p2

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controlling the outflow of money from an organization requires a watchful eye to minimize excessive spending that negatively impacts the inflow of revenue. Because cost control is a major function in the role of the nurse leader, having basic knowledge of cost concepts and their behavior is key to successfully maneuvering through cost management. Fundamental to cost control is an understanding of the relationship of fixed and variable costs.

Fixed Costs Fixed costs are those that are unchanged regardless of the level of activity. The first example of fixed costs is those costs that would exist even if the organization were shutdown: rent/mortgage, insurance, taxes, depreciation, a minimal level of utilities, etc. From a nursing perspective, fixed costs include those minimum costs that are always paid regardless of the volume of activity. Regardless of patient activity— whether measured by patient visits, patient acuity, or patient minutes, hours, or days —certain costs are always present. Additional examples include minimum staffing requirements, the nurse leader’s salary and benefits, and other cost center supplies that do not fluctuate with volume. Some consider these costs to be direct costs, or the costs of resources that are necessary to provide direct care to patients and are attributed to a particular unit, department, or patient. Some examples of direct costs include staff salaries and patient supplies (e.g., IV start kits, dressing supplies, etc.). Figure 4-1 depicts the nurse manager’s salary as a fixed cost. Also to consider are what some would identify as the indirect, or shared, costs related to patient care. These are costs that are specific to supporting the overall operation and cannot be traced to a particular cost object. Costs in this category include administration salaries, quality improvement/assurance staff, risk management functions, information technology/support, and infection control. Indirect costs, sometimes called overhead, are normally shared by all departments. Table 4-1 identifies costs for a nurse-managed clinic. Which of these are fixed costs and which ones are variable costs? See Table 4-1 for correct cost categories.

27293260 - Jones & Bartlett Learning ©

Figure 4-1 Fixed costs: Cost for a nurse manager

Table 4-1 Correct Cost Categories

Description

Variable Costs

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Variable costs are those that change, or fluctuate, depending on the level of activity or volume. In the healthcare environment, volume is a complex concept because volume not only includes the census numbers but also patient acuity, patient minutes/hours/days, and patient visits. Variable costs occur in addition to fixed costs to yield the organization’s total costs:

Total Costs = Fixed Costs + Variable Costs

Staffing, for example, beyond the minimum staffing requirements is a variable cost based on the variable patient census and acuity. The cost to provide staffing, which includes salaries, social security, and other benefit expenses are variable costs as these will fluctuate based on the number of hours of work required to meet the need of increased patient volume (e.g., patient census, patient visits, or patient acuity). Other typical variable costs are medical and surgical supplies, linen, and food costs. Variable costs vary in direct proportion to fluctuations in activity levels, as depicted in Figure 4-2.

Figure 4-2 Variable costs: Cost for supplies as unit volume increases

Table 4-2 illustrates variable and fixed costs for a nursing department’s budget.

Table 4-2 Variable and Fixed Costs for a Nursing Department’s Budget

27293260 - Jones & Bartlett Learning ©

Description

Revenue Concepts Revenue is the amount of money that is earned by an organization and is most easily explained as the charges billed to patients when services are provided for which the organization expects to be paid. There are two types of revenues:

actual (paid at the time services are rendered; e.g., copays, deductibles), and expected (payment that is expected sometime after the services are rendered; e.g., negotiated/contracted rates paid by the patient’s insurer).

The largest portion of healthcare reimbursement is based on expected revenue. Gross revenue is the sum of all charges for the care provided to the patient for all

services provided during an episode of care.

Net Revenue = Gross Revenue – Deductions from Revenue (Costs)

However, healthcare organizations can no longer expect, in most situations, to be reimbursed for full charges. Net revenue is calculated by deducting projected reductions in payment, such as fixed payments (e.g., diagnosis related group [DRG] payments from Medicare), contractual allowance (e.g., a negotiated amount contracted by insurance companies), and charity care (e.g., patients with no healthcare benefits who cannot afford to pay for charges) from the gross revenue (expected amount of payment).

Gross Payment – Projected Reductions in Payment = Net Revenue

Table 4-3 illustrates the calculation of projected net revenue based on a contractual allowance with an insurance payer source.

