Budgeting
Camille Bash, CPA, FHFMA, MBA, MA
Director of Finance
Doctors Community Hospital
March 30, 2012
Discussion Outline
• Budget Landscape
• Board Strategic Goals
• Budget Timeline
• Components of an Operating Budget
• Benchmarks and Development
• Capital Planning
• Cash Flow Budget
• Board Presentation
1
Impact of Global Economic Crisis
• Healthcare providers across the nation facing tremendous
financial pressures
– Operating revenues severely constrained by shortfalls in volume
growth
– This includes Maryland hospitals and physicians
• Strategic spending priorities still exist (i.e. capital,
physicians, info technology)
• Healthcare reform/affordability is in the spotlight.
– Cost reduction has become a national priority.
2
Healthcare Reform Landscape
Near-Term Maryland Environment:
•
HSCRC constraining hospital rate increases
– Maryland state budget still under stress
– Medicaid expansion greater than anticipated
•
HSCRC deploying many new methodologies
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Admission-Readmission Revenue (ARR) payment structure (32 hospitals)
Total Patient Revenue (TPR) payment structure (10 hospitals)
Observation / 1 Day Stays
Outpatient case mix system (not the CPV)
Potentially preventable complications
Longer-Term: (Federal Reform)
•
Introduction of new incentive payment systems
– Patient centered medical homes , Medicare accountable care, bundled payments
•
State has embraced healthcare reform
– Maryland rate setting system will continue to evolve at an accelerated pace
3
Discussion Outline
• Budget Landscape
• Board Strategic Goals
• Budget Timeline
• Components of an Operating Budget
• Benchmarks and Development
• Capital Planning
• Cash Flow Budget
• Board Presentation
4
What they’re talking about in the Boardroom?
• Strategic Initiatives
– New programs, services, technology
– Physician integration
• Quality, Customer Satisfaction, Patient Safety
• Community Wellness
• Motivated Workforce
– Satisfaction
– Wage rates and benefit plan design
– Growth and development training
• Corporate Compliance
• Financial Strength and Stability
• Covenants
5
New Roles and Focus
• Change in focus:
– Volume growth may no longer be a primary performance driver
– Frees us to ask: What is the best care setting for the patient?
– Broadens our view of services beyond just those provided in the
hospital
• Incented to:
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–
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Eliminate over-utilization and over testing
Reduce re-admissions
Engage in primary care and disease management programs
Promote wellness
• Moves us toward being more accountable for care integration
and what happens to our patients outside of the hospital
6
Hospital Boards are facing a financially
challenging environment
Operating
Revenues
“New
Soft Volumes, Difficult
Payment Environment
Normal”
Cost pressures from
Operating
Must operate successfully
under
multiple sources,
Expenses
physician integration,
very tight financial constraints
in
technology and facilities
the healthcare environment of the
future.Declining operating
Operating Income
margins
7
Hospital Boards are facing a financially
challenging environment
Cash Inflows
New payment methods
and forms
Cash Outflows
Payments to vendors,
sister companies, loan
and capital payments
Bank Balances
fluctuating cash balances
8
Discussion Outline
• Budget Landscape
• Board Strategic Goals
• Budget Timeline
• Components of an Operating Budget
• Benchmarks and Development
• Capital Planning
• Cash Flow Budget
• Board Presentation
9
Budget Process Timeline
• Monthly
– Discuss any budget variances with Operational and Finance Staff
• February – Executive Team and Finance Department Staff
– Assess current year financial performance and develop year-end projection
– Develop “Early Outlook” for budget year operating performance
• Establish performance improvement targets
•
– Begin quiet phase of budget preparation for high cost areas
– Focus on number of admissions and visits assumptions
– Discuss CMI results and assumptions
March – Finance and Operational Staff
– Management team roll-out of key assumptions used in “Early Outlook”
– Departments begin budget preparation in earnest
– Submit proposals for new programs and FTE requests
– Submit requests for new or replaced capital
10
Budget Process Timeline
• April – Finance and Operational Staff
– Review departmental budget submissions
– Follow-up meetings
– Prepare 1st pass of operating budget
– Review new program / new position requests
• May – Executive Team involvement
– Regroup
– Assess impact of late breaking information and finalize organizational
budget
– Present to Finance Committee of Board seeking approval
recommendation
• June
– Board Approval
11
Discussion Outline
• Budget Landscape
• Board Strategic Goals
• Budget Timeline
• Components of an Operating Budget
• Benchmarks and Development
• Capital Planning
• Cash Flow Budget
• Board Presentation
12
Revenues
Components of an Operating
Budget
• Volumes / Utilization
Consolidated
(000's Omitted)
Projected
FY 2012
Net Operating Revenue
(Based on Dept Activity)
Departmental Expenses:
Salaries and Benefits
Services and Fees
Supplies and Drugs
Subtotal
$150,000
$82,000
30,000
23,000
$135,000
Income before Capital
$15,000
10.0%
Capital Expenses (Depr./Int)
Total Expenses
$10,500
$145,500
Operating Income
$4,500
3.0%
• HSCRC Rate Increases
• Case Mix
• Payor Contracts / Denials
• Assessments
• Medicare Rate Updates
• Other operating revenues (café, rents, etc..)
