4209- Fiscal Planning & DRGs

Presented by Teri Pierce, MSN, RNNsg 401

Rev. Fall 10

Fiscal Planning

1. Not intuitive; it is a learned skill that improves with practice.

2. An important but often neglected dimension of planning.

Fiscal Planning

1. Should reflect the philosophy, goals, and objectives of the organization

2. Increasingly critical to nursing managers because of increased emphasis on finance and the business side of health care

3. NM’s role: Understanding fiscal terminology and maintaining a cost-effective unit

Cost Containment• Refers to effective and efficient delivery of services

while generating needed revenues for continued organizational productivity

• Responsibility of every health care provider

• Viability of most health care organizations today depends on wise use of resources

• Not the same as being inexpensive

• Defined by the American Heritage Dictionary of the English Language (2005) as “economical in terms of the goods or services received for the money spent.” (A product is worth the price)

• Cost does not always equate to quality in terms of health care

Cost Effective

Responsibility Accounting Each of an organization’s revenues, expenses, assets, and liabilities is someone’s responsibility.

Person with the most direct control is held accountable (unit level= nurse manager)

Budget

• A plan that uses numerical data to predict the activities of an organization over a period of time

• Desired outcome- maximal use of resources to meet organizational short- and long-term needs

• Provides a mechanism for planning and control and

promotes each unit’s needs and contributions

Steps in the Budgetary Process

Forecasting

Forecasting involves making an educated budget estimate using historical data.

Types of Budgets1. Personnel or workforce2. Operating3. Capital4. Continuous or perpetual5. Fiscal year

• Largest of the budget expenditures

• Reason: health care is labor intensive• Takes a lot of people to run a hospital• Don’t want to be overstaffed or understaffed

Personnel Budget

• Productive/Worked Time• Worked hours• Overtime• Per diem

Personnel Budget

• Nonproductive Time• Cost of benefits• New employee

orientation• Employee turnover• Sick time• Holiday time• Education time• Breaks

Nursing Care Hours Per Patient Day (NCH/PPD)

Total hours worked by nursing staff in a 24-hour period

patient census at the end of that 24-hour period

FTE Formula(Full Time Equivalent)

Total hours worked by a nurse (over 7 days)

40 hours

FTE’s

Operating Budget

• Involves all managers• After personnel costs, 2nd most significant

component of hospital budget• Reflects expenses that change in response to

the volume of service• Examples

Capital Budget• Plans for the purchase of buildings or major medical

equipment • Includes equipment that has a long life • Equipment not used in daily operations• Equipment is more expensive than operating supplies• May have to exceed a certain $ amount • Annual or semi-annual• May also be called capital expenditures• Examples

Budgeting Methods• Incremental budgeting– Not very cost effective, predicts for next year

• Zero-based budgeting– Decision package – that’s how you set your priorities for what

you want in your budget– Each year you start over from ground zero, can’t assume that

because it was included last year that it will be included this year

• Flexible budgeting– Varies with volume and labor, calculates what you need based

on your bottom? Who knows• New performance budgeting– Based on outcomes, like home health wants new glucometers,

keeps track of how these new ones work better than the old ones, to justify need for new ones

Critical Pathways

Also called clinical pathways

Definition- standardized prediction of patients’ progress for a specific diagnosis or procedure

Length of stay (LOS)

Variance analysis - may be justifiable… ?

Other Budgeting Terms

• Direct costs– Attributed to direct source, like medication. You can

track exactly where they came from and where they went

• Indirect costs– We can’t attribute to a specific source, usually more

hidden costs, usually spread out over all departments, like housekeeping. Everyone in the hospital needs housekeeping

Other Budgeting Terms

• Controllable costs– Staffing ratios, staffing mix (more LVN’s vs less

RN’s), the type of materials you buy

• Uncontrollable costs– Equipment depreciation, the number and type of

supplies that pt’s need (lots of drains go thru lots of stuff), overtime in the instance of an emergency