Table 4-3 Illustration of Net Revenue Calculation

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Description

There are three primary revenue sources for health care in the United States: Medicare, Medicaid, and other programs/self-pay. (For more information on the history of Medicare and Medicaid in the United States, see Chapter 1 or visit www.cms.gov.). Figure 4-3 depicts the approximate spending per annum by each of these payer sources.

27293260 - Jones & Bartlett Learning ©

Figure 4-3 U.S. primary payer sources spending per annum Data from https://www.statista.com/statistics/200962/percentage-of-americans-covered-by-

medicare/#:~:text=Medicare%20is%20an%20important%20public,increase%20from%20the%20previous% 20year. Retrieved 1/29/2021.

Medicare

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Currently, there are about 61.2 million beneficiaries—some 18.5% of the U.S. population—who are enrolled in the Medicare program, with enrollment expected to rise to 79 million by 2030 (Umans & Nonnemaker, 2009). Total spending from Medicare grew to $644 billion in 2019 (Peter G. Peterson Foundation, 2020).

Medicaid Although the Medicaid program is state specific, the program is both a federal and state matching entitlement program. Now, more than 75 million people in the United States receive their healthcare benefits through this program, with total spending reaching $576.6 billion in 2017 (Rudowitz et al., 2019).

Other Programs/Self-Pay Commercial payers make up the largest revenue stream for U.S. health care, although each individual market might see different payer mixes (or, sources for reimbursement of healthcare services identified by payer type). In 2020, the Centers for Medicare and Medicaid Services (CMS) reported that more than $3.8 trillion of healthcare revenue, or more than $11,582 per person in 2019, comes from private healthcare spending. Out-of-pocket spending, sometimes categorized as “self-pay” constitutes $406.5 billion of total healthcare spending in 2019 (CMS, n.d.).

Break-Even Analysis To stay in operation, the minimum long-term goal of any organization must be to at least break even. When breakeven occurs, the costs of operations equal the revenues. There is no profit and no loss. More revenues result in a profit, and fewer revenues (or more costs) result in a loss. Table 4-4 provides an example of breakeven depicted on a spreadsheet. When an entity operates below the break- even point, it must borrow money from a lending institution or pull from savings from earlier periods when profits were made. Clearly, these are short-term solutions, and when they are exhausted, the entity will be forced to close or sell.

Table 4-4 Example of Break-Even Analysis

Description

Breakeven can also be shown graphically and is based on the definitions of costs. Remember that there are two kinds of costs: fixed costs and variable costs. Figure 4-

27293260 - Jones & Bartlett Learning ©

4 provides a graphical representation of this break-even point. Notice that the variable costs begin to rise from the base of fixed costs—costs that continue even when activity drops to zero. The revenue line begins at zero—no activity, no billing. Thereafter, it climbs at a steady rate toward the upper right corner of the graph. The slope of the revenue line (the rate at which it climbs) is dependent on the rate of billing—the bigger the bills, the steeper the climb. Our revenue slope would be based on the total revenue as it related to the average census or patient day or patient volume/visits. That is a crude measure, and many other measures could be used. Nevertheless, at best, the break-even chart is a tool that will give you a rough idea of the activity level needed to remain solvent.

Figure 4-4 Graphical breakeven Description

Remember, the more detailed your cost analysis, the better this tool will work for you. A break-even analysis for a procedure will be more accurate than a break-even analysis for a unit or department. Similarly, a break-even analysis for a unit or

27293260 - Jones & Bartlett Learning ©

department will be more accurate than a break-even analysis for an entire healthcare firm. Unfortunately, at some point, the break-even point for the organization as a whole becomes the issue in question.

Mathematically, breakeven is calculated using the formula that follows. It indicates that one breaks even when the revenues equal the expenses. Because both revenues and variable costs are a function of activity level—in this case, patient days—we must know both the average cost and the average revenues as we add patients to the census. Given that, breakeven occurs when revenues per patient day equal fixed costs plus variable costs per patient day. The questions we want to answer are, How many patients do we need in house, on average, to break even? What is the break-even census?

