FINANCIAL EXERCISE 3
Financial Exercise: Planning and Controlling Assignment
Jessica Evans
School of Nursing, Liberty University
NURS 523: Financial and Resource Management for Nurse Leaders
Dr. Turner
September 26, 2021
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FINANCIAL EXERCISE 3
1. How does pay for performance (P4P) or value-based purchasing (VBP) affect staffing?
Pay for performance, also known as value-based payment, allows payers to reimburse
providers for services delivered based on the provider’s performance on certain quality of
care outcome measures (Jones et al., 2019). This type of reimbursement combines best
practice, patient satisfaction, and metric outcomes. Pay for performance is one part of the
national strategies to transitions healthcare to become more value-based (NEJM, 2018). After
several years of moving towards value-based care, existing staffing strategies may not meet
the needs for the delivery of care (Frost et al., 2017). Changes that may need to be made
include staff with differing skill sets and capabilities, care coordination, population health,
patient engagement, and use of analytics. To meet the goals and demands of value based care,
healthcare organizations must alter their staffing to provide the best care at an affordable
price. As the transition begins, a higher skill-set may be required to provide comprehensive
care. However, staffing those that hold a higher skillset comes at a higher price as well.
Having a greater variety of staff such as registered nurses, social workers, and other licensed
professionals will provide the most well-rounded care. Although this type of staffing may be
more expensive in the beginning, it will pay off in the long run because more of their care
will be eligible for value based reimbursement.
2. As the nurse manager of the new 15-bed observation unit you are responsible for reporting to
your nursing director and the finance department any variances identified within your
operating budget. Listed below is your monthly operating report. Please review and discuss
the specific variances and how you will determine the causes of variances.
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FINANCIAL EXERCISE 3
In the table above, the monthly variances are calculated. To determine the monthly variances,
the difference between the amount budgeted and the amount actually incurred is the total
variance (Jones et al., 2019). If an organization spends more than what was budgeted, then it is
considered an unfavorable variance. When spending is less than what was budgeted, then it is a
favorable variance. For the volume and census variance, the actual amount spent was 360 and the
budget was 420. This specific variance is a favorable variance because the actual amount spent
was 60 less than what was budgeted. For the supplies variance, the actual amount spent was
$8,550, but the budget was $7,800. This means that variance is unfavorable because the amount
spent on supplies was $750 greater than what was budgeted for the supplies. Lastly, $8,550 was
spent on nursing labor, but was budgeted to spend $7,800. This specific variance is unfavorable
because the amount spent on nursing labor was $5,875 more than the amount budgeted.
Many times, it is not as important whether a variance is unfavorable, but more important
the reason why more money was spent than budgeted. The causes of variances may be
internal or external. Common internal causes include a shift in the quality of provided care,
changes in the technology that is being used, the efficiency of nurses fluctuating, change in
organizational policy, and incorrect standards. Some external causes of variances include
changes in prices for supplies, volume changes in workload, and shifts in the availability of
staff. In general, the external sources of a budget are less controllable than the internal
sources. Some potential causes for these specific variances are that there’s a change in
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Actual Budget Variance
Volume/Census 360 420 60
Supplies $8,550 $7,800 -750
Nursing Labor $58,450 $52,575 -5,875
FINANCIAL EXERCISE 3
census, the cost of supplies may be higher, more supplies might have been used, or nursing
salaries may have increased. Determining the causes in variance allows for overall healthcare
improvement.
3. As the nurse manager, you will now need to determine the staff mix based on budgeted full-
time equivalents (FTEs). Consider the formula below:
Actual Price per FTE x Actual Total Number of FTEs = Budgeted Cost
Using the figure in the table above for nursing labor, calculate the Actual Cost and how you
will divide the nursing labor expense based on skill mix. Consider safe staffing requirements,
quality of care and operational needs to meet the demands of the new unit. Provide a detailed
rationale of why and how you arrived at your decision.
