Types of Budget and Health Care System Discussion

Miami Dade College Types of Budget and Health Care System Discussion

Types of Budget and Health Care System Discussion

Read Chapter on Davis Plus: Finance in order to answer the questions below. Book and chapter PDF attached.

1. Mention some examples of indirect and direct cost.

2. What is Medicaid?

3. What is Medicare? How many parts it has? What does each cover?

4. Mention the types of budget

5. What is DRGs and PPs? What do they do for the Health Care System.

6. What is: ADC, ALOS, HHPD?

7. Mention three of the strategies for Cost-Conscious Nursing Practice?

8. What is the income statement. Types of Budget and Health Care System Discussion

2208_Ch01_001-018.qxd 6/23/09 11:27 AM Page 1 bonus chapter 1 Finance OBJECTIVES After reading this chapter, the student should be able to: ■ Understand how a health care agency or institution operates as a business. ■ Compare and contrast the different types of public and private health insurance on a financial level. ■ Define financial terminology, both general and health care-specific. ■ Explain the types of budgets and how each budget applies to a unit, department, and/or institution. OUTLINE Nurses and Budget Knowledge The History of Health Insurance in the United States The Cost of Health Care Types of Health Insurance Medicare Medicaid Private Managed Health Care Plans Health Maintenance Organizations (HMO) Preferred Provider Organizations (PPO) Point-of-Service Plans (POS) Financial Terminology Revenues and Expenses Controllable and Noncontrollable Costs Fixed and Variable Expenses Direct and Indirect Costs Productive and Nonproductive Hours Financial Management Financial Statements Income Statement Additional Financial Terminology Specific to Health Care Average Daily Census Average Length of Stay Hours per Patient Day Principles Of Budgeting Types Of Budgets Operating Budget Capital Budget Cash Budget Personnel Budget and Requirements Fringe Benefits FTEs Staffing Conclusion 1 2208_Ch01_001-018.qxd 2 bonus chapter 1 6/23/09 11:27 AM Page 2 | Finance Health care is becoming more and more like other industries as technology expands and this country spends more and more of its gross national product (GNP) on health care. It is because of this great expenditure that the health care industry must behave more like a business then ever before. Having a business mindset will assist health care institutions to survive in a highly competitive market. An institution’s administration cannot be solely responsible for assuring profitability in health care. Each member of the institution has a responsibility to assist in generating enough money not only to stay in business but to help the organization generate an excess amount of money so it can grow and prosper. Types of Budget and Health Care System Discussion

Now that resources are limited and competition is growing among health care organizations, all resources need to be used wisely and efficiently; the business-savvy nurse will be the leader in this cost-savings movement. This chapter will introduce the nurse to concepts of business and finance to instill an understanding of how a health care agency or institution operates as a business. Nurses and Budget Knowledge The role of nurses in health care today is not what it was just 10 short years ago. Nurses were educated to care exclusively for patients’ health issues and were not part of the day-to-day operations of the units or departments in which they worked. They did not want to be involved in the financial activities of their work environment because they believed that these activities had nothing to do with caring for patients. But today, nurses must recognize that hospitals and other health care organizations are businesses and that the way they provide care to the patients influences how profitable that business can be (see Box 1). For businesses to be successful, they must make a profit on the goods and services that they offer or sell. All health care agencies, whether they are forprofit or not-for-profit, are in the business of making money. If expenses exceed revenues, then they experience a loss. If expenses equal revenues, then they break even. In both cases, there is no money to hire nurses, replace facilities and equipment, expand services, or accommodate costs due to inflation. Some organizations survive only because they use interest from investments and income from grants, endowments, profits, sale of properties, and so forth to supplement revenues. However, since Box 1-1 Strategies for Cost-Conscious Nursing Practice 1. Understanding what is required to remain financially sound 2. Knowing costs and reimbursement practices 3.

