Healthcare organizations must assess the future in terms of their ability to meet the expectations of a more well-informed public and a more active group of purchasers of care and services. Also, the fact that the government is assigning itself a larger role in controlling the growth of the system calls for constant monitoring by providers. Finally, the relationship between hospitals and physicians is changing as well. Physicians now perceive that their role as the primary customer of hospitals and driving force of the system is eroding through the growing influence of managed care. The authority of physicians to direct the care of their patients within the system is decreasing.
Reflection
Reflect on how factors such as a more well-informed public, greater government involvement, and a changing relationship between physicians and healthcare organizations affected your healthcare organization.
The convergences of these factors and other changes in the healthcare environment have caused healthcare organizations to understand their environment in which they must deliver their services. The forces of the environment are causing the system to change rather than allowing the system to assess and change itself.
Without an awareness of how their organization affects other organizations and other forces in the environment, healthcare managers run the risk of developing plans that are ineffective. It is essential that managers understand their organization’s system terms. As they do, they will begin to measure each decision that they make in terms of its ramifications in and on the environment.
This is the basis of strategic thinking. Several steps are involved in preparing for the strategic planning process, including
- selecting the participants;
- developing a mission statement;
- getting to the strategic level;
- identifying the stakeholders; and
- defining a strategy.
Capital Budgets
A capital budget is a plan for the acquisition of long-term investments. For example, a hospital may be planning for the purchase of new or replacement equipment, undertaking a new service, or planning for a renovation or expansion of an existing facility. Fundamental to capital budgeting is that the asset being acquired has a lifetime that extends beyond the year of purchase. The asset is, therefore, only partly used up in one year, and, in any one year, the organization earns only part of the revenues that the capital assets generate over their useful lifetimes (Jones et al., 2019).
The capital budget serves as the basis for setting some of the critical quality and operating targets. Creating a capital budget proposal that quantifies the costs and benefits of the proposed investment is the starting point in the capital budgeting process. Capital budgets are approved by the governing board. There is often a lack of sufficient funds at the organizational level to approve all capital budget requests. It is, therefore, important to also provide a justification for each requested purchase and to specify the consequences if funding is not made available.
Forecasting Model
Review the following activity to learn about forecasting models.
The forecasting process allows DNP practice scholar and organizations to predict into the future based on historical data and quantitative forecasting. Forecasting techniques allow for prediction of how many patients, or patient days the organization, or particular unit will treat. If a DNP practice scholar were to attempt to prepare an operating budget for the organization without some prediction of these elements, it would be difficult to determine the number of staff needed.
The results of the forecast are helpful and essential when preparing a budget or when making financial decisions. Forecasting is an essential part of the budgeting process. Most forecasting is based on theories of probability. Probability is the likely given to occur and is based on historical data. The forecasting process consists of collecting data, graphing the data, analyzing the graphed data and preparing prediction formulas.
Analysis of the graph data helps the manager determine whether an item to be forecast has been exhibiting seasonal or trend behavior, both or neither. Computer programs are available to assist a DNP prepared leader in forecasting items, and allow for greater accuracy of results. A formalized forecasting process consist of several steps, collection of historical data, graphing the data, analysis of the data to reveal trends, and seasonal patterns and utilizing formulas to project the Item being forecasted into the future.
Data patterns generally fall into one of the following four categories. Random fluctuations occur due to unpredictable events. Seasonal fluctuations occur cyclically every calendar year and are common in the healthcare industry. Trends occur related to the passage of time either upward, downward or constant, and maybe random. Seasonal fluctuations and trends occur at the same time.
One of the most common approaches and forecasting future trends is called Regression Analysis. It consists of a scattered diagram which uses variables to plot points on the graph. Each point on the graph is represented by an independent variable and a dependent variable. The independent variable is the variable that causes changes in the independent variable.