Breakeven occurs when:

Revenues/Patient Day × Census = Fixed Costs + (Variable Costs/Patient Day × Census)

Assume the following data:

Average revenues per patient day $ 2,000

Average variable costs per patient day $ 110

Fixed costs per year $ 1,000,000

Revenues per Patient Day × Census = Fixed Costs + (Variable Costs per Patient Day × Census)

Calculate your answer for breakeven here, then compare it to the solution that follows:

Revenues per Patient Day × Census = Fixed Costs + Variable Costs per Patient Day × Census

$2,000 × Census = $1,000,000 + $110 × Census

(2,000 – 110) × Census = $1,000,000

Census = $1,000,000 / 1,890

Census = 529 per year

You can verify your answer:

Revenues/Patient Day × Census = Fixed Costs + (Variable Costs/Patient Day × Census)

$2,000 × 529 = $1,000,000 + ($110 × 529)

$1,058,190 = $1,000,000 + $58,190

Your answer may not be exact. First, these are estimated numbers, which is why we used the term average. You cannot be certain that your fixed costs will be $1,000,000, or that your average daily patient revenue will be $2,000, or that your average daily variable cost will be $110. What the break-even analysis has given you, however, is a rough estimate. If, as you move into the year, you find your estimates

27293260 - Jones & Bartlett Learning ©

of revenues or costs are significantly off target, or you find your average census is only 475 (versus 529), you can go back to the drawing board and change the underlying realities. This type of recalculation is of particular importance when unexpected events occur (e.g., natural disasters, pandemics) that have an immediate impact on any of these metrics in calculating the breakeven.

Similarly, if your variable revenues do not exceed your variable costs, you can never break even. If, in this example, the revenues per patient day had been $2,000 but the variable costs per patient day had totaled $2,001, no amount of activity will result in a break-even situation. You will lose $1 per patient day, and the harder you work, the deeper in a hole you will find yourself. This understanding of the fact that variable revenues must exceed variable costs leads to an alternative way to think about the break-even calculation. (Note: This is not a change in either the concept or the calculation. It is simply an approach that avoids the manipulation of an algebraic equation and is easier for some people to remember.)

1. Start with your fixed costs. They exist whether or not there are patients in the beds. To cover your fixed costs, you must make more revenues on the patients than you have costs caused by the patients. This “extra” revenue can then be used to cover your fixed costs.

2. Think about the revenues and the variable costs. These elements change with activity. In essence, if there were no patients in the beds, neither the revenue nor the variable cost exists. So, a patient, in a bed, creates both a variable revenue and a variable cost. The term for the difference between these two is contribution margin. Contribution margin is the amount available to contribute toward covering fixed costs. When you have just enough contribution margin to cover fixed costs, you arrive at breakeven:

27293260 - Jones & Bartlett Learning ©

Description

If one approach to calculating breakeven works, so will the other. Perhaps the most important concept of breakeven is the understanding that some costs and most revenues are a function of activity. As an example, consider the impact on costs that occurred with work-from-home (WFH) measures in response to the COVID-19 pandemic. Did all the organization’s costs cease because employees did not report to work at the firm? No. These are your fixed costs. (Consider: What costs incurred by the organization might have been positively impacted [reduced] due to WFH orders?)

Some costs, however (perhaps most costs in a typical small healthcare institution), are fixed and continue even after the shutdown point. When you consider actions that will improve profitability or reduce a loss situation, you must clearly identify which elements of cost and revenue you can best affect to improve profitability.

27293260 - Jones & Bartlett Learning ©

27293260 - Jones & Bartlett Learning ©

Budgeting Implications for Nurse Leaders The process of budgeting, both in annual preparation and in ongoing monitoring, consumes a large portion of the nurse leader’s time. The two primary components of a budget are costs and revenues. It is a clear expectation that variable costs are well budgeted, closely monitored, and any variances are quickly adjusted to positively impact an organization’s overall financial health status. And while revenue and fixed costs are often considered less vital to the role of the nurse leader, as healthcare organizations realign to provide a more patient-centric healthcare model, nurse leaders will be required to have a better understanding of the patient’s payer source and the impact this has on the revenue side of the budget.

