Martin is the nurse manager of a busy ward in a large public hospital. He has been in this position for the previous four years. During this time he has noticed both an increase in the number of patients being cared for and the complexity of the care provided. However, there has been little change in the annual budget other than a notional increase each year that is approximately the same rate as the consumer price index. His nursing staff have also noticed the change during this period and have raised this in several team meetings, stating that nursing staff in other wards in the hospital do not have to work as hard as they do.
Martin has discussed the situation with senior management and the finance manager. However, the current historic budgeting process that is used in the facility does not enable an increase in budget without other areas receiving a lower amount. This is seen as difficult to achieve.
A new finance manager is appointed to the facility and receives executive management approval to implement a zero-based budget. Martin is sceptical that the new budgeting process will make any difference. However, on completion of the new budget, his ward receives a higher budget than expected. In discussing this with other nurse managers within the hospital, Martin discovers that several other areas were in a similar situation to his ward. Other areas had less budget than expected. In general, staff were accepting of the outcome, as the budget had been constructed in an equitable way which was transparent to all employees.
Healthcare funding
Healthcare sectors in Australia are funded differently, which can influence both the budgeting process and the ongoing management. The funding for public hospitals is provided from a range of different sources; however, the majority is provided by national and state governments. The bulk of the funding that is provided by the government is capped. This capped funding impacts on the development and ongoing management of the budget and on the levels of service. Both have to be managed to ensure that the budget revenue and expenses balance. In contrast, while private hospitals also receive their funding from different sources, it is not capped. This is a significant difference and enables them to provide activity-based budgets that may change during the budget period based on the levels of clinical activity that have been provided.
- Capped funding
A set amount or level of funding to the healthcare facility to provide services; it does not increase if additional services are provided above the funded levels of activity
About two-thirds of the funding for residential aged care is provided by the Australian federal government. Subsidies are paid directly to aged care homes on behalf of their residents. The degree of funding for each resident is based on a clinical assessment which results in a set level of funding being provided for each day. Also, residents who can afford to do so contribute to the cost of their care. Aged care funding is similar in some ways to private hospitals, in that it is not capped.
Casemix
Casemix is a generic term for the method of classifying the activities that health services deliver. The origins of casemix as a classification system date back as far as the systematic diagnosis and treatment of illness. This simply means that if a patient presented with certain symptoms and a procedure was performed whose outcome was successful, the next patient presenting with the similar symptoms would be treated in the same way. The point is that casemix was founded in clinical terms, not in financial or economic terms (Heslop, 2012).
Casemix-based hospital funding was introduced in Australia in the early 1990s. It supported higher accountability. The previous standards of measuring activity, based on occupied bed days and admitted patients, evolved into a system that takes into account the acuity of the patient and the cost of the likely resources used.
- Acuity
The level of clinical care required by the patient based on their condition
In order for a casemix classification system to be useful, a number of design principles must be incorporated (Madden, 2013). Firstly, classification systems in health must have clinical meaning to be useful. Patients in the same class should be similar from a clinical perspective. Episodes of care in the same class should contain similar diagnoses and treatments. Secondly, resource use homogeneity is required. The cost of the healthcare provided should be approximately the same for all patients within the same class. Finally, there should be about the right number of classes in the system – that is, not too many classes and not too few.
There are several casemix-based funding instruments being used in Australia – for example, the Aged Care Funding Instrument and the Australian National Diagnostic Related Groups (sometimes called AN-DRGs). The Diagnosis Related Groups classification was developed to classify acute admitted patient episodes in public and private hospitals, and comprises a description of body systems, separation of medical and surgical procedures, and a description of a hierarchy of procedures, medical problems and other factors that differentiate processes of care. Each episode of care is assigned to one of 24 Major Diagnostic Categories. Most of these categories are defined by body system or disease type and correspond with a particular medical or surgical specialty – for example, respiratory system. The classification of patient episodes of care to Australian National Diagnostic Related Groups allows for a more accurate method of understanding the type and level of clinical activity within a hospital. In addition, each Diagnostic Related Group is allocated a weight, which has been calculated to represent the acuity of the service provided and the average use of resources in comparison to other groups.
In Table 20.1, the various weights represent the average costs of the different types of episodes of care. The weights are relative to each other; for example, a heart transplant uses 20.53 times more resources than a carpal tunnel release (13.96 ÷ 0.68 = 20.53). The table shows that St Florence Hospital has provided 70 episodes of inpatient care. However, it is the ability to state the types of care and the total weighted separations (174.0) that is important. The average acuity for St Florence was 2.49 (174.0 ÷ 70 = 2.49). The average acuity can be used to benchmark with other similar facilities.
