Budget Preparation Instructions for Swedish Hospital: A Case Study

Case Study Sections 1-2

Budget Preparation instructions: the case study is designed as an individual work open-book open-notes test. Three essay questions are worth 10 points each. The total assignment is worth 30 points. Be sure to show your work and write professionally and neatly. Do not forget to underscore numeric answers, professionally format tables and write conclusions whenever applicable.  Case Study Sections 1-2. As a newly hired budget analyst, you were assigned to the Swedish Hospital’s finance department. Currently the Hospital is planning its master budget for the coming year. The budget will include operating, cash and flexible budgets. Capital budget was passed last year and needs not to be revisited. The hospital is noted for its three fine programs: oncology (cancer), cardiac (heart) and rhinoplasty (nose jobs). Revenue The hospital managers have projected that next year they will have 303 patients. They expect 150 oncology patients, 120 cardiac patients, and 33 rhinoplasty patients. The average charge, or list price, for oncology patients is $80,000. Cardiac patients will be charged an average of $50,000, and rhinoplasty will charge $30,000 per patient. However, the charges often are not the actual amounts ultimately received. Assume that private insurance companies will pay the full charge of list price. However, Medicare and Medicaid rates will pay as follows: oncology patients - $50,000, cardiac patients - $45,000, and rhinoplasty patients - $20,000. Self-pay patients are expected to pay the full charge, but generally 25% of self-pay charges become a bad debt. Note that bad debts are treated as expense in health care. They may not be shown as a reduction in revenue: the full charge for self-pay patients is shown as revenue, and then bad debts are reflected as an expense. No payment for charity care is ever received, so charity care is not shown as a revenue or expense. The payer mix is as follows: Private insurance Medicare/Medicaid Self-Pay Charity Oncology 40% 40% 15% 5% Cardiac 50% 30% 15% 5% Rhinoplasty 40% 20% 35% 5% Gift shop is projected to earn $100,000 for the current year and is expected to remain the same. The hospital has an endowment that brings in an additional $500,000 in interest income per annum (per year). Expenditures The hospital expects to employ workers in the following departments: Oncology Cardiology Rhinoplasty Total Managers 500,000 500,000 300,000 1,300,000 Staff 2,200,000 2,000,000 500,000 4,700,000 Total 2,700,000 2,500,000 800,000 6,000,000 Supplies are to be purchased throughout the year for the departments as follows: Total Oncology 400,000 Cardiology 300,000 Rhinoplasty 280,000 Total 980,000 Assume that all supply use varies with the number of patients. Swedish hospital currently pays rent on its buildings and equipment of $200,000 per year, paid quarterly at $50,000 each quarter. Rent is expected to remain unchanged next year. Flexible budget The hospital usually prepares a flexible budget as part of its annual master budget to assess the likely impact of patient volume variations on revenues and expenses. The salaries of managers are fixed costs (manager salaries do not change with the patient volume). The staff salaries are variable costs (expenses) in all areas. All salaries are paid in equal amounts each month. Variable salaries are paid in direct proportion to patient volume. Supplies vary in direct proportion to patient volume. Essay 1. The Task:

Revenue

1. Calculate patient revenue on accrual basis for the coming year. Sub-divide revenue by program, and within each program subdivide it by type of taxpayer.

2. Prepare a revenue budget based on all of the sources of revenue.

3. Calculate an expense budget on accrual basis for the coming year. The expenses should show main categories such as salaries and supplies.

Essay 2. The Task: Prepare a flexible budget assuming patient volumes are 5 and 10 per cent higher and 5 and 10 per cent lower than expected. Also include the initially expected patient volume level in the flexible budget. Present flexible budget in one neatly organized table. Do not forget to present budget balances at the bottom of that table. Case Study Section 3. Cash Budgets. Patients are expected to be treated and discharged throughout the year as follows. Quarter 1 January-March Quarter 2 April-June Quarter 3 July-September Quarter 4 October-December Total 30% 30% 25% 15% 100% Historically, Swedish has found that private insurance, Medicare/Medicaid and self-pay patients are reimbursed the same quarter as the service provided. However, charity care is never collected. Assume that the above patient flow, payment rates, staffing and supplies purchases are the same as those projected in the budget for the coming year. Costs attributed to supplies and staffing are directly related to the number of patients served. Assume that all interest earned by the endowment is received on the first day of the second month of the year. Assume that gift shop revenue is received in equal amounts each quarter. Assume that all management salaries are also paid equally each quarter. Swedish plans to start next year with $100,000 in cash.

Essay 3. The Task: Prepare a cash budget for the coming year. It will help for you to prepare it in the following order:

1. Determine patient revenues by quarter, by type of payer, in the coming year (i.e. determine private insurance revenues for each quarter, Medicare/Medicaid revenues by quarter, and so on).

2. Determine cash collections by quarter for the coming year, using revenue information from part a).

3. Develop the cash budget by quarter: 1. Start with beginning cash. 2. Add cash receipts shown by source (i.e. patient revenue by payer, from an endowment and from the gift shop). • Deduct cash payments by line-item (i.e. salaries, supplies). 1. If needed, you can take a bank loan and then repay it. Show the loan as a separate line item within expenditures. When issuing loan repayment, factor in the interest amount(s). 2. Calculate available cash balance at the end of each quarter.