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Learning and mastering the operating budget


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By Denise Danna, DNS, RN, NEA-BC, FACHE

Healthcare organizations use various types of budgets to monitor the financial status of their organization, such as operating, program, product line, cash, or capital. A budget is a plan, roadmap, or a tool used by managers to ensure that quality and cost-effective services are provided to patients. In particular, nurse managers use budgets to monitor personnel and supply costs. It is important that nurse managers are familiar with the different types of budgets, specifically the operating budget, because it is the nurse manager who is closest to the patient and knows exactly what is needed to provide care and services. (Finkler, 2001).

The operating budget is a plan to monitor anticipated day-to-day activities, resources, personnel, and supplies, typically over a one-year period (Finkler, 2001). Each nursing unit is considered a cost center and has an operating budget. It is important to note that nursing services are included in the overall charges of room and board and nursing costs are not considered revenue producing (Graf, 2001). The major components of the operating budget include revenues and expenses:

Revenue is based on charges and is the money the organization will receive for a patient visit, procedure, or inpatient hospitalization from Medicare, Medicaid, managed care, private insurers, and self-pay patients. Of course not all charges are paid in the full amount, depending if the charges were discounted or if the payer is Medicaid or Medicare. For a nursing unit, the revenues will be projected from patient days, average daily census, or procedures.

Expenses include the cost of staff, activities, supplies, and so forth in running the nursing unit. There are two main categories found in an operating budget: employment costs and non-salary expenses (Graf, 2001). Employment costs include salaries and wages, including overtime, shift differentials, holidays, orientation, education, in-service, and benefits. Salaries and wages consist of productive and non-productive time. Productive time is the actual hours that the employee works (includes overtime hours) and is based on 2080 hours (1 full time equivalent). Productive time is the actual time worked minus vacation, orientation, and education hours during the year. Included in the category of salaries and wages are the following subcategories that you may find in a typical operating budget:

  • Contract labor: This includes the amount of money spent on individuals who are not considered employees of the facility, i.e. agency nurses. It is important that the nurse manager ensures that a charge nurse, scheduler, or payroll clerk maintains specific documentation in order to keep track of contract hours. This is because the money spent on contract labor is usually not posted in the month that the contract nurse worked due to billing cycles of the outside agency and facility.
  • Orientation/education: Any orientation, in-service, and educational time that an employee uses is expected to be included by the nurse manager when preparing the budget.
  • Benefits: Common benefits include vacation, holidays, and sick time. Vacation and holidays are earned and are considered an actual earned benefit. Vacation time can be controlled and should be approved and monitored by the manager. Many organizations have policies and procedures addressing vacation time. For example, no more than two staff members in a unit can take vacation at the same time, or no vacation can be taken during a holiday week. Holidays are also paid in the pay period that the holiday occurs. In addition, this category includes employment taxes, health insurance premiums (the portion the organization pays), and retirement contributions, if applicable.

The other main category found in the operating budget is non-salary expenses, which includes the following supplies and interdepartmental expenses:

  • Medical supplies: Any items staff members use to care for patients, including IV tubing, catheter trays, bandages, and thermometer covers. Many of these supplies are bundled in the patient charges. Each nursing unit has an inventory of medical supplies that is stocked and restocked daily by central supply personnel.
  • Office supplies: Products such as forms, paper clips, pencils, pens, and folders. If these supplies are not controlled, they can be costly, which is why most units have par levels for them.
  • Equipment lease/rental: Equipment that is either leased or rented is included in this line item, such as specialty beds, IV pumps, or respirators.
  • Repair and maintenance: Items that need repair and maintenance are included in this line item. For example, the repair of a telemetry unit or an IV pump might be required. Typically repairs under $500 are included, while anything between $500-$1,000 is a capital request allocated from another budget. Maintenance expenses are usually charged internally from various hospital departments on such things as preventive maintenance on telemetry units or computers.
  • Travel: Trips for educational purposes attended by staff. A form usually has to be completed by the person traveling and many facilities set a limited amount of dollars for travel.

The third expense category in the operating budget includes the expenses incurred by another department and charged to your nursing unit budget. Such interdepartmental charges may include:

  • Pharmacy: The pharmacy may stock your unit with stock medications (i.e. IVs and syringes). Once these items are used for a patient and charged, the pharmacy department will restock the items used.
  • Central supply: Central supply may stock your unit with supplies such as glucometer strips, irrigation solution, IV kits, etc. Similar to the process that the pharmacy department uses, once the supply is used for a patient and charged, central supply will restock the items used.

As nurse managers, you are challenged to be cost-effective and aware of your unit finances. Use this basic description of an operating budget to get an understanding of its major components.

References:
Finkler, S. ( 2001). The Different Types of Budgets. In S.F. Finkler (3rd  Ed). Budgeting Concepts for Nurse Managers (pp. 1-17).  Philadelphia: W.B. Saunders Company.     
Graf, C. (2001). The Operating Budget.  In S.F. Finkler (3rd  Ed). Budgeting Concepts for Nurse Managers (pp. 167-214).  Philadelphia: W.B. Saunders Company.      

Editor's note: Denise Danna is an assistant professor and acting associate dean for Professional Practice, Community Services, and Advanced Nursing Practice Education at Louisiana State University. She has 17 years of experiences as a chief nursing officer and over 25 years experience in various nursing management positions.