- Benchmark
To measure and compare services with an agreed standard (Heslop, 2012)
| Service description | Number of cases | Casemix indexa | Weighted separationsb |
|---|---|---|---|
| Heart transplant | 10 | 13.96 | 139.6 |
| Carpal tunnel release | 20 | 0.68 | 13.6 |
| Renal dialysis | 40 | 0.52 | 20.8 |
| Total | 70 | 174.0 |
Notes: (a) Relative value units per case; (b) Total relative value units per service type. The table has been constructed to clearly show the difference between simply counting the number of cases and the total weighted separations, which acknowledges the average costs for each type of case.
Reforms in funding
There has been a significant change to Australian public hospital funding arrangements, with the federal government becoming the major funder. A key feature of this reform is the national introduction of activity-based funding, which commenced in July 2012.
The Independent Hospital Pricing Authority was established as a statutory authority in December 2011 by the National Health Reform Act 2011 (Cth). The authority is responsible for developing the national pricing framework and a consistent approach to activity-based funding of public hospitals. It is also responsible for setting the national efficient prices of the Australian National Diagnostic Related Groups that are funded to the public hospitals.
Casemix is an important tool in managing and funding healthcare systems in Australia and forms the foundation of activity-based funding for public hospitals, including funding arrangements, budgeting and performance-monitoring, at both state and federal levels (Willis, Reynolds & Keleher, 2012). It was one of the core concepts of the nation’s 2010 health reform.
Management and financial performance
An organisation’s financial performance must be planned and controlled with sound budgeting procedures as thoroughly as possible if acceptable results are to be achieved. This statement holds true for both public and private organisations. While public organisations do not operate for profit, they are responsible for delivering services to the public within an allocated budget. Both public and private healthcare organisations depend on the development of budgets to plan for the effective use of the available resources (Horngren, Datar & Foster, 2006). The major benefits of budgeting are listed below:
- It forces management to plan ahead and anticipate the future on a systematic basis.
- It provides management with realistic performance targets against which actual results can be compared.
- It coordinates the various segments of the organisation.
- It serves as a communication device with which the various managers can exchange information concerning goals, ideas and achievements.
Costs
The development and subsequent monitoring of a budget requires an understanding of the various types of costs and their behaviours. The total costs of an activity or service consist of three types of costs, and their relationship can be expressed as total costs = fixed costs + semi-variable costs + variable costs. Fixed costs have to be paid regardless of the level of activity or production – for example, rent, security staff and maintenance contracts. Variable costs change in direct proportion to the level of activity or production. The greater the level of activity, the greater the variable costs – for example, clinical drugs and pathology. Semi-variable costs are fixed in the short term but will vary over time or with large changes in activity or production – for example, the availability of an additional CT scanner due to patient demand.
In addition to fixed, semi-variable and variable costs, direct and indirect costs also need to be considered in developing a budget. Direct costs can be directly associated with the activity or production, and they can be either fixed or variable depending on the nature of the costs – for example, nursing services and medical supplies. Indirect costs, also called overheads, are not directly related to producing the activity or service. They can be either fixed or variable depending on the nature of the costs – for example, administrative departments and medical records department.
The budget needs to take into account the level of planned activity together with all the different types of costs. These will consist of material costs (for example, drugs and clinical supplies), direct labour and associated on-costs, and overhead costs, which are more difficult to charge directly to units of production (for example, general management salaries, power, telephone, cleaning, rent, rates and taxes).
Variance
Variance analysis is an essential financial management control function. The difference between a budgeted amount and the actual amount expended represents a variance. Managers need to investigate variances to determine their cause. Actions taken in response to variances can often dramatically improve the financial outlook of the healthcare organisation (Henderson, 2003b). There are several types of variances, which are discussed below.
Volume variance
This is caused by a change in the total numbers of services being provided. This can be both higher and lower than expected. There is a cost associated with each product, and the costs will vary according to the number produced. If a day surgery unit provides an additional 5 per cent of cases in a month, it will be reasonable to expect the variable costs of providing the service to be 5 per cent higher.
Mix variance
Mix variance is caused by a change in the proportion and types of services being provided. While the total volume of patients or services may be as planned, the complexity may increase, and this may result in an increase in nursing care.
Utilisation variance
This is caused by changes in efficiency. Efficiency variances relate to the level of resources used in producing each output and reflect a manager’s performance in resource management – for example, the number of hours of nursing care per occupied bed day.
Budget development
The first stage in the development of a budget is identifying the goals and objectives. To illustrate the budget development process, we will assume that we have to develop a budget for a 30-bed ward with a planned occupancy rate of 90 per cent. As shown in Table 20.2, the level of nursing care will be 5.0 hours per occupied bed day. (An occupied bed day is a hospital inpatient bed occupied at midnight.) The number of full-time equivalents required (24.9) has been divided into fixed nursing costs, consisting of the unit manager and the assistant; and variable nursing costs, which include the remainder of the staff.
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