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Budgeting Camille Bash, CPA, FHFMA, MBA, MA Director of Finance Doctors Community Hospital March 30, 2012
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Budgeting
Camille Bash, CPA, FHFMA, MBA, MADirector of Finance
Doctors Community Hospital
March 30, 2012
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Discussion Outline • Budget Landscape• Board Strategic Goals• Budget Timeline• Components of an Operating Budget• Benchmarks and Development• Capital Planning • Cash Flow Budget• Board Presentation
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.
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Healthcare Reform LandscapeNear-Term Maryland Environment:• HSCRC constraining hospital rate increases
– Maryland state budget still under stress – Medicaid expansion greater than anticipated
• HSCRC deploying many new methodologies– 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
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Discussion Outline • Budget Landscape• Board Strategic Goals• Budget Timeline• Components of an Operating Budget• Benchmarks and Development• Capital Planning • Cash Flow Budget• Board Presentation
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
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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:– 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
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Hospital Boards are facing a financially challenging environment
Operating Revenues
Operating Expenses
Operating Income
Soft Volumes, Difficult Payment Environment
Cost pressures from multiple sources, physician integration, technology and facilities
Declining operating margins
“New Normal”
Must operate successfully under very tight financial constraints in the healthcare environment of the
future.
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Hospital Boards are facing a financially challenging environment
Cash Inflows
Cash Outflows
Bank Balances
New payment methods and forms
Payments to vendors, sister companies, loan and capital payments
fluctuating cash balances
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Discussion Outline • Budget Landscape• Board Strategic Goals• Budget Timeline• Components of an Operating Budget• Benchmarks and Development• Capital Planning • Cash Flow Budget• Board Presentation
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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
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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
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Discussion Outline • Budget Landscape• Board Strategic Goals• Budget Timeline• Components of an Operating Budget• Benchmarks and Development• Capital Planning • Cash Flow Budget• Board Presentation
Components of an Operating BudgetConsolidated(000's Omitted)Projected
FY 2012
Net Operating Revenue $150,000 (Based on Dept Activity)Departmental Expenses: Salaries and Benefits $82,000 Services and Fees 30,000 Supplies and Drugs 23,000 Subtotal $135,000
Income before Capital $15,00010.0%
Capital Expenses (Depr./Int) $10,500 Total Expenses $145,500
Operating Income $4,5003.0% Capital Expenses
• Capital Spending• Interest Rates
•Existing Debt•New Debt
Departmental Expenses• Volumes / Utilization• Expense Inflation
• Wage Rates / Market Adj.• Benefit Design• Info. Technology• Agency Utilization
• New Programs•New Positions
Revenues• Volumes / Utilization• HSCRC Rate Increases• Case Mix• Payor Contracts / Denials• Assessments• Medicare Rate Updates• Other operating revenues (café, rents, etc..)
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Discussion Outline • Budget Landscape• Board Strategic Goals• Budget Timeline• Components of an Operating Budget• Benchmarks and Development• Capital Planning • Cash Flow Budget• Board Presentation
Why do you benchmark?• Compare your departmental activity to:
– 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– Reduce preventable readmissions– Increase observation– Reduce one-day stays– Expand outpatient services
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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 daysadmissionsvisitsRVUstests or procedurestreatments
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Review Departmental Activity to develop next year Budgeted Volumes
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Benchmark Volumes (prior year, competitor, state averages)
Inpatient Outpatient Total
1 Lab Tests 2,000,000 2,200,000 4,200,0002 Hospital Volume 45,000 Days 72,000 Visits
3 Test Use Rate 44 Test/Day 31 Test/Visit
Current YTD Volumes (5 Months)
Inpatient Outpatient Total
1 Lab Tests 2,025,000 2,160,000 4,185,0002 Hospital Volume 45,000 Days 72,000 Visits
3 Test Use Rate 45 Test/Day 30 Test/Visit
Projected YTD Volumes (12 Months)
3 Test Use Rate 45 Test/Day 31 Test/Visit2 Hospital Volume @ growth of 1% 45,450 Days 72,720 Visits1 Lab Tests 2,045,250 Tests 2,222,000 Tests 4,267,250
Plan to discuss why the activity is different from the benchmark
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
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New Position/Program SubmissionJustification
• 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
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New Position/Program SubmissionJustification
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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?
