Your chief nursing officer stops you in the hall. To your surprise, she asks, “Jen, why don’t you apply for that charge nurse position that’s opening up on your unit? I’ve heard so many good things about you from your colleagues and patients. And I know you’re active on several committees.”
Flattered by her encouragement and affirmation, you tell her you’ll give it some thought. But as you mull over the opportunity, a nagging doubt keeps surfacing: Charge nurses deal with the dreaded “F” word—finance. You know what budgets are, of course, and know a little about cost-benefit analysis, but you haven’t dealt with these things personally. Plus, you’ve heard charge nurses throwing around mysterious terms such as FTEs, UOS, and charge capture. The more you think about it, the more you wonder why nurses need to be involved with financial issues in the first place.
If you think you’d react the way Jen does, this article is for you. Or perhaps you would like to pursue a leadership position, but hesitate to do so because you’re not confident you know enough about finance.
Don’t let your fears or limited knowledge of finance intimidate you. In this article, I’ll define and discuss some essential concepts of health finance. Understanding these concepts will help you work better with management to address patient needs and help your organization stay afloat financially so it can continue to care for the community.
Competing for scarce resources
Nurses and healthcare organizations share the overarching goal of delivering safe, effective care in an economical manner. But healthcare resources are scarce, and many players in an organization compete for them. Every day, administrators grapple with such questions as:
• Does our hospital really need a new 64-slice computed tomography scanner?
• Should we invest in the latest computerized physician-order entry system?
• Do we need to increase the skill mix of RNs in our progressive care unit to meet the demands of higher patient acuity?
• Will we lose market share if we don’t buy a robotic system to perform minimally invasive surgery?
• If we purchase new patient lift equipment for nursing units, to what extent could this reduce staff injuries and lower hospital expenses?
Being familiar with basic financial concepts will help you understand how decisions about healthcare structures, processes, and outcomes are made and will give you insight into the efficiencies on your unit.
Reimbursement and revenue terms
Generally, healthcare costs are reimbursed by third-party payers—organizations (such as insurance companies and managed-care companies) and agencies (such as Medicare and Medicaid) that pay or insure the healthcare expenses of beneficiaries or recipients. A steady flow of revenue (input) from these sources ensures that the organization can continue to care for the community.
Over the last few decades, third-party payers have reduced the level of their reimbursements. At the same time, the number of uninsured patients in this country (now estimated at 47 million) has risen. Uninsured Americans incur billions of dollars in uncompensated health care.
From retrospective to prospective reimbursement
Before 1983, hospitals were paid on a retrospective fee-for-service system, which gave both hospitals and physicians the incentive to provide more care. This led to uncontrolled use of healthcare resources—and skyrocketing costs. In 1983, Medicare instituted a prospective payment system (PPS), which pays hospitals according to established criteria; the reimbursement amount is established before services are rendered.
As part of its PPS, Medicare established diagnostic-related groups (DRGs), a patient classification system based on resources that patients with a given diagnosis were expected to use. For each DRG, Medicare established a predetermined fixed rate for inpatient bundled services. Since 1983, DRGs have expanded in scope.
The emergence of the PPS led to the rise of managed-care systems to reduce healthcare resource use and lower costs. With an agency or insurance company acting as an intermediary between patient and physician, a managed-care system limits the type, level, and frequency of treatment; restricts access to care; and controls the level of reimbursement for services.
In 2000, a similar PPS was implemented to cover outpatient healthcare costs, called ambulatory payment classifications (APCs). APC clusters ambulatory procedures into procedural groups, with reimbursement based on the median cost of services within each group.
Gross vs. net revenue
Gross revenues are charges entered and generated for each patient day during that month; they include charges for the daily room rate, procedural charges, and supply charges. Actual net revenue is based on reimbursements from third-party payers and individual patient payments, which sometimes aren’t received until weeks or even months after budget reports are generated.
Budgets, expenses, and charges
In many healthcare facilities, a nursing unit or department is deemed a cost center—an entity that doesn’t produce revenue and for which costs are determined and allocated separately. In a cost center, a nurse manager or other leader is responsible for financial performance, overall operations, and quality of care. To determine how a cost center is performing, its actual costs are compared with budgeted costs for a specified time period.
