i needed urgent financial budgeting
Major Assignment – Case Study
Context
Setting: The JKL Tertiary Care Hospital
A new business manager, Mr Kaur, has been appointed to work with the Medical Division at the JKL Tertiary Care Hospital. While such appointments have occurred elsewhere, this is the first such appointment at the JKL Tertiary Care Hospital.
While Mr Kaur is a qualified accountant and has some years of experience in the preparation of budgets, this is his first appointment in the health industry.
After his first week on the job, Mr Kaur was talking to the Director of Finance regarding his experience in the hospital so far:
I’m going to have to make some assumptions in order to create the new budget, but I don’t feel comfortable about doing so given the level of knowledge I’ve got about how hospitals run.
The Director of Finance suggested that it probably would be helpful to work closely with the Clinical Director of the Medical Division in order to learn about the hospital and begin the engagement process with the clinical staff.
The Director of Finance reminded Mr Kaur that everyone was watching this initiative between the Finance Department and the clinicians, as the clinical staff had not been in favour of additional administrative overheads (e.g the appointment of the Business Manager) being incurred during a period of budget restraint. The hospital’s executive are hoping that the appointment of Mr Kaur will demonstrate to the clinical staff the benefit of establishing a close working relationship between finance staff and clinical staff, and that as a result the clinicians will have greater trust in the budget process, and participate in the identification of savings strategies in the coming years. Failure could set relationships between the clinicians and corporate services back considerably.
In previous years, the divisional budgets had been set by the Finance Department without significant involvement of the clinical directors.
Additionally, the budgets had only shown the costs of providing services and not the income that the hospital received for providing the services.
Mr Kaur’s Approach
After the weekend and having had a chance to reflect on the Director of Finance’s words, Mr Kaur decided to create a sample budget as a means of helping to show the potential of what the Finance Department could help the clinicians achieve – namely a better understanding of the budget and how they might control it.
1
To create an entire budget would require a significant investment of time and so Mr Kaur decided to attempt to create a budget based solely on types of inpatient activity work undertaken in the Division. Mr Kaur had discovered that the following DRGs were common:

DRG Description Average Length of Stay (Days) Number
of
Patients
Last Year Expected
Average
Length of
Stay
(Days) Expected
Number of
Patients Inlier Weight
F74Z Chest Pain 1 1808 1 1600 0.265199
E65B Chronic Obstructive Airways Disease W/O Catastrophic CC 4 761 3 750 1.13937
F73B Syncope and Collapse W/O Catastrophic or Severe CC 2 465 2 450 0.392604
F76B Arrhythmia, Cardiac Arrest and Conduction Disorders W/O Cat or Sev CC 2 481 2 500 0.404471
E62B Respiratory Infections/Inflammations W Severe or Moderate CC 6 467 5 450 1.40111
F62B Heart Failure and Shock W/O Catastrophic CC 3 445 3 450 1.26491
L63B Kidney and Urinary Tract Infections W/O Catastrophic or Severe CC 3 359 3 350 0.612745
F42B Circulatory Disorder W/O AMI W Invasive Cardiac Inves Proc W/O Cat or Sev CC 3 303 3 300 0.940617
E62A Respiratory Infections/Inflammations W Catastrophic CC 11 340 10 350 2.41597
E62C Respiratory Infections/Inflammations W/O CC 3 315 2 300 0.721117
Mr Kaur has sensed that the hospital is keen to avoid congestion and overspending, as well as dealing with additional funding constraints (cuts), has determined that some marginal savings in the average length of patient stay would be useful targets for the coming year. He has also determined that patient activity should be rounded (always) to the nearest 50 patients (e.g., 501 patients would become 500 patients and 545 patients would become 550 patients for the purposes of budgeting). He had also read in the local newspaper (an interesting source of evidence!) that there had been more cases of chest pain in this hospital than elsewhere, so He is suggesting a cut in activity for the coming year.
