Question

Question 1.

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 303 patients. They expect 150 oncology patients, 120 cardiac patients, and 33 rhinoplasty patients.

The average charge, or list price, for oncology patients is $90,000. 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 - $50,000, cardiac patients - $45,000, and rhinoplasty patients - $40,000. 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	50%	30%	15%	5%
Cardiac	50%	40%	5%	5%
Rhinoplasty	40%	20%	25%	15%

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 annum (per year).

Expenditures

The hospital expects to employ workers in the following departments:

	Oncology	Cardiology	Rhinoplasty	Total
Managers	500,000	500,000	300,000	1,300,000
Staff	3,200,000	2,000,000	500,000	5,700,000
Total	3,700,000	2,500,000	800,000	7,000,000

Supplies are to be purchased throughout the year for the departments as follows:

	Total
Oncology	500,000
Cardiology	300,000
Rhinoplasty	280,000
Total	1,080,000

Assume that all supply use varies with the number of patients.

Swedish hospital currently pays rent on its buildings and equipment of $240,000 per year, paid quarterly at $60,000 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. The salaries of managers are fixed costs (manager salaries do not change with the patient volume). The staff salaries are variable costs (expenses) in all areas. All salaries are paid in equal amounts each month. Variable salaries are paid in direct proportion to patient volume. Supplies vary in direct proportion to patient volume.

Essay 1. The Task:

1. Calculate patient revenue on accrual basis for the coming year. Sub-divide revenue by program, and within each program subdivide it by type of taxpayer.
2. Prepare a revenue budget based on all of the sources of revenue.
3. Calculate an expense budget on accrual basis for the coming year. The expenses should show main categories such as salaries and supplies.

Essay 2. The Task:

Prepare a flexible budget assuming patient volumes are 10 and 20 per cent higher and 10 and 20 per cent lower than expected. Also include the initially expected patient volume level in the flexible budget.

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
20%	30%	15%	35%	100%

Historically, Swedish has found that private insurance, Medicare/Medicaid and self-pay patients are reimbursed the same quarter as the service provided. However, charity care is never collected.

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 amounts each quarter. Assume that all management 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:

1. 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).
2. Determine cash collections by quarter for the coming year, using revenue information from part a).
3. Develop the cash budget by quarter:
   1. Start with beginning cash.
   2. Add cash receipts shown by source (i.e. patient revenue by payer, from an endowment and from the gift shop).
4. Deduct cash payments by line-item (i.e. salaries, supplies).
5. Calculate available cash balance at the end of each quarter.

Answer 1

Task 1 :

Revenue Budget
Particulars	Oncology	Cardiac	Rhinoplasty
Expected Patients	150	120	33
Private Insurance	50%	50%	40%
Medicare	30%	40%	20%
Self Pay	15%	5%	25%
Charity	5%	5%	15%
Expected # Patients
Private Insurance	75.00	60.00	13.20
Medicare	45.00	48.00	6.60
Self Pay	22.50	6.00	8.25
Charity	7.50	6.00	4.95
Revenue
Private Insurance	$        6,750,000	$        3,600,000	$        660,000
Medicare	$        2,250,000	$        2,160,000	$        264,000
Self Pay	$        2,025,000	$            360,000	$        412,500
Charity	$                       -	$                       -	$                   -
Gross Revenue	$      11,025,000	$        6,120,000	$    1,336,500
Less : Bad Debts of Self Pay	$            506,250	$              90,000	$        103,125
Net Revenue	$      10,518,750	$        6,030,000	$    1,233,375
Total Revenue	$      17,782,125

Particulars	Amount
Revenue from Operations ( After Bad Debts)
Oncology	$          10,518,750
Cardiac	$             6,030,000
Rhinoplasty	$             1,233,375
Total	$          17,782,125
Other Income
Gift Shop	$                200,000
Interest Income	$                600,000
Total Income	$          18,582,125
Expenditure
Salary
Managers	$             1,300,000
Staff	$             5,700,000
Total	$             7,000,000
Rent	$                240,000
Supplies Cost	$             1,080,000
Net Income over Expenses	$          10,262,125

Task 2 : Flexible Budget

Flexible Budget
Particulars	( Current Level Patients)	10% Higher Patients	20% Higher Patients	10% Lower Patients	20% Lower Patients
Revenue from Operations ( After Bad Debts)
Oncology	$      10,518,750	$ 11,570,625	$ 12,622,500	$    9,466,875	$    8,415,000
Cardiac	$         6,030,000	$    6,633,000	$    7,236,000	$    5,427,000	$    4,824,000
Rhinoplasty	$         1,233,375	$    1,356,713	$    1,480,050	$    1,110,038	$        986,700
Total	$      17,782,125	$ 19,560,338	$ 21,338,550	$ 16,003,913	$ 14,225,700
Other Income
Gift Shop	$            200,000	$        200,000	$        200,000	$        200,000	$        200,000
Interest Income	$            600,000	$        600,000	$        600,000	$        600,000	$        600,000
Total Income	$      18,582,125	$ 20,360,338	$ 22,138,550	$ 16,803,913	$ 15,025,700
Expenditure
Salary
Managers	$         1,300,000	$    1,300,000	$    1,300,000	$    1,300,000	$    1,300,000
Staff	$         5,700,000	$    6,270,000	$    6,840,000	$    5,130,000	$    4,560,000
Total	$         7,000,000	$    7,570,000	$    8,140,000	$    6,430,000	$    5,860,000
Rent	$            240,000	$        240,000	$        240,000	$        240,000	$        240,000
Supplies Cost	$         1,080,000	$    1,188,000	$    1,296,000	$        972,000	$        864,000
Net Income over Expenses	$      10,262,125	$ 11,362,338	$ 12,462,550	$    9,161,913	$    8,061,700

Expected Patient Volume at different Levels :

Particulars	Oncology	Cardiac	Rhinoplasty
At Current Level	150	120	33
10% Higher Patients	165	132	36.3
20% Higher Patients	180	144	39.6
10% Lower Patients	135	108	29.7
205 Lower Patients	120	96	26.4

Task 3 : Cash Budget

	Revenue Source	Q1	Q2	Q3	Q4
	Private Insurance	$         2,202,000	$        3,303,000	$    1,651,500	$        3,853,500
	Medicare	$             934,800	$        1,402,200	$        701,100	$        1,635,900
	Self Pay	$             419,625	$            629,438	$        314,719	$            734,344
	Charity	$                         -	$                        -	$                    -	$                       -
	Cash Accruals from Operations	$         3,556,425	$        5,334,638	$    2,667,319	$        6,223,744
Add:	Gift Shop Income	$               50,000	$              50,000	$          50,000	$              50,000
	Interest Income	$             600,000
	Total Cash Accruals	$         4,206,425	$        5,384,638	$    2,717,319	$        6,273,744
	Opening Balance	$             100,000	$        2,565,425	$    5,531,063	$        6,846,381
Less :	Rent	$               60,000	$              60,000	$          60,000	$              60,000
	Salaries
	Managers	$             325,000	$            325,000	$        325,000	$            325,000
	Staff	$         1,140,000	$        1,710,000	$        855,000	$        1,995,000
	Supplies Cost	$             216,000	$            324,000	$        162,000	$            378,000
	Closing Cash Balance	$         2,565,425	$        5,531,063	$    6,846,381	$      10,362,125