This document discusses several key concepts in healthcare finance including budgets, costs, financial statements, and payor sources. It explains that nurses should recognize the financial impact of daily decisions and be aware of concepts like staffing costs, supplies, budgets, revenue sources, and payor mix. The document provides examples of operating budgets, capital budgets, variance analysis, and break-even analysis. It also outlines major sources of healthcare payment including Medicare, Medicaid, managed care, and fee for service.

1. Health Care Finance Issues
SXU 2017 Diann Martin, PhD, RN

2. Major Concepts in FINANCE
 Budget ; operating budget, annual budget, capital budget
 COSTS: fixed, variable
 Variance Analysis
 Financial Statements
 Cost/Benefit Analysis
 Break Even Analysis

3. Nursing Responsibilities
 Recognize financial impact of daily decisions
 Staffing, salaries, scheduling, case-mix
 Supplies and services
 Cost vs Quality Decisions
 Avoiding rework, waste and duplication of expenses
 Awareness of financial plan and financial well being of facility
 Payor mix and revenue cycle

4. Budgets in Healthcare
 Operating Budget: annual financial plan for the facility matches revenue (by source) with
expenses
 Capital budget: generally funds large asset purchases for equipment, facilities and programs –can
be depreciated overtime and listed as a resource on the balance sheet of the facility
 Variance analysis: periodic (monthly) matching of revenue with expenses to track net income or
revenue as a snap shot of financial health of the entity
 Contractual allowance: difference between gross charges and revenue paid by a billng source –
similar to a discount-often negotiated by 3rd party payors
 Payor mix: the % of income from various payors –each is likely to be different and many are less
than charges

5. Payor Sources
 Governmental
 Medicare: pays based on DRGs via prospective payment that is diagnostic specific and adjusted for age,
complications and comorbidities
 Now pay for performance adjusted ie, readmission within 30 days with same diagnosis, complications
 Medicaid: state funded, usually a per diem rate that varies by state –some are below cost and some are
at cost, state has final rate setting responsibility and coverage criteria
 Managed care: generally negotiates a daily or per case rate
 Fee for service: based on cost of care or a % of cost

6. Budget Process
 Determine payor mix, expected service delivery by unit or service line
 Adjust total revenue for contractual allowances and discounts
 Calculate gross revenue and income from non patient care services
 Determine expenses : labor and supplies are largest components
 Fixed
 Variable
 Capital budget to fund large projects and services >10,000/year
 Approval by governing body

7. Break Even Analysis
 A break-even analysis is an analysis to determine the point at which revenue received equals the
costs associated with receiving the revenue. Break-even analysis calculates what is known as
a margin of safety, the amount that revenues exceed the break-even point. This is the amount
that revenues can fall while still staying above the break-even point.
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8. Break Even Example : TENS UNITS
 Break-even analysis is a supply-side analysis; that is, it only analyzes the costs of the sales. It does not
analyze how demand may be affected at different price levels.
 For example, if it costs $50 to produce a TENS Unit , and there are fixed costs of $1,000, the break-
even point for selling the widgets would be:
 If selling for $100: 20 TENS UNITS(Calculated as 1000/(100-50)=20)
 If selling for $200: 7 TENS UNITS (Calculated as 1000/(200-50)=6.7)
 In this example, if someone sells the product for a higher price, the break-even point will come faster.
What the analysis does not show is that it may be easier to sell 20 TENS Units at $100 each than 7
TENS UNITS at $200 each. A demand-side analysis would give the seller that information.

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