Departmental Expenses
• Volumes / Utilization
• Expense Inflation
• Wage Rates / Market Adj.
• Benefit Design
• Info. Technology
• Agency Utilization
• New Programs
•New Positions
Capital Expenses
• Capital Spending
• Interest Rates
•Existing Debt
•New Debt
13
Discussion Outline
• Budget Landscape
• Board Strategic Goals
• Budget Timeline
• Components of an Operating Budget
• Benchmarks and Development
• Capital Planning
• Cash Flow Budget
• Board Presentation
14
Why do you benchmark?
• Compare your departmental activity to:
–
–
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The state averages
Your competitor or peer groups
Your prior year activity
The current year activity
• Plan for changes within your organization
– Growth
– New business lines
• Plan for changes within the state’s goals
–
–
–
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Reduce preventable readmissions
Increase observation
Reduce one-day stays
Expand outpatient services
15
Volume: Key Definition
Definitions:
Volume is the activity that can be counted in a department
and is used to apply rates to develop the revenue for services.
Examples of volumes or statistics are:
patient days
admissions
visits
RVUs
tests or procedures
treatments
16
Review Departmental Activity to develop
next year Budgeted Volumes
Benchmark Volumes (prior year, competitor, state averages)
Inpatient
1 Lab Tests
2 Hospital Volume
Outpatient
2,000,000
45,000 Days
3 Test Use Rate
44 Test/Day
Total
2,200,000
72,000 Visits
31
4,200,000
Test/Visit
Current YTD Volumes (5 Months)
Inpatient
1 Lab Tests
2 Hospital Volume
3 Test Use Rate
Outpatient
2,025,000
45,000 Days
45
Test/Day
2,160,000
72,000 Visits
Total
4,185,000
30 Test/Visit
Projected YTD Volumes (12 Months)
3 Test Use Rate
2 Hospital Volume @ growth of 1%
1 Lab Tests
45
Test/Day
45,450 Days
2,045,250 Tests
31
Test/Visit
72,720 Visits
2,222,000 Tests
4,267,250
Plan to discuss why the activity is different from the benchmark
17
FTE: Key Definition
Definitions:
FTE - Full Time Equivalent
1.0 FTE = 40hrs per wk or 80hrs per pay or 2,080hrs per year
Worked Hours - Regular and Overtime Hours paid
NPPD Hours – (nursing per patient day) Education, PTO, Holiday
18
New Position/Program Submission
Justification
• Result in improved customer satisfaction
• Result in improved quality outcomes
• Meet regulatory compliance requirement
• Result in improved patient care
• Result in improved associate satisfaction
• Result in future cost avoidance
• Generate new revenue
• Result in current cost reduction
19
New Position/Program Submission
Justification
Submission should specifically address:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Goals/Objectives
What data have you reviewed?
What alternatives have you considered?
Is there an opportunity to restructure your organizational structure?
Workload impact (patient volumes or non-patient volume measure)
Financial impact
Three to one ROI much better than one to one
Timing: Implementation plan
Staffing: Internal or external recruitment
Impact to other departments
Space or I/T or equipment requirements
Coordination with other providers
Hours of operation
What is your measure of success?
20
New Position/Program Submission
Justification
Submission should specifically address:
• Goals/Objectives
•• What

Result
Have
your
inhave
improved
submission
customer
as fullysatisfaction
developed as possible
data
you reviewed?
• What alternatives have you considered?
•• IsEncourage

Result
improved
you to collaborate
outcomes
with
other departments
in
there aninopportunity
toquality
restructure
your organizational
structure?
• Workload
impactyour
(patient
volumes or non-patient volume measure)
developing
submission:
•• Financial
Meet regulatory
compliance requirement
impact
 Finance
• Three
to one ROI much better than one to one
•• Timing:
Result
in improved
care
Human
Resources patient
Implementation
plan
Internal
or external recruitment
 Business
Development
••• Staffing:
Result
in
improved
associate satisfaction
Impact
to other
departments
 Supply
Chain
– Materials Management
or I/T
or equipment
requirements
 Information
Systems
•• Space
Result
in future
cost avoidance
• Coordination
with other providers
 Facilities
of operation
•• Hours
Generate
new revenue
• What is your measure of success?
• Result in current cost reduction
21
Develop an FTE Budget (Staffing Plan) based on
Departmental Activity or Fixed Components:
• 3 Lab Technicians (working 8 hour shifts) required M-F
- number of tests to accomplish tests
• 2 Lab Technicians (working 12 hour shifts) required on Sa-Su
- number of tests to accomplish tests
• 1 FT Department Manager (FIXED)
• 1 FT Admin. Assistant (FIXED)
22
Develop Other Expense based on
Departmental Activity or Fixed Components:
• Based on Departmental Activity levels, such as
– Supplies
– Equipment repairs
• Fixed Activity, such as
– Equipment maintenance
– Staff functions
23
Develop Overhead Expenses
•
•
•
•
•
Depreciation
Interest Expense
Rent and leases
Employee Benefits
Support Departments:
– Accounting
– Plant Ops
– Executive Management
24
Benchmarking – Planning - Budgeting
• “Plans are of little importance, but planning is essential” –
Winston Churchill
• “Plans are worthless, but planning is everything” - Dwight D.