3
He has found out that that the following services were used for each DRG with a particular frequency:
DRG Description Days of Stay No. of
No. of
Path X-Rays
Tests No. of Scripts
F74Z Chest Pain 1 3 8 4
E65B Chronic Obstructive Airways Disease W/O Catastrophic CC 3 3 10 7
F73B Syncope and Collapse W/O Catastrophic or Severe CC 2 4 3 5
F76B Arrhythmia, Cardiac Arrest and Conduction Disorders W/O Cat or Sev CC 2 1 5 5
E62B Respiratory Infections/Inflammations W Severe or Moderate CC 5 3 6 4
F62B Heart Failure and Shock W/O Catastrophic CC 3 4 4 2
L63B Kidney and Urinary Tract Infections W/O Catastrophic or Severe CC 3 2 5 3
F42B Circulatory Disorder W/O AMI W Invasive Cardiac Inves Proc W/O Cat or Sev CC 3 1 6 4
E62A Respiratory Infections/Inflammations W Catastrophic CC 10 4 6 6
E62C Respiratory Infections/Inflammations W/O CC 2 3 3 5

Mr Kaur has applied his costing assumptions and determined that it is appropriate to use an average cost of service. He is aware that in some cases, the average is only appropriate within the DRG and not across all DRGs. Hence, he has determined from looking at the budgets for Imaging, Pathology and Pharmacy that the average cost for any patient for each DRG is:
DRG Description Daily Cost of Stay
(Excluding X/Ray,Path and Drugs) Cost of
Cost of
each
each pathology
X-Ray test Cost of each script
F74Z Chest Pain 870 220 90 75
E65B Chronic Obstructive Airways Disease W/O Catastrophic CC 870 150 105 150
F73B Syncope and Collapse W/O Catastrophic or Severe CC 870 100 90 80
F76B Arrhythmia, Cardiac Arrest and Conduction Disorders W/O Cat or Sev CC 870 110 90 75
E62B Respiratory Infections/Inflammations W Severe or Moderate CC 870 150 100 150
F62B Heart Failure and Shock W/O Catastrophic CC 870 100 90 75
L63B Kidney and Urinary Tract Infections W/O Catastrophic or Severe CC 870 100 90 95
F42B Circulatory Disorder W/O AMI W Invasive Cardiac Inves Proc W/O Cat or Sev CC 870 1400 190 75
E62A Respiratory Infections/Inflammations W Catastrophic CC 870 160 120 85
E62C Respiratory Infections/Inflammations W/O CC 870 100 85 75

Now while the Division has more patients than covered by these DRGs, Mr Kaur has determined that the above is sufficient to build a budget, so he can commence the engagement process with the director of the Division.
Looking at the Division’s costs for the current year, Mr Kaur believes that the fixed costs for next year can be apportioned across the Division’s activities. He estimates that the fixed costs relating to the above work should be in the order of $3,000,000.
Mr Kaur understands that the national efficient price is $5,750 and that the inlier weight is used to determine how much of this price the hospital will get for any patient for a given DRG. Mr Kaur has been assured that at the JKL Tertiary Care Hospital all patients stay within the inlier patient range.
Mr Kaur is going to prepare a budget and believes that the director of the Division will see the value in extending the work to cover all the activity undertaken by the Division.
Your Tasks
1. Prepare a budget for the Division of Medicine based on the material that Mr Kaur has available to him.
a. The budget does not need to be cashed flowed across the year, but it should be presented in a manner that the Director of Medicine will find easy to understand and useful.
b. It should be prepared in Excel and use appropriate formulae wherever possible. (Note: you can insert tables or graphs into a Word document as you might do for presentation purposes, but still submit the Excel spreadsheet.)
2. When Mr Kaur met the Clinical Director of the Division to discuss the sample budget, the Clinical Director’s only concern related to the reductions in the patient number activity that had been applied by Mr Kaur. Based on the actual patient number activity levels over the last 3 years, the clinical director believes that a 6% increase in patients (i.e., the number of patients will increase by 6%) is likely to occur during the next year.
a. Update the budget to reflect this change in patient activity
b. How does the increased activity affect the bottom line of the Division’s budget?
c. Based on the changes recommended by the Clinical Director, what does this suggest about budgets created without involvement of the operational team?
