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4209- Fiscal Planning & DRGs. Presented by Teri Pierce, MSN, RN Nsg 401 Rev. Fall 10. Fiscal Planning. Not intuitive; it is a learned skill that improves with practice. An important but often neglected dimension of planning. Fiscal Planning.

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4209 fiscal planning drgs

4209- Fiscal Planning & DRGs

Presented by Teri Pierce, MSN, RN

Nsg 401

Rev. Fall 10

fiscal planning
Fiscal Planning
  • Not intuitive; it is a learned skill that improves with practice.
  • An important but often neglected dimension of planning.
fiscal planning1
Fiscal Planning
  • Should reflect the philosophy, goals, and objectives of the organization
  • Increasingly critical to nursing managers because of increased emphasis on finance and the business side of health care
  • NM’s role: Understanding fiscal terminology and maintaining a cost-effective unit
cost containment
Cost Containment

Refers to effective and efficient delivery of services while generating needed revenues for continued organizational productivity

Responsibility of every health care provider

Viability of most health care organizations today depends on wise use of resources

cost effective
Cost Effective
  • Not the same as being inexpensive
  • Defined by the American Heritage Dictionary of the English Language (2005) as “economical in terms of the goods or services received for the money spent.” (A product is worth the price)
  • Cost does not always equate to quality in terms of health care
responsibility accounting
Responsibility Accounting
  • Each of an organization’s revenues, expenses, assets, and liabilities is someone’s responsibility.
  • Person with the most direct control is held accountable (unit level= nurse manager)
  • A plan that uses numerical data to predict the activities of an organization over a period of time
  • Desired outcome- maximal use of resources to meet organizational short- and long-term needs
  • Provides a mechanism for planning and control and promotes each unit’s needs and contributions

Forecasting involves making an educated budget estimate using historical data.

types of budgets
Types of Budgets
  • Personnel or workforce
  • Operating
  • Capital
  • Continuous or perpetual
  • Fiscal year
personnel budget
Personnel Budget
  • Largest of the budget expenditures
  • Reason: health care is labor intensive
    • Takes a lot of people to run a hospital
    • Don’t want to be overstaffed or understaffed
personnel budget1
Personnel Budget

Nonproductive Time

Cost of benefits

New employee orientation

Employee turnover

Sick time

Holiday time

Education time


  • Productive/Worked Time
  • Worked hours
  • Overtime
  • Per diem
nursing care hours per patient day nch ppd
Nursing Care Hours Per Patient Day (NCH/PPD)

Total hours worked by nursing staff in a 24-hour period


patient census at the end of that

24-hour period

fte formula full time equivalent
FTE Formula(Full Time Equivalent)

Total hours worked by a nurse (over 7 days)


40 hours


operating budget
Operating Budget
  • Involves all managers
  • After personnel costs, 2nd most significant component of hospital budget
  • Reflects expenses that change in response to the volume of service
  • Examples
capital budget
Capital Budget
  • Plans for the purchase of buildings or major medical equipment
  • Includes equipment that has a long life
  • Equipment not used in daily operations
  • Equipment is more expensive than operating supplies
  • May have to exceed a certain $ amount
  • Annual or semi-annual
  • May also be called capital expenditures
  • Examples
budgeting methods
Budgeting Methods
  • Incremental budgeting
    • Not very cost effective, predicts for next year
  • Zero-based budgeting
    • Decision package – that’s how you set your priorities for what you want in your budget
    • Each year you start over from ground zero, can’t assume that because it was included last year that it will be included this year
  • Flexible budgeting
    • Varies with volume and labor, calculates what you need based on your bottom? Who knows
  • New performance budgeting
    • Based on outcomes, like home health wants new glucometers, keeps track of how these new ones work better than the old ones, to justify need for new ones
critical pathways
Critical Pathways

Also called clinical pathways

Definition- standardized prediction of patients’ progress for a specific diagnosis or procedure

Length of stay (LOS)

Variance analysis - may be justifiable… ?

other budgeting terms
Other Budgeting Terms
  • Direct costs
    • Attributed to direct source, like medication. You can track exactly where they came from and where they went
  • Indirect costs
    • We can’t attribute to a specific source, usually more hidden costs, usually spread out over all departments, like housekeeping. Everyone in the hospital needs housekeeping
other budgeting terms1
Other Budgeting Terms
  • Controllable costs
    • Staffing ratios, staffing mix (more LVN’s vs less RN’s), the type of materials you buy
  • Uncontrollable costs
    • Equipment depreciation, the number and type of supplies that pt’s need (lots of drains go thru lots of stuff), overtime in the instance of an emergency
other budgeting terms2
Other Budgeting Terms