Each cost center has an operational budget that’s established anew each fiscal year. The budget is divided into expenses and revenue, calculated on the basis of unit of service (UOS). For an inpatient unit, the UOS typically is a patient day. The unit’s expenses can be calculated per UOS to determine average expenses per UOS. (UOS varies with the type of unit or department. For an operating room or a postanesthesia care unit, UOS might be minutes; for an outpatient clinic or emergency department, it might be visits; for a wound care or dialysis center, it might be treatments.)
Monthly budget reports provide summaries of projected expenses and revenues, and compare these to actual expenses and revenues. Expense items include salaries, supplies, medications, seminars, and travel costs.
Charges for supplies and services are listed on the department’s charge master. Ensuring proper charging is termed charge capture.
A capital budget item refers to equipment or furniture that is used beyond the year in which it’s purchased and usually costs more than $500. Capital budget items are planned according to both a multiple-year strategic plan and a fiscal-year plan; they’re not part of the individual cost center budget. For example, purchase of new patient beds is considered a capital budget item and doesn’t come out of a nursing unit’s operational budget.
Direct and indirect healthcare costs
“How much does it cost?” This might seem like a simple question, but when it pertains to health care, the answer gets complicated. That’s partly because both direct and indirect costs must be considered.
Direct costs are those that are clearly and directly associated with care. Examples include supplies, medications, therapies, and nurses’ salaries. Some direct costs are fixed, meaning they don’t vary with patient volume. Others are variable, changing in direct proportion to patient volume. (See What’s the difference between fixed and variable FTEs? in pdf format available by clicking download now.)
Indirect costs are those that can’t be assigned directly to patient care but are integral to the unit’s functioning and the organization’s overhead. They include electricity and other utilities, housekeeping services, risk-management costs, and other support and business services.
Nurse managers review unit budget reports and must reconcile variances
—discrepancies between budgeted amounts and actual performance. To promote better management of resources and monitor productivity, the nurse manager (and by extension, the entire nursing team) must stay on top of the unit’s budgetary performance on a daily basis.
Depending on the unit activity, patient acuity, and other extenuating factors, a unit may be over or under its budget. Reasons for the variance are presented in a budget analysis/justification.
Output and productivity
In the hospital setting, output might be related to the number of procedures completed, the number of cases, or the number of patients cared for. Productivity is the ratio of output to input (revenue). Many hospitals have productivity measures and reports that measure expected outputs from resources extended.
Cost-effectiveness vs cost-benefit analysis
A cost-effectiveness analysis compares equivalent approaches that have different costs; the goal is to choose the approach that provides the best possible care at the lowest cost. For example, if two urethral catheter kits are of equal quality and efficacy, a cost-effectiveness analysis would lead to selection of the less expensive kit.
In contrast, a cost-benefit analysis measures relative costs against the benefits of a given task, project, or aspect of care. It’s more complex than a cost-effectiveness analysis. Say, for instance, a nurse manager is studying whether to propose adding an extra 8 hours of certified nursing assistant (CNA) support daily to increase patient and nurse satisfaction, improve patient outcomes, and decrease nursing turnover. She would conduct a cost-benefit analysis that includes:
• costs, by calculating the number of full-time equivalents needed and the CNA salary (plus benefits, if a full-time employee is involved)
• projected benefits, by calculating the decrease in nursing overtime and turnover, improvement in prevalence and incidence of pressure ulcers, and reduction in patient falls.
Embracing the “F” word
The continuing existence of a healthcare organization hinges on good financial stewardship—from the chief executive officer all the way down to individual unit leaders. Whether or not you are, or ever will be, directly responsible for budgeting and finance, you should embrace the “F” word. Only by understanding basic financial concepts can you evaluate the feasibility of the interventions you provide while demonstrating the value that nursing brings to your organization.
DeNavas-Walt C, Proctor BD, Smith J. Income, poverty, and health insurance coverage in the United States: 2006. U.S. Census Bureau (2007). www.census.gov/prod/2007pubs/p60-233.pdf. Accessed June 25, 2008.
Finkler SA, Ward DA, Baker JW. Essentials of Cost Accounting for Health Care Organizations. 3rd ed. Sudbury, MA: Jones and Bartlett; 2007.
Siegel JE, Clancy CM. Relative value in healthcare. Cost effectiveness of interventions. J Nurs Care Qual. 2006;21(2):99-103.
Barbara Sorbello is Administrative Director of Acute Care Services at Bon Secours St. Francis Medical Center in Midlothian, Va.