Preparing this budget requires many assumptions that I’m not the least bit qualified to make. If the hospital is to have something that’s realistic, I’m going to have to involve the physician chiefs and a few other key managers. The real question is how best to do that.
Alex Cohn, the Chief Financial Officer of Los Reyes Hospital, was commenting on the frustration he felt as he began the process of preparing the hospital’s budget for the upcoming fiscal year. As a first step in the process, he had requested some basic information from each of the hospital’s clinical and service departments. He continued:
In reviewing this information, I realized that I simply couldn’t make many of the budgetary decisions in a sensible way. So, I thought it would make sense to decentralize some decisions to the clinical and service departments. However, I know that I’ll encounter some resistance in doing that since these people have never been involved in budgetary decision making before. I thought it might make sense to show them how they could become involved in a way that takes advantage of their expertise. I only hope that I’m not creating a monster of some sort!
To demonstrate the potential role for physician chiefs and service department managers in formulating the hospital’s budget, Mr. Cohn chose four case types in the department of medicine and four hospital service departments as the building blocks for a sample budget. He felt that if he could demonstrate a better approach to budgeting for these four case types and four departments, his approach then could be expanded to cover the rest of the hospital.
The four case types he chose were DRG089 (Simple pneumonia & pleurisy, age over 17), DRG014 (Specific cerebral vascular disorders except transient ischemic attack), DRG096 (Bronchitis & asthma, age over 17), and DRG140 (Angina pectoris). The four service departments he chose were routine care (i.e. the hospital stay itself), radiology, laboratory, and pharmacy.
Financial Information
Mr. Cohn used the information he had obtained from his meetings and conversations with the the chief of medicine, Maria Delgado, M.D., to determine how many cases of each type she expected the physicians in her department would treat during the upcoming year, and how many units of service she expected each case would use from each of the four service departments.
Since most of the hospital’s contracts used a diagnosis-based form of payment, he then discussed the expected revenue the hospital would receive for each case type with his manager of contracting. The results of his information gathering efforts are contained in Exhibit 1. . . .
Assignment
- Using the information contained in the case and Exhibit 1, prepare a budget for the department of medicine for the four case types shown. Organize your figures so that Dr. Delgado will find them understandable and useful.*
- Assuming Dr. Delgado and Mr. Cohn are unhappy with the “bottom line” of this budget, what options are available to change it? Which options seem the most feasible to implement?
- What problems do you think Dr. Delgado and Mr. Cohn will encounter in attempting to expand this effort to the rest of the department of medicine? What should be done about those problems?
- What problems do you think Mr. Cohn will encounter in attempting to expand this effort to the rest of the hospital? What should be done about those problems?