Eisenhower
• “The success of a project will depend critically upon the effort,
care, and skill you apply in the initial planning” - Gerald M.
Blair, U.S. writer
• “Preparation is everything. Noah did not start building the ark
when it was raining.” - Warren Buffet
25
Budget Year 2013 Early Outlook
Net Operating Revenue
Departmental Expenses:
Salaries and Benefits
Services and Fees
Supplies and Drugs
Subtotal
Consolidated
Consolidated
(000's Omitted)
(000's Omitted)
Projected
Projected
FY 2012
FY 2013
$150,000
1.5% Growth
$152,250
$82,000
30,000
23,000
$135,000
3.0% Growth
3.0% Growth
3.0% Growth
$84,460
30,900
23,690
$139,050
Income before Capital
$15,000
10.0%
$13,200
8.7%
Capital Expenses (Depr./Int)
Total Expenses
$10,500
$145,500
$10,815
$149,865
Operating Income
$4,500
3.0%
$2,385
1.6%
26
Budget Year 2013 Early Outlook
Net Operating Revenue
Departmental Expenses:
Salaries and Benefits
Services and Fees
Supplies and Drugs
Subtotal
Consolidated
Consolidated
(000's Omitted)
(000's Omitted)
Projected
Projected
FY 2012
FY 2013
$150,000
1.5% Growth
$152,250
$82,000
30,000
23,000
$135,000
4.0% Growth
4.0% Growth
4.0% Growth
$85,280
31,200
23,920
$140,400
Income before Capital
$15,000
10.0%
$11,850
7.8%
Capital Expenses (Depr./Int)
Total Expenses
$10,500
$145,500
$10,920
$151,320
Operating Income
$4,500
3.0%
$930
0.6%
27
Discussion Outline
• Budget Landscape
• Board Strategic Goals
• Budget Timeline
• Components of an Operating Budget
• Benchmarks and Development
• Capital Planning
• Cash Flow Budget
• Board Presentation
28
Capital Planning Process
• Evaluation of health system’s ability to fund
future capital spending needs
– Five year forecast (Budget is 1st year of the forecast)
– Quantifies funding capacity in terms of projected
cash flow, borrowing, and fund raising
– Matches projected funding sources with spending
needs
– Analyzes potential impact on credit rating
29
Capital Planning Goals
• Support development of services and programs
– Generate sufficient capital resources to meet future
spending needs
• Position health system to be financially strong
– Maintain strong investment grade credit rating
30
Sources and Uses
(000's Om itted)
Uses:
Capital Spending Needs
$200,000
Sources:
Cash Flow / Reserves
Fundraising/Grants
New Borrowing
Total Sources
$100,000
$25,000
$75,000
$200,000
31
Discussion Outline
• Budget Landscape
• Board Strategic Goals
• Budget Timeline
• Components of an Operating Budget
• Benchmarks and Development
• Capital Planning
• Cash Flow Budget
• Board Presentation
32
Cash Receipts and Disbursements
(000's Om itted)
Cash Receipts
Patient Billings
$150,000,000
Other Revenue
300,000
Interest Income
100,000
Total Receipt
$150,400,000
Cash Disbursements
Wages, Temps, Benefits
Supplies and Drugs
Services and Supplies
Capital and Loan Payments
Total Disbursements
Net change in cash
$82,000,000
23,000,000
30,000,000
10,200,000
$145,200,000
$5,200,000
33
Discussion Outline
• Budget Landscape
• Board Strategic Goals
• Budget Timeline
• Components of an Operating Budget
• Benchmarks and Development
• Capital Planning
• Cash Flow Budget
• Board Presentation
34
Board Presentation
• Executive Summary
– who we are and where we are going
•
•
•
•
•
General Assumptions
HSCRC Assumptions
Stretch Goals not in Budget but possible
Covenants and Credit Ratings
Today, Projected Year-end, Budget
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Volume
Operating Statement
Capital Budget
Cash Flow
35
Credit Rating Profile
Operating Ratios
Benchmark (Moody's 2009)
Released August 2010
Operating Cash Flow Margin
(Operating EBIDA)
9.9%
8.1%
A3-rating
Baa1-rating
Operating Margin
2.6%
1.6%
A3-rating
Baa1-rating
10 yrs
10.5 yrs
A3-rating
Baa1-rating
Debt Service Coverage
4.1x
3.4x
A3-rating
Baa1-rating
Debt to Capitalization
41%
51%
A3-rating
Baa1-rating
153
118
A3-rating
Baa1-rating
Average Age of Plant
Days Cash on Hand
36
Budgeting
Questions and Discussions
Next – Case Study
Camille Bash
Director of Finance
Doctors Community Hospital
March 30, 2012