Fixed costs – things that don’t change, the amt you pay every month is the sameVariable costs – varies with volume and staff

Other Budgeting Terms

DRGs, Reimbursement, & Managed Care

Types of Health Care Reimbursement

• Fee for Service (FFS)• Medicare• Medicaid• Diagnosis-Related Groups (DRGs) & the

Prospective Payment System (PPS)• Managed Care

Fee for Service (FFS)

• Little emphasis on budgeting• Virtually limitless reimbursement• Reimbursement= cost to provide service+ profit• More services= greater amount billed• Encourages overtreatment of patients• Health care costs skyrocketed

Medicare• CMMS – Center for Medicare and Medicaid Services

• Medicare– Elderly (>65)– Catastrophic or chronic illness (no age limit)– Part A – covers hospital or inpatient services, pts have to

pay deductable– Part B – usually covers labs, flu shots, outpt services

(physician charges)– Part C (Medicare Advantage)– Part D – newer, came into existence in 2006, Medicare

prescription drug coverage

Medicaid

• Federal and state cooperative health insurance plan • Administered by the states under broad federal

guidelines (CMMS)• Primarily for the financially indigent• Majority of Medicaid recipients are women and

children

Prospective Payment System (PPS)

• The creation of Medicare, Medicaid, and fee for service (FFS) reimbursement caused health care costs to skyrocket

• Government established regulations for justifying need for service and quality monitoring

• So… the Prospective Payment System was started• Here’s what you’re going to get paid, you can work

within these bounds…

Diagnosis-Related Groups (DRGs)

• 1983- to monitor cost containment • Medicare & Medicaid• Predetermined pay rates set for inpatient hospital

stays based upon admitting diagnosis (flat fee)• Rates reflected historical costs for treatment• Prospective payment, not retrospective as in the

past with FFS

Prospective Payment System (PPS)

• Hospitals receive a specified amount for each Medicare patient’s admission- regardless of the actual cost of care

• Outliers– Exceptions– Extra payment justified

• Length of stay (LOS) declining• Reimbursement declining

Managed Care• Attempts to integrate efficiency of care, access,

and cost of care• Primary care physicians (PCPs)- “gatekeepers” • Selective contracting• Copayments- “copays”• Use of formularies• Continuous quality monitoring/improvement• Utilization review (UR)

Types of Managed Care Organizations (MCOs)

• HMO–Certain financial, geographic, & professional

limits–Different types of HMOs

• PPO– Financial incentives to consumers if using

preferred provider• Medicare & Medicaid Managed Care

Capitation• A hallmark of managed care• Fixed payment regardless of services used by

the patient during that month • Less cost= provider profit• Cost > capitated amount= loss for provider• Goals– Stay healthy, avoid illness– Eliminate unnecessary use of health care services

Capitation• Most difficult part- calculation of the capitation amount

• Must be acceptable to the purchaser and must cover the expenses

• Number of enrollees too low- provider may not be able to cover practice costs

• Ethical dilemma- encourages underutilization of services

Pros and Cons of Managed Care• Pros• Decreased costs• Broader patient benefits• Shift from inpatient to

outpatient settings• Higher physician productivity• High enrollee satisfaction levels

• Cons• Loss of existing physician-patient

relationships• Limited choice of physicians• Lower continuity of care• Decreased physician autonomy• Longer wait times• Consumer confusion over rules

Moral Hazard

• Overuse of more medical services than necessary just because insurance covers so much of the cost.

Impact of Managed Care

• Reimbursement is not guaranteed by provision of service

• Need for self-awareness regarding values in provision of care

Participation in managed care plans (by both consumers and providers) declining

Still a major force affecting contemporary health care

Managed care no longer significantly less expensive for consumers or insurers

Providers frustrated- limited reimbursement & need to justify services

Will continue to change

Recent Trends

Marquis, B. L., & Huston C. J. (2009). Leadership roles and management functions in nursing: Theory and application (6th ed.). Philadelphia: Wolters Kluwer Health.

References