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Operating Budget

Operating Budget Case Study

Background

The Major Health System is located in a major metropolitan area where there is significant competition in both the inpatient and outpatient settings.  Physicians are dedicated to the health system and includes a residency program in multiple specialties.  The market share of the organization has been stagnant at best in the past three years, hovering around 35%, with significant pressures by managed care payors on the ambulatory or outpatient rates.  The system is looking at several projects and would like to implement at least one of these over the next fiscal year with more upcoming: trauma program, skilled nursing facility, ambulatory surgery center, community wellness center with rehab and open heart program.  

The health system employs approximately 20,000 people including 1,000 employed physicians in various inpatient and outpatient specialties.  The statistics are included in the below table with market growth of 1% in the overall statistics for next year:

StatisticsFY 2016
Admissions35,453
ER Visits243,719
Outpatient Surgeries7,659
Cardiac Catheterizations14,963
Patient Days159,539
Case mix index1.61

Financial Statements

The health system has endured some tough years financially in the past three years with reimbursement challenges and outmigration of its more profitable services to physician-owned surgery and imaging centers.  Below is the balance sheet and income statement for the organization:

September 30, 2016($ in  000s)
Assets
Cash and Equivalents$54,651
Patient Accounts Receivable124,589
Other Current Assets79,154
Total Current Assets258,394
Property, Plant & Equipment225,632
Long Term Investments120,000
Other Assets86,686
Total Assets690,712
Liabilities and Net Assets
Current Maturities of Long-Term Debt18,651
Accounts Payable and Accrued Expenses65,498
Other Current Liabilities12,484
Total Current Liabilities96,633
Long-term Debt223,812
Total Liabilities320,445
Net Assets370,267
Total Liabilities and Net Assets690,712
12 Months Ended 9/30/16 ($ in 000s)
Net Patient Revenue$385,251
Other Revenue14,781
Total Revenues400,032
Expenses
Salaries, Wages & Benefits225,585
Supplies81,687
Purchased Services51,698
Depreciation and Amortization21,898
Interest11,191
Total Expenses392,059
Income from Operations7,973
Nonoperating Gains/(Losses)4,329
Excess Revenues over Expenses12,302

Assumptions

Net revenue for the organization is based on the following payor mix:

Medicare                     49%

Managed Care            31%      

Medicaid                    12%

Self Pay                       8%

Supply inflation is estimated at 2% over the next year with rate increases for Medicare and Medicaid at the same.  Managed care rate increases are challenging with early estimates at 3% but could go to 5% with better negotiations.  Personnel cost increases for salaries and wages are estimated to increase 4% next year with more competition for labor resources.  

Capital requests include $18 million of routine replacement with $30 million available in project capital for the following key projects:

• Trauma Center- $25 million plus $10 million in operational expenses each year with $4 million in revenues for year 1

• Skilled nursing facility- $30 million plus $5 million in operational expenses each year with $3 million in revenues for year 1

• Ambulatory surgery center- $12 million plus $8 million in operational expenses and $12 million in revenues for year 1

• Wellness center with rehab services- $8 million plus $3 million in operational expenses and $2 million in revenues for year 1

• Open heart program- $12 million plus $5 million in operational expenses and $4 million in revenues for year 1

Assumptions

The goal is to put together a budget for both operations and capital for the following year that will improve the operations and gain market share for the organization, utilizing the resources most efficiently and setting the course for the organizationâ€s long-term objectives of improving market share by 5% over the next 3 years and improving its outcomes for its community.


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