3. The Central Health Department that funds all of the tertiary hospitals has determined that in order to meet the budget cutbacks being enforced by the government the easiest option is to apply either a 5 or 10% reduction to the National Efficient Price (NEP) for the forthcoming year. The hospitals will only be told what level of cut will be enforced closer to the financial year. The Finance Director has asked Mr Kaur to examine the effects of both levels of funding cuts. Prepare budgets that show the consequences of such price reductions based on the activity levels used in question 2. (Hint: if you set up your spreadsheet well you should be able to handle any level of price change by only changing a single spreadsheet cell)
a. Report the consequences of the possible changes on the Division of Medicine’s bottom line in a summary table. Use the activity levels suggested by the Clinical Director of the Division. (Hint: the level of detail you show in the table should be useful for part b of this question.)
b. What advice regarding the budget should Mr Kaur give to the Clinical Director based on this information?
4. Mr Kaur believes that he can convince the Clinical Director of the Division that there are possible means to reduce costs and improve the bottom line. He believes that a reduction in the daily cost of stay (which incorporates Nursing, Medical and Hotel Costs) is possible. Create a series of budget outcomes based on a reduction of stay costs of between 1% and 10% using the activity levels suggested by the Director and the original weighted inlier equivalent separation price. Also prepare the same information using a 5% reduction in national efficient price. Present the overall budget outcome for each price graphically – use a single graph.
5. While the Divisional staff are unaware of what Mr Kaur is proposing (and what he is proposing is possible although he has not had experience in implementing change in a hospital), they have already experienced a number of reforms over the last five years and believe that the service is currently efficient as possible based on the changes that they have implemented and the cost of stay savings they have already achieved. The Director of the Division will have to lead much of the change process if Mr Kaur’s ideas are implemented. Do you believe the likely proposed savings warrant the effort required by the Director to engage a reform weary staff (provide justification for your answer)? (Hint: are there other opportunities for savings that may be made that are less likely to require the Divisional staff to implement significant effort? If so, show the impact using a table or graph.)
6. What might be the issues that the Director of Finance has to contend with in attempting to role this style of budget development out across the hospital (you can assume that the Director of the Division has found the budgeting process to be of value – but you should still state this assumption)? What strategies would you suggest the Director of Finance adopt to minimise the consequences of these issues?
7. Reflection: what insights have you gained regarding the budget setting process in your workplace (or if you’re not currently working, in a place where you have previously worked, and if you have not worked in a health or aged care organization you will still have gained insights, so detail those) as a consequence of undertaking this topic? (As a guide – a single A4 page with single line spacing should provide you with sufficient content for a good reflection).
Remember to:
• Read the requirements of the assignment and plan your spreadsheet first before creating the spreadsheet
• List any assumptions that you make when preparing your budget information
• If you are able to construct a single spreadsheet that can demonstrate the answers then do so. Just paste your spreadsheet results into your Word document.
• If you need to construct a variety of spreadsheets to answer the questions you may do so. This may increase the number of worksheets you have in your Excel file, but there is no penalty for this (other than it may take you longer to do this).
• Submit both the Excel and Word files on LearnonLine.
• Answers should be prepared as though you were submitting them in a business setting. This means:
o The assignment should be well formatted o Including a title page and a table of contents o There should be no spelling mistakes
o You can use dot points, but use sentences were appropriate (You can’t answer the whole assignment as a series of dot points).
• This is also an academic exercise – so please use referencing where appropriate.
• The word limit is an indication only. Answer the questions to the best of your ability. There is no penalty for exceeding the word limit. However, unduly lengthy answers will be penalized, as will answers that do not provide sufficient detail.
• Remember to complete the self-assessment template and also submit that on LearnonLine.
Note – the number of tests, images, pathology and pharmaceutical items per DRG, the costs and the scenarios used in this exercise are purely fictitious.