Budget Case Study PUBM-530 Fall 2018: 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. This case study is due in two weeks and can be either typewritten or handwritten. 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. The final output ought to be three professionally-formatted tables. Feel free to add any text remarks, if needed.
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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 350 patients. They expect 100 oncology patients, 130 cardiac patients, and 120 rhinoplasty patients.
The average charge, or list price, for oncology patients is $85,000. Cardiac patients will be charged an average of $60,000, and rhinoplasty will charge $50,000 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 – $65,000, cardiac patients – $35,000, 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 | 30% | 60% | 5% | 5% |
| Cardiac | 50% | 40% | 5% | 5% |
| Rhinoplasty | 60% | 20% | 15% | 5% |
Gift shop is projected to earn $200,000 for the current year and is expected to remain the same. The hospital has an endowment that brings in an additional $600,000 in interest income per year.
Expenditures
The hospital expects to employ workers in the following departments:
| Oncology | Cardiology | Rhinoplasty | Total | |
| Administration | 120,000 | 120,000 | 120,000 | 360,000 |
| Managers | 500,000 | 500,000 | 300,000 | 1,300,000 |
| Staff | 4,200,000 | 3,000,000 | 1,000,000 | 8,200,000 |
| Total | 4,820,000 | 3,620,000 | 1,420,000 | 9,860,000 |
Supplies are to be purchased throughout the year for the departments as follows:
| Total | |
| Oncology | 400,000 |
| Cardiology | 400,000 |
| Rhinoplasty | 380,000 |
| Total | 1,180,000 |
Assume that all supply use varies with the number of patients.
Swedish hospital currently pays rent on its buildings and equipment of $500,000 per year, paid quarterly at $125,000 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. Administrative salaries are fixed costs (these do not change with the number of patients). Similarly, the salaries of managers are fixed costs (these do not change either with patient volume). The staff salaries are variable costs (expenses) in all areas. Fixed salaries are paid in equal parts each month, while variable salaries are paid in direct proportion to patient volume. The cost of supplies varies proportionally to patient volume.
Essay 1. The Task:
- Calculate patient revenue on accrual basis for the coming year. Sub-divide revenue by program, and within each program subdivide it by payer type.
- Prepare a revenue budget on accrual basis based on all revenue streams.
- Prepare an expense budget on accrual basis: the expenses should include main categories (i.e. salaries, supplies and others).
Essay 2. The Task:
Prepare a flexible budget assuming patient volumes increase by 10 and 20 per cent and decline by 10 and 20 per cent respectively. For reference, include the initially-expected patient enrollment into the flexible budget as well. The flexible budget for all enrollment levels should be presented in one 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 |
| 35% | 25% | 30% | 10% | 100% |
Historically, Swedish has found that private insurance pays in the quarter after patient discharge. Medicare/Medicaid pays half in the quarter after discharge and half in the following quarter. Twenty-five percent of all self-pay revenue is collected each quarter for three quarters following discharge. Twenty-five percent is never collected. Charity care is similarly never collected, and so it is excluded from the budget altogether.
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 installments each quarter.
Assume that all management and administrative 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:
- 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).
- Determine cash collections by quarter for the coming year, using revenue information from part a) and the information about lags in payments provided above.
- Develop the cash budget by quarter:
- Start with beginning cash.
- 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).
- Do not assume that revenue is carried over into the first quarter from the previous year: this is a brand-new hospital, and the beginning cash is all the money you have at the beginning of the first quarter.
- Estimate the amount of loan needed to cover the funding gap early on in the year and include that loan in your budget. When you collect enough cash to repay the loan – make repayment(s). There is an 8% annual interest on the loan amount: show interest payments as an expense.
- Calculate available cash balance at the end of each quarter.
- Present the cash budget in one professionally formatted table.
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