budget

Introduction

In health care as in other industries, a budget is a statement of expected financial inputs and outputs. But a budget is affected by more than revenues and expenses. It's integrated with the organization's strategic plan. In order to understand an organization's financial health, not just in the present but in the future, it's essential to understand its budget and the relationship between that budget and the strategic plan that guides the organization's actions.

After completing the activity, you should be able to:

· Analyze a hospital budget and recognize red flags based on budget variances.

· Discuss the hospital budgeting process.

· Calculate next year's budget based on current-year data and directives from senior leadership based on a strategic plan.

Your Office

You are the administrator of the Medical-Surgical Department at St. Anthony Medical Center, the third largest hospital in the Twin Cities metro area. You will be creating the budget for your department. To prepare, you have to go to a budget meeting for the overall hospital, where you'll hear about the current fiscal year — and how reality is corresponding to the assumptions in the budget.

You have a voicemail from Owen Welch, CFO.

Voicemail

Caller ID: Owen Welch, CFO

Voicemail Transcript

 Hi, it's Owen. I hear you're working on a budget for the Med-Surg department. I'd like you to come to the budget meeting this afternoon, because I'm going to be sharing some numbers that are likely to have an impact on your budget. I've sent you the year-to-date statements through December, the overall budget for the year, and the year-to-date budget variance for your department. Take a look at them, and bring them with you to the meeting. See you later!

St. Anthony Medical Center Financial Statements

Please  download the Excel file  for financial data.

Leadership Meeting

It's time to head over to the meeting with hospital leadership to talk about the budget for the coming fiscal year.

Budget Meeting Conversation

Owen Welch, CFO: Hi, everyone. Thanks for coming. We've got some important numbers to go through and a big challenge to respond to, so I think we better get started.

Carla Neustadt, Vice President of Operations: That sounds ominous.

Owen Welch: Not really, Carla. Well…let's get started. Okay, everybody take a look at the budget for the current year. We'll get to the year-to-date numbers in a minute, but for now I want to focus on the whole-year budget.

Christopher Hewitt, Vice President of Medical Support: Well, can we at least get an idea of how we're doing year-to-date before you go to the 40,000-foot level?

Owen Welch: I think you might need to hear this first. Here's the situation: The hospital has to cut operating expenses by 5 percent for next fiscal year.

George Fink, Director of Clinical Operations: I'm sorry, did you say 5 percent? Operating expenses?

Owen Welch: That's right.

George Fink: That's a big ask. We're already operating awfully lean.

Owen Welch: Agreed. But it's the situation we're in. I'll get to the reasons, but based on what I'm going to go over, I just want everyone to keep in mind that we can't make assumptions we were making before. So let me give you an overview of the budget and the year-to-date numbers, and I think you'll see why we're going to have to make those cuts.

Now, last year, for the entire hospital, we assumed that we would see $1,225,000,000 in total patient revenue. But as you can see, for half the year, we've only hit $607,538,746. By this point in the year, we should be at $612,500,000. So already in terms of total patient revenue, we've got a deficit of $4,961,254 that we didn't expect. The problem is made worse when we see that other operating revenue is also under budget by $1,500,000.

Our operating expenses are fairly close to target so far this year, but given the situation with declining revenue, we will need to try to find some additional cost savings opportunities.

Christopher Hewitt: Wow. Well, okay, so that's the reality. What's the timeline? How long do we have to make these cuts?

Owen Welch: Well, implementation is obviously by June 30 since the next fiscal year starts July 1. The board will approve the new budget probably by mid-June, but all the negotiation at the unit and department level will be going on in April. Our first official budget committee meeting is in February. So I'd suggest getting your ducks in a row by then.

Conclusion

You have completed the Vila Health: Developing an Operating Budget. 

In this activity, you learned about some budget realities at St. Anthony Medical Center, and some trends to keep in mind as you develop your budget for the Medical-Surgical Unit.