Budget responsibilities usually include an evaluation of the adequacy of the budget and, at times, the development of a new budget. Budget evaluation is an important activity because a cost center budget may not have been thoroughly evaluated for some time. What has been appropriate for the past 10 years is not necessarily what is needed presently. This chapter is designed to help the nurse leader understand the foundational elements of budgeting.

In Chapter 4 we have introduced you to some of the key building blocks of finance. Nurse managers are accountable for arming themselves with a basic understanding of healthcare finance particularly as it is impacted by the department(s) for which they have financial accountability. While comprehending the terminology is a key stepping off point to having an understanding of financial budgeting, application of the budgeting techniques provide the nurse manager with more influence in the financial planning process. The budget building exercises in the following chapters are intended to build on the foundation of the accounting and budgeting principles previously discussed.

D I S C U S S I O N Q U E S T I O N S

1. As a nurse leader, how would you describe the concept of an operational budget to your staff in such a way for them to understand the importance of it on departmental operations?

2. Your charge nurses ask what they can do in their role to improve the unit’s “bottom line.” Which of the budgeting costs do you ask them to focus on and why?

3. What financial data are necessary for the nurse leader to calculate breakeven?

R E F E R E N C E S

Centers for Medicare & Medicaid Services. (n.d.). National health expenditures 2017 highlights. https://www.cms.gov/newsroom/press-releases/cms-office-actuary-releases-2019-national- health-expenditures

27293260 - Jones & Bartlett Learning ©

Peter G. Peterson Foundation. (2020, July 29). Budget basics: Medicare. https://www.pgpf.org/budget-basics/medicare

Rudowitz, R., Orgera, K., & Hinton, E. (2019, March 21). Medicaid financing: The basics. Kaiser Family Foundation. https://www.kff.org/medicaid/issue-brief/medicaid-financing-the- basics/view/print/

Umans, B., & Nonnemaker, K. L. (2009, January). The Medicare beneficiary population. AARP Public Policy Institute Fact Sheet. http://assets.aarp.org/rgcenter/health/fs149_medicare.pdf

27293260 - Jones & Bartlett Learning ©

controlling the outflow of money from an organization requires a watchful eye to minimize excessive spending that negatively impacts the inflow of revenue. Because cost control is a major function in the role of the nurse leader, having basic knowledge of cost concepts and their behavior is key to successfully maneuvering through cost management. Fundamental to cost control is an understanding of the relationship of fixed and variable costs.

Fixed Costs Fixed costs are those that are unchanged regardless of the level of activity. The first example of fixed costs is those costs that would exist even if the organization were shutdown: rent/mortgage, insurance, taxes, depreciation, a minimal level of utilities, etc. From a nursing perspective, fixed costs include those minimum costs that are always paid regardless of the volume of activity. Regardless of patient activity— whether measured by patient visits, patient acuity, or patient minutes, hours, or days —certain costs are always present. Additional examples include minimum staffing requirements, the nurse leader’s salary and benefits, and other cost center supplies that do not fluctuate with volume. Some consider these costs to be direct costs, or the costs of resources that are necessary to provide direct care to patients and are attributed to a particular unit, department, or patient. Some examples of direct costs include staff salaries and patient supplies (e.g., IV start kits, dressing supplies, etc.). Figure 4-1 depicts the nurse manager’s salary as a fixed cost. Also to consider are what some would identify as the indirect, or shared, costs related to patient care. These are costs that are specific to supporting the overall operation and cannot be traced to a particular cost object. Costs in this category include administration salaries, quality improvement/assurance staff, risk management functions, information technology/support, and infection control. Indirect costs, sometimes called overhead, are normally shared by all departments. Table 4-1 identifies costs for a nurse-managed clinic. Which of these are fixed costs and which ones are variable costs? See Table 4-1 for correct cost categories.