Fixed costs – things that don’t change, the amt you pay every month is the same

Variable costs – varies with volume and staff

types of health care reimbursement
Types of Health Care Reimbursement
  • Fee for Service (FFS)
  • Medicare
  • Medicaid
  • Diagnosis-Related Groups (DRGs) & the Prospective Payment System (PPS)
  • Managed Care
fee for service ffs
Fee for Service (FFS)
  • Little emphasis on budgeting
  • Virtually limitless reimbursement
  • Reimbursement=

cost to provide service+ profit

  • More services= greater amount billed
  • Encourages overtreatment of patients
  • Health care costs skyrocketed
  • CMMS
    • Center for Medicare and Medicaid Services
  • Medicare
    • Elderly (>65)
    • Catastrophic or chronic illness (no age limit)
    • Part A – covers hospital or inpatient services, pts have to pay deductable
    • Part B – usually covers labs, flu shots, outpt services (physician charges)
    • Part C (Medicare Advantage)
    • Part D – newer, came into existence in 2006, Medicare prescription drug coverage
  • Federal and state cooperative health insurance plan
  • Administered by the states under broad federal guidelines (CMMS)
  • Primarily for the financially indigent
  • Majority of Medicaid recipients are women and children
prospective payment system pps
Prospective Payment System (PPS)
  • The creation of Medicare, Medicaid, and fee for service (FFS) reimbursement caused health care costs to skyrocket
  • Government established regulations for justifying need for service and quality monitoring
  • So… the Prospective Payment System was started
  • Here’s what you’re going to get paid, you can work within these bounds…
diagnosis related groups drgs
Diagnosis-Related Groups (DRGs)
  • 1983- to monitor cost containment
  • Medicare & Medicaid
  • Predeterminedpay rates set for inpatient hospital stays based upon admitting diagnosis (flat fee)
  • Rates reflected historical costs for treatment
  • Prospective payment, not retrospective as in the past with FFS
prospective payment system pps1
Prospective Payment System (PPS)
  • Hospitals receive a specified amount for each Medicare patient’s admission- regardless of the actual cost of care
  • Outliers
    • Exceptions
    • Extra payment justified
  • Length of stay (LOS) declining
  • Reimbursement declining
managed care
Managed Care
  • Attempts to integrate efficiency of care, access, and cost of care
  • Primary care physicians (PCPs)- “gatekeepers”
  • Selective contracting
  • Copayments- “copays”
  • Use of formularies
  • Continuous quality monitoring/improvement
  • Utilization review (UR)
types of managed care organizations mcos
Types of Managed Care Organizations (MCOs)
  • HMO
    • Certain financial, geographic, & professional limits
    • Different types of HMOs
  • PPO
    • Financial incentives to consumers if using preferred provider
  • Medicare & Medicaid Managed Care
  • A hallmark of managed care
  • Fixed payment regardless of servicesused by the patient during that month
  • Less cost= provider profit
  • Cost > capitated amount= loss for provider
  • Goals
    • Stay healthy, avoid illness
    • Eliminate unnecessary use of health care services
  • Most difficult part- calculation of the capitation amount
  • Must be acceptable to the purchaser and must cover the expenses
  • Number of enrollees too low- provider may not be able to cover practice costs
  • Ethical dilemma- encourages underutilization of services
pros and cons of managed care
Pros and Cons of Managed Care
  • Pros
  • Decreased costs
  • Broader patient benefits
  • Shift from inpatient to outpatient settings
  • Higher physician productivity
  • High enrollee satisfaction levels
  • Cons
  • Loss of existing physician-patient relationships
  • Limited choice of physicians
  • Lower continuity of care
  • Decreased physician autonomy
  • Longer wait times
  • Consumer confusion over rules
moral hazard
Moral Hazard
  • Overuse of more medical services than necessary just because insurance covers so much of the cost.
impact of managed care
Impact of Managed Care

Reimbursement is not guaranteed by provision of service

Need for self-awareness regarding values in provision of care

recent trends
Recent Trends
  • Participation in managed care plans (by both consumers and providers) declining
  • Still a major force affecting contemporary health care
  • Managed care no longer significantly less expensive for consumers or insurers
  • Providers frustrated- limited reimbursement & need to justify services
  • Will continue to change

Marquis, B. L., & Huston C. J. (2009). Leadership roles and management functions in nursing: Theory and application (6th ed.).Philadelphia: Wolters Kluwer Health.