New Position/Program SubmissionJustification
• 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
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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?
Have your submission as fully developed as possible Encourage you to collaborate with other departments in
developing your submission: Finance
Human Resources Business Development Supply Chain – Materials Management Information Systems Facilities
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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)
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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
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Develop Overhead Expenses• Depreciation• Interest Expense• Rent and leases• Employee Benefits• Support Departments:
– Accounting– Plant Ops– Executive Management
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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
Budget Year 2013 Early OutlookConsolidated Consolidated(000's Omitted) (000's Omitted)
Projected Projected
FY 2012 FY 2013
Net Operating Revenue $150,000 $152,250
Departmental Expenses: Salaries and Benefits $82,000 $84,460 Services and Fees 30,000 30,900 Supplies and Drugs 23,000 23,690 Subtotal $135,000 $139,050
Income before Capital $15,000 $13,20010.0% 8.7%
Capital Expenses (Depr./Int) $10,500 $10,815 Total Expenses $145,500 $149,865
Operating Income $4,500 $2,3853.0% 1.6%
1.5% Growth
3.0% Growth3.0% Growth3.0% Growth
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Budget Year 2013 Early OutlookConsolidated Consolidated(000's Omitted) (000's Omitted)
Projected Projected
FY 2012 FY 2013
Net Operating Revenue $150,000 $152,250
Departmental Expenses: Salaries and Benefits $82,000 $85,280 Services and Fees 30,000 31,200 Supplies and Drugs 23,000 23,920 Subtotal $135,000 $140,400
Income before Capital $15,000 $11,85010.0% 7.8%
Capital Expenses (Depr./Int) $10,500 $10,920 Total Expenses $145,500 $151,320
Operating Income $4,500 $9303.0% 0.6%
1.5% Growth
4.0% Growth4.0% Growth4.0% Growth
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Discussion Outline • Budget Landscape• Board Strategic Goals• Budget Timeline• Components of an Operating Budget• Benchmarks and Development• Capital Planning • Cash Flow Budget
• Board Presentation
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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
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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
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Sources and Uses(000's Omitted)
Uses:
Capital Spending Needs $200,000
Sources:
Cash Flow / Reserves $100,000Fundraising/Grants $25,000New Borrowing $75,000
Total Sources $200,000
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Discussion Outline • Budget Landscape• Board Strategic Goals• Budget Timeline• Components of an Operating Budget• Benchmarks and Development• Capital Planning • Cash Flow Budget
• Board Presentation
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Cash Receipts and Disbursements(000's Omitted)
Cash ReceiptsPatient Billings $150,000,000Other Revenue 300,000 Interest Income 100,000
Total Receipt $150,400,000
Cash DisbursementsWages, Temps, Benefits $82,000,000Supplies and Drugs 23,000,000 Services and Supplies 30,000,000 Capital and Loan Payments 10,200,000
Total Disbursements $145,200,000
Net change in cash $5,200,000
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Discussion Outline • Budget Landscape• Board Strategic Goals• Budget Timeline• Components of an Operating Budget
• Benchmarks and Development• Capital Planning • Cash Flow Budget
• Board Presentation
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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
– Volume– Operating Statement– Capital Budget– Cash Flow
Operating Ratios
Benchmark (Moody's 2009) Released August 2010
Operating Cash Flow Margin 9.9% A3-rating(Operating EBIDA) 8.1% Baa1-rating
Operating Margin 2.6% A3-rating1.6% Baa1-rating
Average Age of Plant 10 yrs A3-rating10.5 yrs Baa1-rating
Debt Service Coverage 4.1x A3-rating3.4x Baa1-rating
Debt to Capitalization 41% A3-rating51% Baa1-rating
Days Cash on Hand 153 A3-rating118 Baa1-rating
Credit Rating Profile
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BudgetingQuestions and Discussions
Next – Case Study
Camille BashDirector of Finance
Doctors Community Hospital
March 30, 2012