27293260 - Jones & Bartlett Learning ©

Figure 4-1 Fixed costs: Cost for a nurse manager

Table 4-1 Correct Cost Categories

Description

Variable Costs

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Variable costs are those that change, or fluctuate, depending on the level of activity or volume. In the healthcare environment, volume is a complex concept because volume not only includes the census numbers but also patient acuity, patient minutes/hours/days, and patient visits. Variable costs occur in addition to fixed costs to yield the organization’s total costs:

Total Costs = Fixed Costs + Variable Costs

Staffing, for example, beyond the minimum staffing requirements is a variable cost based on the variable patient census and acuity. The cost to provide staffing, which includes salaries, social security, and other benefit expenses are variable costs as these will fluctuate based on the number of hours of work required to meet the need of increased patient volume (e.g., patient census, patient visits, or patient acuity). Other typical variable costs are medical and surgical supplies, linen, and food costs. Variable costs vary in direct proportion to fluctuations in activity levels, as depicted in Figure 4-2.

Figure 4-2 Variable costs: Cost for supplies as unit volume increases

Table 4-2 illustrates variable and fixed costs for a nursing department’s budget.

Table 4-2 Variable and Fixed Costs for a Nursing Department’s Budget

27293260 - Jones & Bartlett Learning ©

Description

Revenue Concepts Revenue is the amount of money that is earned by an organization and is most easily explained as the charges billed to patients when services are provided for which the organization expects to be paid. There are two types of revenues:

actual (paid at the time services are rendered; e.g., copays, deductibles), and expected (payment that is expected sometime after the services are rendered; e.g., negotiated/contracted rates paid by the patient’s insurer).

The largest portion of healthcare reimbursement is based on expected revenue. Gross revenue is the sum of all charges for the care provided to the patient for all

services provided during an episode of care.

Net Revenue = Gross Revenue – Deductions from Revenue (Costs)

However, healthcare organizations can no longer expect, in most situations, to be reimbursed for full charges. Net revenue is calculated by deducting projected reductions in payment, such as fixed payments (e.g., diagnosis related group [DRG] payments from Medicare), contractual allowance (e.g., a negotiated amount contracted by insurance companies), and charity care (e.g., patients with no healthcare benefits who cannot afford to pay for charges) from the gross revenue (expected amount of payment).

Gross Payment – Projected Reductions in Payment = Net Revenue

Table 4-3 illustrates the calculation of projected net revenue based on a contractual allowance with an insurance payer source.

Table 4-3 Illustration of Net Revenue Calculation

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Description

There are three primary revenue sources for health care in the United States: Medicare, Medicaid, and other programs/self-pay. (For more information on the history of Medicare and Medicaid in the United States, see Chapter 1 or visit www.cms.gov.). Figure 4-3 depicts the approximate spending per annum by each of these payer sources.

27293260 - Jones & Bartlett Learning ©

Figure 4-3 U.S. primary payer sources spending per annum Data from https://www.statista.com/statistics/200962/percentage-of-americans-covered-by-

medicare/#:~:text=Medicare%20is%20an%20important%20public,increase%20from%20the%20previous% 20year. Retrieved 1/29/2021.

Medicare

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Currently, there are about 61.2 million beneficiaries—some 18.5% of the U.S. population—who are enrolled in the Medicare program, with enrollment expected to rise to 79 million by 2030 (Umans & Nonnemaker, 2009). Total spending from Medicare grew to $644 billion in 2019 (Peter G. Peterson Foundation, 2020).

Medicaid Although the Medicaid program is state specific, the program is both a federal and state matching entitlement program. Now, more than 75 million people in the United States receive their healthcare benefits through this program, with total spending reaching $576.6 billion in 2017 (Rudowitz et al., 2019).

Other Programs/Self-Pay Commercial payers make up the largest revenue stream for U.S. health care, although each individual market might see different payer mixes (or, sources for reimbursement of healthcare services identified by payer type). In 2020, the Centers for Medicare and Medicaid Services (CMS) reported that more than $3.8 trillion of healthcare revenue, or more than $11,582 per person in 2019, comes from private healthcare spending. Out-of-pocket spending, sometimes categorized as “self-pay” constitutes $406.5 billion of total healthcare spending in 2019 (CMS, n.d.).