Seasonality together with trend pose a more complex problem, yet in healthcare it is likely to be a common occurrence. There are two steps involved in this forecasting approach. The first step is to use regression analysis to predict a trend line for the coming year. The second step is to extend the trend backward for the last five years and then calculate how much above or below the line the actual value was for the last five years.
Those amounts are converted into percentages.
Break-Even Analysis
The break-even analysis is used to determine at what point will a new program or service break even and then start to make money – be profitable. The analysis is based on the following formula.
Click here to do the media activity (Links to an external site.).
Transcript
Term 1: Q is the breakeven number, or quantity.
Term 2: FC is the total fixed cost.
Term 3: P is the price.
Term 4: VC is the variable cost per patient.
Define the Problem
Defining the focus of the project is essential to ensure that the ultimate outcome addresses the situation intended. This is especially true when the perceived problem may be identified by someone without direct knowledge of the situation. A common instance is when a senior administrator requests that an issue be addressed. Defining the problem is also important not only to validate that a problem exists but also to create a common understanding among relevant stakeholders regarding the purpose of the project. A project that does not address the issue intended by the proponent is unlikely to be viewed as a success regardless of the outcome. Defining the problem clearly at the outset ensures that all interested parties are in agreement and that resources allocated are being used effectively.
Scenario
The scenario that is presented leads us to the first consideration in the initiation phase of a project. Questions to consider may include the following:
- What situation is being addressed?
- Why is this a problem, improvement activity, or opportunity for improvement? Are all team members in agreement?
- What is the ultimate goal of this project? Are all team members in agreement?
- What outcomes are impacted as a result of this project?
- Who are the key stakeholders who influence the outcome?
Let’s Apply
The significance of patient falls is far-reaching for patients and healthcare organizations alike. Ancillary department and patient care unit managers have convened at the request of the executive leadership team to discuss the upward trend in patient falls that has been reported by the risk management department. At this first meeting, management representatives discuss the significance of the problem, need for diverse team membership, and executive leadership champion to work with the team in further meetings.
At a quantity lower than Q, there would be a loss; at a quantity higher than Q there would be a profit. P, or price, is assumed to be the average amount collected per patient, or the average amount of revenue the organization ultimately receives per patient. The basis for the formula is the underlying relationship between revenues and expenses. If total revenues are greater than expenses, there is a profit. If total revenues are less than expenses, there is a loss. If revenues are just equal to expenses, there is neither a profit nor a loss, and the service is said to just break even (Jones et al., 2019).
When there are different types of patients the break-even analysis becomes more complicated. If there are different types of patients with different prices, it is necessary to find the weighted average contribution margin.
Example 1
The following is an example of break-even analysis for a home health agency with different types of patients with different prices.
| Type of Patient | Price | Variable Cost | Contributing Margin | |
| Complex | $100 | $30 | = | $70 |
| Moderate | $75 | $30 | = | $45 |
| Simple | $50 | $30 | = | $20 |
The crucial piece of information for calculating the break-even point is the relative proportion of each type of visit. Let’s say that 20% of all visits are complex, 50% are moderate, and 30% simple. This information can be used to calculate the weighted average contribution margin. This requires multiplying each type of contributing margin by the percentage of patients that type of visit makes up, and then adding the sum of those results to attain the total weighted average contribution margin.
| Type of Patient | % of Visits | Contributing Margin | Weighted Average Contribution Margin | |
| 20% | 20% | $70 | = | $14.00 |
| Moderate | 50% | $45 | = | $22.50 |
| Simple | 30% | $20 | = | $6.00 |
| Total Weighted Average Contribution Margin | = | $42.50 |
The $42.50 represents the average contribution margin for all types of visits. It can be used to calculate the break-even quantity. Assume that fixed costs are at $10,000 What is the total number of home visits that the agency would need to make to break even?
$10,000$42.50=235 Visits
The answer is 235 visits. Of the total number of visits:
- 47 would be expected to be complex care visits (20%),
- 118 moderate care visits (50%), and
- 70 simple care visits (30%).