Budgeted Price per FTE = Total Nursing Labor / Budgeted Hours
= $52,575/ 420 = $125.17
Budgeted Total Number of FTE = 15 bed unit
$125.17 x 15 beds = $1,877.55 Budgeted Cost
Actual Price per FTE x Actual Total Number of FTEs = Actual Cost
= $58,450 / 360 = $162.36
= $162.36 x 15 = $2,435.40 Actual Cost
When determining the staffing mix, there are several factors to take into consideration
such as patient outcomes. To create an effective staffing mix, there must be a balance
between healthcare costs patient needs, and supply (Sharma et al., 2016). The staffing of the
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FINANCIAL EXERCISE 3
new observation unit will be based on the acuity of the patients and pairing them with
providers that have adequate skills, education, and experience to meet their needs.
4. The productivity standards for your new observation unit are set. You must meet the
minimum target of 95% with a maximum target of 105%. Keep in mind that volume drives
productivity in a positive direction. Using the formulas provided in your assigned textbook
readings, determine the number of patients you need to admit to meet budgeted volumes.
Consider the type of unit you are managing. An observation unit has a minimal stay of six (6)
hours and a maximum stay of forty-eight (48) hours. Most patients are admitted into an
appropriate next level of care (inpatient admission) or discharged home within 24 hours of
admission into an observation unit. This demonstrates a unit with rapid turnover. Also
include in your discussion how nursing labor/staffing will be managed when census/volume
drops.
Productivity = Total Outputs/ Total Inputs
1.05 = X / 48 hours
X = 0.0218 or 2.18 Patients per Hour
Number of Patients Needed to Admit Budgeted Volume = Budgeted Volume / Total
Output per Hour
= 420/ 2.18 Patients per Hour
= 192.66 or 193 Patients
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FINANCIAL EXERCISE 3
To calculate productivity, you measure the amount of output produced by each unit of
input (Jones et al., 2019). In this problem, we were already given the productivity amount as
105% at the budgeted level. It was also provided that the observation unit has a maximum stay of
48 hours. The amount of 48 hours will be the total inputs. The productivity amount of 105% is
divided by the total input amount of 48 hours to get a total output amount of 0.0218 or 2.18
patients per hour. When determining the number of patients needed to admit the budgeted
volume, the budgeted volume divided by the total output per hour will provide the total number
of patients. The assumed budget volume is 420. The budgeted volume of 420 is divided by 2.18
patients per hour. The total number of patients needed to admit the budgeted volume is 192.66 or
193 patients. When the volume/census drops, the patients needed to be admitted will decrease to
meet the productivity per hour requirement.
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FINANCIAL EXERCISE 3
References
Catalyst, N. E. J. M. (2018, March 1). What is pay for performance in healthcare? NEJM
Catalyst. Retrieved September 27, 2021, from
https://catalyst.nejm.org/doi/full/10.1056/CAT.18.0245.
Dorr, L. (2020, November 12). How value-based care changes the PROVIDER staffing model.
Managed Healthcare Executive. Retrieved September 27, 2021, from
https://www.managedhealthcareexecutive.com/view/how-value-based-care-changes-
provider-staffing-model.
Ferguson, J. (2021, June 18). Reducing variation in healthcare to boost improvement. Health
Catalyst. Retrieved September 27, 2021, from
https://www.healthcatalyst.com/insights/reducing-variation-in-healthcare-to-boost-
improvement/.
Frost & Sullivan. (2017). Staffing for Success in Value-Based Care A Guide for a Fast-Changing
Healthcare System.
Jones, C. B., Finkler, S. A., Kovner, C. T., & Mose, J. (2019). Financial management for nurse
managers and executives. Saunders.
Sharma, K., Hastings, S. E., Suter, E., & Bloom, J. (2016, December 1). Variability of staffing
and STAFF mix Across acute care units in Alberta, Canada. Human Resources for Health.
Retrieved September 27, 2021, from https://human-resources-
health.biomedcentral.com/articles/10.1186/s12960-016-0172-1.
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