Break-Even Analysis To stay in operation, the minimum long-term goal of any organization must be to at least break even. When breakeven occurs, the costs of operations equal the revenues. There is no profit and no loss. More revenues result in a profit, and fewer revenues (or more costs) result in a loss. Table 4-4 provides an example of breakeven depicted on a spreadsheet. When an entity operates below the break- even point, it must borrow money from a lending institution or pull from savings from earlier periods when profits were made. Clearly, these are short-term solutions, and when they are exhausted, the entity will be forced to close or sell.

Table 4-4 Example of Break-Even Analysis

Description

Breakeven can also be shown graphically and is based on the definitions of costs. Remember that there are two kinds of costs: fixed costs and variable costs. Figure 4-

27293260 - Jones & Bartlett Learning ©

4 provides a graphical representation of this break-even point. Notice that the variable costs begin to rise from the base of fixed costs—costs that continue even when activity drops to zero. The revenue line begins at zero—no activity, no billing. Thereafter, it climbs at a steady rate toward the upper right corner of the graph. The slope of the revenue line (the rate at which it climbs) is dependent on the rate of billing—the bigger the bills, the steeper the climb. Our revenue slope would be based on the total revenue as it related to the average census or patient day or patient volume/visits. That is a crude measure, and many other measures could be used. Nevertheless, at best, the break-even chart is a tool that will give you a rough idea of the activity level needed to remain solvent.

Figure 4-4 Graphical breakeven Description

Remember, the more detailed your cost analysis, the better this tool will work for you. A break-even analysis for a procedure will be more accurate than a break-even analysis for a unit or department. Similarly, a break-even analysis for a unit or

27293260 - Jones & Bartlett Learning ©

department will be more accurate than a break-even analysis for an entire healthcare firm. Unfortunately, at some point, the break-even point for the organization as a whole becomes the issue in question.

Mathematically, breakeven is calculated using the formula that follows. It indicates that one breaks even when the revenues equal the expenses. Because both revenues and variable costs are a function of activity level—in this case, patient days—we must know both the average cost and the average revenues as we add patients to the census. Given that, breakeven occurs when revenues per patient day equal fixed costs plus variable costs per patient day. The questions we want to answer are, How many patients do we need in house, on average, to break even? What is the break-even census?

Breakeven occurs when:

Revenues/Patient Day × Census = Fixed Costs + (Variable Costs/Patient Day × Census)

Assume the following data:

Average revenues per patient day $ 2,000

Average variable costs per patient day $ 110

Fixed costs per year $ 1,000,000

Revenues per Patient Day × Census = Fixed Costs + (Variable Costs per Patient Day × Census)

Calculate your answer for breakeven here, then compare it to the solution that follows:

Revenues per Patient Day × Census = Fixed Costs + Variable Costs per Patient Day × Census

$2,000 × Census = $1,000,000 + $110 × Census

(2,000 – 110) × Census = $1,000,000

Census = $1,000,000 / 1,890

Census = 529 per year

You can verify your answer:

Revenues/Patient Day × Census = Fixed Costs + (Variable Costs/Patient Day × Census)

$2,000 × 529 = $1,000,000 + ($110 × 529)

$1,058,190 = $1,000,000 + $58,190

Your answer may not be exact. First, these are estimated numbers, which is why we used the term average. You cannot be certain that your fixed costs will be $1,000,000, or that your average daily patient revenue will be $2,000, or that your average daily variable cost will be $110. What the break-even analysis has given you, however, is a rough estimate. If, as you move into the year, you find your estimates

27293260 - Jones & Bartlett Learning ©

of revenues or costs are significantly off target, or you find your average census is only 475 (versus 529), you can go back to the drawing board and change the underlying realities. This type of recalculation is of particular importance when unexpected events occur (e.g., natural disasters, pandemics) that have an immediate impact on any of these metrics in calculating the breakeven.

Similarly, if your variable revenues do not exceed your variable costs, you can never break even. If, in this example, the revenues per patient day had been $2,000 but the variable costs per patient day had totaled $2,001, no amount of activity will result in a break-even situation. You will lose $1 per patient day, and the harder you work, the deeper in a hole you will find yourself. This understanding of the fact that variable revenues must exceed variable costs leads to an alternative way to think about the break-even calculation. (Note: This is not a change in either the concept or the calculation. It is simply an approach that avoids the manipulation of an algebraic equation and is easier for some people to remember.)