The same weighted average approach could be used to find the break-even volume when there are more than three different types of patients.
Example 2
Use the following example to calculate the break-even point:
Suppose we want to know the exact day when a profit will begin for the new home healthcare agency mentioned in Example 1. Refer to the previous example for information.
The home health sees 1,800 patients per year. Use the formula below to calculate the number of patients the agency serves per day:
# of patients seen per year# of days per year or 1800365=4.93 patients
Armed with this information, use the formula below to calculate the number of days to break even:
# of patients to breakeven# of patients the agency serves per day=# of days to breakeven
2354.93=47.6 or 48 days to break even
The new home healthcare agency will break even on the 48th day of operation, and on the 49th day of operation will start to make a profit.
Pro Formas Financial Statements and Business Planning
An effective business plan has to include Pro Forma financial statements. Pro Forma financial statements are used to facilitate comparisons of historic data and projections of future performance. These statements are used to forecast future revenues, expenses, and profits and/or losses resulting from the program’s operations. Pro Forma statements are based on three main accounting statements:
- Profit or loss income statement
- Balance sheet
- Cash flow statement
A business plan is a detailed proposed program, project, or service. The plan is an important step in the management of all businesses and assists the DNP-prepared nurse in identifying customers, market and competition, projected revenues and expense, and time frame for achieving a break-even position. The depth and complexity of the business plan will vary by the project and for projects with large operating expenses and/or capital investments, a thorough business plan is crucial. (Jones et al., 2019).
Review the activity below to discover the details of the steps in business plan development:
Here are the steps to develop a business plan. The first step in developing a business plan is project proposal, which is comprised of the actual statements of what the business plan proposes to accomplish. Once the program has been proposed, the product must be carefully defined. The next step is the market analysis, which identifies the estimated market share, clients and client mix, and payers and payer mix.
When developing a rough financial plan, estimates of revenues and expenses are attained. The revenues can be based on the demand projections from the market analysis as well as projected based on assumptions of payer mix. The expenses are based on approximations of the types and amounts of resources needed and may include startup costs of the program.
Such as, purchase of equipment, office supplies, salaries, and other miscellaneous items. The detailed operations plan will address the impact the project will have on the entire organization from operations perspective. The detailed financial plan incorporates all of the information from the operations plan, considering the financial impact of the resources to be use.
And will ultimately determine whether it is possible to go ahead with the proposed program. The detailed plan will include a cash flow analysis, pro forma statement, and sensitivity analysis. Finally, write an executive summary to summarize your plan.
Financial Contribution of the Nurse Practitioner to a Practice
Advanced practice registered nurses (APRNs) have become increasingly more important in the delivery of healthcare in the United States. APRNs include nurse practitioners (NP), clinical nurse specialists (CNS), nurse anesthetists, and nurse midwives and all play an important role in the delivery of essential care services.
Nurse practitioners have been delivering primary care services since 1965 and currently represent the largest and most visible group of APRNs. However, many are “hidden providers” in that their financial contribution to healthcare is often difficult to assess.
A business skill important for nurse practitioners is the ability to calculate their financial contributions to the practice (Waxman, 2018). Nurse practitioners should be able to calculate how much revenue they generate and how this compares with their salary.
View the following graphic and click on the four areas to become familiar with the steps to take to determine the financial contribution of a nurse practitioner to the practice.
- Track services provided over a representative period
- Track number of patients seen per day
- Identify CPT codes used to bill for services
- Determine the billing rate for these services
- Determine the collection rate
- Calculate the amount of revenue generated per week
- Determine cost of practice expenses
- Determine overhead costs
- Identify the amount of revenue to supervising physician
- Identify the practice profit amount
- Identify how revenue is generated and spent
- Determine whether billing is done in NP’s name or physician provider
- Examine billing patterns
- Examine workflow
- Understand policies regarding reimbursement
- Determine the amount of revenue you generate before entering into negotiations
- Salary and benefits
- Type of contract
- Services to be provided
- Salary structure
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