June 24, 2011


(CODE BLUE) The changing of hospital budgets; 

By Melvin J. Howard


Hospitals plan their budgets not only based on the projected volume but also on the projected reimbursement for the services rendered. The hospitals’ ability to pay for the operating and capital expenses depend on how well they forecast the volume and factors; therefore, translating the volume into staffing, supplies and other operating expenses. The staffing standards used will have a major impact on the budgets. The tendency of most departments is to be at the same level or above, but not below the budgets in a majority of the cases. The continuously eroding operating and contributing margins of the hospitals can be impacted significantly if the budgets are impractical to begin with.


The hospital-operating budget is usually a rollup of the individual entities/departments’ budgets. Most hospital departments’ operating budgets have the following components: labor, supplies, and other. Labor comprises of 60 to 70% of a department’s operating budgets and supplies 15 to 25%. Labor is further divided into payroll and non-payroll which is also known as contract, registry, agency, or outsourcing. This covers managerial, professional, technical, and support staff. Supplies include both patient consumed e.g. medical/surgical and department consumed items such as office supplies. Maintenance contracts to cover the equipment, and travel for education are some examples of the other expenses component of the budget.


As labor is a significant and an important component of the total department-operating budget, I will limit this discussion to labor budgets only. At one time, future labor budgets were prepared as a percent of the past budgets rather than reviewing all the factors that impacted the budget. In years after that, the departmental budgets were prepared based on the percent change to the hospital-projected volume. Subsequently, the departmental volume projections were developed based on their ratio to the hospital volumes and the percent change was applied to the labor budgets. In the past quarter century, more hospitals used labor standards to convert the projected departmental volume to the staffing in FTEs and then convert the FTEs to the labor dollar expense. Sophisticated approaches used % of skill mix assumptions to the FTE projections based on labor standards to identify the staffing budgets by professional, technical, and support categories. A small percent of hospitals developed contingency budgets for optimistic and pessimistic scenarios.

All these budgets used deterministic models with no consideration for the probabilistic nature of the projections; whether they are workload volumes, FTEs, skill mix or labor $ making it limited in its reliability. The ‘cost plus’ reimbursement methods prior to mid 1970’s did encourage such unrealistic budget preparation and management practices as the hospitals got paid not for sticking to budgets but based on the actual expenses incurred. Spiraling healthcare costs warranted changes from the cost plus reimbursement method to prospective payment and continually decreasing reimbursement there after.

§        NEW METHODS

There are many variables involved in the departmental labor budget preparation including but not limited to:

·         Workload volume
·         Workload volume mix
·         Non-linearity of the labor standards
·         Staffing levels
·         Staffing skill mix
·         Staffing mix by full time & part time
·         Staff scheduling practices & impact of labor laws
·         Confounding effects of staffing skills on each other
·         Seasonality of workload
·         Availability of staffing
·         Use of overtime
·         Use of supplemental staff i.e. contract labor
·         Fringe benefits i.e. vacation, sick, and holidays

Most of these variables involved follow a probabilistic distribution although some of them are determined by policy such as the amount of earned paid time off (PTO) covering the vacation, sick, and holidays. Even in the case of PTO, the actual usage is a probabilistic distribution depending on the needs and mix of staff in a given department. Preparing the labor budgets with due consideration to the probabilistic nature will help improve the predictability and hence the reliability of the budgets. Accurate planning for the expenses will minimize surprises, especially the unpleasant type that could hurt the financial health of the hospital.


EDs are referred as Level I, II or III trauma centers based on their capabilities, equipment, resources, and expertise available to the patients arriving for treatment. A patient coming to the hospital Emergency Department is categorized as an outpatient who could become an inpatient upon admission. The workload volume indicator is an ED visit. Every time a patient visits the ED, it is considered as an ED visit whether they come by themselves, brought by a family member, transported by an ambulance, or other mode such as helicopter. Such ED visit may be further classified as Emergent, Urgent, and Non-Urgent depending on the medical needs of the patient. They can also have other classifications based on the interaction with the patient i.e. brief visit, complex visit etc. and is used in addition to or in lieu of patient classification system. Patient classification is used either to assign staff and / or to charge the patient based on amount of staff time, tests, treatments and supplies used.

The arriving patient is either first registered or triaged depending on the medical necessity, and then put in an ED bed, nurse assesses the patient and documents the observations; the ED physician assesses the patient and orders the appropriate labs and/or medications. The diagnostic staff either comes to administer the test, e.g., EKG or X-Ray, procures a specimen e.g., Lab. or transports the patient for CT exam. Upon reviewing the results, the ED physician makes a decision, i.e., whether to discharge the patient, transfer to another hospital or admit the patient. The ED physician consults with other physicians if the patient is transferred or admitted. The labor involved are: Reception, & Registration, Triage nurse, Registered and Licensed Practical Nurse, Unit Secretary, Security Guard, Patient & Materials Transporter, Physician Assistant, and ED physician. Depending on the organizational structure of the hospital and department, some or all of these skills could be part of the ED budget. Certain staff may be working full time while others work only part time. Some may work overtime while others do not. Supplemental staff may come from the hospital’s internal float pool, contract help, or called from the on-call roster. Each one of these staff members has different wage and salary structure based on their skill and experience. Unlike some other departments of the hospital that may be open five or six days during the week with day and evening shifts, ED is open 7x24 year round. The demand for the ED services can vary by hour of day, day of week, week of the month, and month of the year.
Budgeting steps include:

1.     Project ED visits either total or by type;
2.     Select labor standards in hours per visit or visit type;
3.     Convert the workload volume into staffing in Worked FTEs;
4.     Break them down by skill levels;
5.     Allocate by position for adequate coverage and round up and add
                 staff if necessary;
6.     Add the factor for PTO to come up with the Paid ftes; Compare with the staff on the payroll to determine the use of contract help if there are no pending staff who are in the hiring pipeline;
7.      Apply the wage & salary factors to convert the ftes to labor dollars;
8.     Add the premium cost of overtime, on-call pay, and call-back pay differential;
9.     Add other labor costs if they belong to the operating budget category
10. The sum total of FTEs is the FTE budget and the dollars are labor dollar budget.

Usually hospitals start the budget four to six months before the start of the next fiscal year. In terms of the tools hospitals in general and ED in particular may use include either a spread sheet template or printed work sheets included as part of Budgeting Package distributed by the Finance department.

The department managers may seek help as needed. Otherwise, the manager verifies the projected volumes, follows the steps, completes the budget and submits that to Finance and will be reviewed by the line administrator.

Every time there is a change involved, uncertainty is a given and is accompanied by risk and dilemma requiring help. Imitating reality in the form of a model whether it is physical, schematic, or mathematical is helpful so that the model can be manipulated rather than the reality to show the probability of certainty for making decisions this is the most appropriate type of help for each potential situation.