1. Start with your fixed costs. They exist whether or not there are patients in the beds. To cover your fixed costs, you must make more revenues on the patients than you have costs caused by the patients. This “extra” revenue can then be used to cover your fixed costs.

2. Think about the revenues and the variable costs. These elements change with activity. In essence, if there were no patients in the beds, neither the revenue nor the variable cost exists. So, a patient, in a bed, creates both a variable revenue and a variable cost. The term for the difference between these two is contribution margin. Contribution margin is the amount available to contribute toward covering fixed costs. When you have just enough contribution margin to cover fixed costs, you arrive at breakeven:

27293260 - Jones & Bartlett Learning ©

Description

If one approach to calculating breakeven works, so will the other. Perhaps the most important concept of breakeven is the understanding that some costs and most revenues are a function of activity. As an example, consider the impact on costs that occurred with work-from-home (WFH) measures in response to the COVID-19 pandemic. Did all the organization’s costs cease because employees did not report to work at the firm? No. These are your fixed costs. (Consider: What costs incurred by the organization might have been positively impacted [reduced] due to WFH orders?)

Some costs, however (perhaps most costs in a typical small healthcare institution), are fixed and continue even after the shutdown point. When you consider actions that will improve profitability or reduce a loss situation, you must clearly identify which elements of cost and revenue you can best affect to improve profitability.

27293260 - Jones & Bartlett Learning ©

27293260 - Jones & Bartlett Learning ©

Budgeting Implications for Nurse Leaders The process of budgeting, both in annual preparation and in ongoing monitoring, consumes a large portion of the nurse leader’s time. The two primary components of a budget are costs and revenues. It is a clear expectation that variable costs are well budgeted, closely monitored, and any variances are quickly adjusted to positively impact an organization’s overall financial health status. And while revenue and fixed costs are often considered less vital to the role of the nurse leader, as healthcare organizations realign to provide a more patient-centric healthcare model, nurse leaders will be required to have a better understanding of the patient’s payer source and the impact this has on the revenue side of the budget.

Budget responsibilities usually include an evaluation of the adequacy of the budget and, at times, the development of a new budget. Budget evaluation is an important activity because a cost center budget may not have been thoroughly evaluated for some time. What has been appropriate for the past 10 years is not necessarily what is needed presently. This chapter is designed to help the nurse leader understand the foundational elements of budgeting.

In Chapter 4 we have introduced you to some of the key building blocks of finance. Nurse managers are accountable for arming themselves with a basic understanding of healthcare finance particularly as it is impacted by the department(s) for which they have financial accountability. While comprehending the terminology is a key stepping off point to having an understanding of financial budgeting, application of the budgeting techniques provide the nurse manager with more influence in the financial planning process. The budget building exercises in the following chapters are intended to build on the foundation of the accounting and budgeting principles previously discussed.

D I S C U S S I O N Q U E S T I O N S

1. As a nurse leader, how would you describe the concept of an operational budget to your staff in such a way for them to understand the importance of it on departmental operations?

2. Your charge nurses ask what they can do in their role to improve the unit’s “bottom line.” Which of the budgeting costs do you ask them to focus on and why?

3. What financial data are necessary for the nurse leader to calculate breakeven?

R E F E R E N C E S

Centers for Medicare & Medicaid Services. (n.d.). National health expenditures 2017 highlights. https://www.cms.gov/newsroom/press-releases/cms-office-actuary-releases-2019-national- health-expenditures

27293260 - Jones & Bartlett Learning ©

Peter G. Peterson Foundation. (2020, July 29). Budget basics: Medicare. https://www.pgpf.org/budget-basics/medicare

Rudowitz, R., Orgera, K., & Hinton, E. (2019, March 21). Medicaid financing: The basics. Kaiser Family Foundation. https://www.kff.org/medicaid/issue-brief/medicaid-financing-the- basics/view/print/

Umans, B., & Nonnemaker, K. L. (2009, January). The Medicare beneficiary population. AARP Public Policy Institute Fact Sheet. http://assets.aarp.org/rgcenter/health/fs149_medicare.pdf