keeping, training and other related activities.

4.11 Items Typically Used to Calculate Direct Costs

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Here are items typically used to calculate the direct costs of a program that would appear in a line at a budget. Keep in mind that staff usually spend their time working in multiple programs, especially in smaller organizations. Hence the need for those daily activity time sheets that code units of staff time to the various programs that an employee works in. I said

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earlier that equipment shared among different programs in your organization might be accounted for as an indirect cost. However, some funders may allow your program to purchase or rent equipment outright. If so, this can be accounted for as a direct cost. In my experience, it's often best to calculate or estimate as many of a program's costs as direct costs, if possible, rather than rely on an indirect cost rate whose calculation is complex and must be periodically updated. And some funders will not allow the organization to charge indirect costs.

4.12 Personal Costs

Notes:

Besides salaries and wages, what are some other personal costs that must be accounted for any cost analysis? Here are some potential costs.

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4.13 Additional Costs

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Of course, direct costs are not the only cost for a program. We've already given some examples of other support costs that must be accounted for. There are two ways to account for these costs, first and this would be my preferred approach, the organization can attempt to classify them as direct costs and identify the actual cost of providing support to the program. For example, the fraction of time dedicated to program oversight by senior management, fiscal, IT and Human Resources staff. Rent as the percentage of the organization's total rental costs occupied by the program. IT network maintenance costs as the number of network users in the program. The number or photocopies made by the program for example. As I said before, many health services organizations would do well to pursue the strategy of costing out these support services as direct costs because the entity funding the program may not allow the organization to charge back indirect costs to the funder.

Smaller health services organizations may lack the resources and expertise to accurately track these actual support costs and will instead attempt to apply an indirect cost rate to their direct program costs, if their funders allow it. This is a rate that may be developed internally or allowable by or negotiated with funders. For example, some states will allow local health departments to use an indirect cost rate capped at a certain percentage of direct costs and apply it in their environmental regulatory program cost analyses that are used to set license and permit fees.

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4.14 Cost Accounting Summary

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To summarize our discussion of cost accounting and cost analyses, remember, no margin, no mission. Being able to account for all of your costs of providing a service is the key to the financial sustainability of a health services organization.

4.15 Exercise: Cost Analysis

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4.16 Tutorial Video 2

Notes:

Hello this is Matthew Stefanak again. In this tutorial, we're going to use a cost analysis template that I've used many times in my health department to apply some of the cost analysis, cost accounting concepts that we've been talking about as part of the module. In the scenario for this tutorial, your health services organization, in this case, the health department has been asked to provide on-site flu shot clinics for the employees of a large employer of a large company, in your community. Now, we know that the largest cost the greatest cost for providing health services is staff time. So we've organized a cost analysis tool with salaries being the first tab in the tool. So here we see that we are going to allocate nursing and support staff time to the clinic. Now, how do you do that? How do you estimate staff time commitment? Well, fortunately in this case, we have past experience to go by. The health department provided worksite flu shot clinics to this very same company last year. Last year 1000 employees of the company took advantage of these drop in clinics at the company's three locations.

In those clinics, which were open all day, we found it necessary to assign two public health nurses and a support staff, a clerical person during the day long clinic to ensure that there was no waiting time, that there was efficient throughput. So you can see here in this calculation we know what the annual salaries of, are of these three employees, each of them is going to spend three days out of their work here, their 260 workdays a year, on this assignment, and that amounts to about 1% of a full-time equivalent salary. So in the tool, we input 1% as the percentage of time allocated to the program, multiplied by the annual salary to determine the salary that's attributable to the program for each of these three employees. The spreadsheet then totals the total salaries that are attributable to the program. Salaries are not the only person or staff cost that should be accounted for in a cost analysis. On the second tab of the cost analysis tool, we do that. So the spreadsheet includes formulas that allow for you to calculate the retirement costs for these employees. In this case, the employer share of the Social Security trust fund contribution, the employer's contribution

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into the state's workers' compensation or an employment insurance fund and a health insurance premium cost.

Now, we know that all three staff have family health insurance plans. And the current premium cost to the agency for each of those employees is $18,000 per year. So since 1% of the employee's time and salaries is being committed to the program, it's appropriate to recover 1% of these different premium costs for each of these employees. And that amounts to $540 per year for health insurance. So the total payroll expenses, sum of social security, workers' comp, health insurance is about $500. It can be attributed to the program. In this same tab, we need to account for travel time. Now all three staff were gonna travel in one vehicle privately owned and they're traveling to three different clinic sites. We know what the mileage is and we know what the allowable reimbursement rate is for those who are using a private vehicles. So it's currently 57.5 cents per mile. So that calculation amounts to about $41 in mileage reimbursement costs that should be attributed to the program. Since this is a flu shot clinic, we need to purchase vaccine and vaccine is administration materials. And here we've estimated that we will need to purchase a 1000 doses of vaccine again because that was the utilization rate, the numbers of employees that came through last year's clinic.

So at $18.79 a dose, the vaccine costs are considerable nearly $19,000. We add in needles, syringes and bandages and alcohol pads for a total supply budget, if you will, of about $19,600. We are assuming that these supply costs or what are known as sub costs that is we cannot divert them, or reduce them. Once the vaccines are purchased it needs to be administered it can't be returned it has to be discarded when it expires. Now in this tool, we have created a tab for occupancy and indirect costs as well as contract services. Now in this scenario there are no occupancy, or rental costs because the company is providing space for the clinics, gratis to the program. We do need to however account for indirect costs to the program. So the spreadsheet will calculate that for us and the scenario the company assumes an indirect cost rate of 30%, for all of its programs. In this cell then, the total indirect costs are calculated based on a total direct cost of the program of $21,574. So those costs amount to $6,472. Those indirect costs. We have included a tab for miscellaneous expenses and we don't anticipate any.

If we needed to purchase equipment for the program, there is a mechanism to recover those costs here with this equipment tab. In this scenario there is no equipment necessary to provide the service. If we did need to purchase equipment or allocate equipment, to the service, we've included a depreciation tab in the tool here that allows for recovery of those costs. Equipment depreciation is often in this scenario it's included in the 30% indirect cost rate that the organization charges. Now all of the data that we've entered into the previous tabs of the tool are summed here on the summary sheet, so here you can see we've accounted for salaries, payroll-related expenses, travel, consumable supplies, vaccines and vaccine administration materials and indirect costs at 30% of total direct costs. So all of these costs together, summed up, are calculated in this cell, as total program expenses. So based on these costs of administering vaccine to 1000 employees at three different work site

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locations, we anticipate that it will cost us, $27,948 to provide this service to this employer in our community.

In the final tab, in this cost analysis tool, we present the total program expenses here that are calculated on the previous summary sheet. Assume that 1000 individuals will be vaccinated, and we calculate that unit cost of doing so at $27.95 per dose, per client vaccinated. Now, in the final part of this module, I'm going to ask you to practice doing a cost analysis yourself, in this applied exercise using the cost analysis tool template that I've provided. Using these scenario assumptions and the instructions. Try using different staffing assumptions, clinic schedules, and anticipated numbers of employees seeking the service, the flu shots to see how your costs will vary in your cost analyses.

Completion

Thank You!

Notes:

Thank you for your participation in this course. To learn more about financial management, cost accounting, cost analysis and topics such as the uniform chart of accounts, please consult the references for this course.

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Course Completion