Capturing all possible charges in a timely fashion 4. Using time efficiently 5. Discussing the costs of care with patients 6. Meeting patient, rather than provider, needs 7. Evaluating cost-effectiveness of new technology 8. Predicting and using nursing resources efficiently 9. Using research to evaluate standard nursing practice the decline in the stock market in late 2008, income from investments cannot be counted on. Therefore, nurses must provide care with the knowledge of how to do so cost-effectively; only then will they help their institutions prosper. Nurses, to be valued care providers, need to be thinking about income and expenses and what is needed for their institution to make a profit. The cost of doing business is determined by many factors, and every choice a nurse makes while caring for a patient contributes to the profit or loss experienced by the institution. The cost of doing business is determined by direct and indirect costs plus a profit margin. Direct costs are such things as salaries, benefits, and supplies.

Indirect costs include electricity, housekeeping, the medical records department, administration, bad debts, and uncollectibles. More information on direct and indirect costs is provided later in this chapter (see Table 1). The state of the economy plays a large role in health care costs. During tough economic times, many people begin making the hard decisions between putting food on the table or paying for health care, and so people enter the health care system sicker, requiring more money to return them to Table 1-1 Number of Nonelderly Uninsured Americans, 2004–2007 Year 2004 2005 2006 2007 Number of Uninsured (in millions) 43.0 44.4 47.0 45.7 2208_Ch01_001-018.qxd 6/23/09 11:27 AM Page 3 bonus chapter a healthy state. In 2006, 47 million people were without health insurance coverage (U.S. Census Bureau, 2007); in 2007, the Census Bureau reported the number of people without health insurance decreased to 45.7 million, an improvement likely due to an increased enrollment in public programs—notably Medicare and Medicaid. But in November 2008, unemployment hit an alltime high of 6.7%, most likely erasing any further decreases in the number of uninsured (U.S. Department of Labor, 2008). Types of Budget and Health Care System Discussion

Recent analysis predicts that each 1 percentage point increase in unemployment will lead to 1.1 million more uninsured adults (Kaiser Family Foundation and Health Research and Education Trust, 2008). When people make a choice between food on the table and going to a doctor, the food wins out, therefore delaying care for fear of medical bills. This begins the downward spiral that leads ultimately to higher health care costs for all of us. It has never been more important for nurses to understand the cost of health care and what their part is in keeping down those costs. In today’s market of competition and limited resources, understanding how human and material resources are allocated and utilized in providing patient care will help nurses to help their health care organization maintain and even improve profitability. Such an understanding will also help increase the amount and quality of nursing services. These depend on the budgetary plan, so nurses must become skillful in budgetary procedures. The costs of nursing services historically have been lumped in with the patient’s room and board charges. The nursing profession has been unable to charge independently for the skill, knowledge, and care it provides. To achieve reimbursement for nursing services requires a change in government regulations and third-party payer policies. When nurses can demonstrate their financial value and savvy in the health care setting, then the possibility of charging for their knowledge and experience in caring for patients will become more of a reality. Nurses must be able to determine the resources they will need to manage patient care and articulate those needs to ensure they receive their share of limited resources. And they must be able to accurately project the resources needed to maintain efficiency and provide quality care. Each year, the pressure to control costs increases, requiring nurses to understand more sophisticated information about 1 | Finance 3 the financial aspects of their job.

Nurses are expected to use financial tools to develop and justify budgets and to minimize the cost of staff and supplies. Because the budget is an annual plan that guides the effective use of human and material resources, of goods and services, and of the management of the environment to improve productivity, it is one of the most important tools of financial management. This chapter is an introduction to how the health care system arrived at the business it is today and provides knowledge and skills to develop and articulate the budgetary needs of nursing. The History of Health Insurance in the United States The health care industry is a service industry rather than a production industry. Its essential business is the delivery of quality health care services, for which it receives payment. Traditionally, health care was paid for from private funding sources, meaning either individuals paid for themselves or money was made available through various charitable institutions.

During World War II (WWII), the government initiated employee wage and price freezes to prevent wartime inflation. The 1942 Stabilization Act was designed to curb inflation, control wage levels, and ration essential consumer goods, thereby helping to stabilize the cost of living. Because it was illegal to raise wages, employers began offering benefits packages, including health insurance. A 1943 administrative ruling determined that the monetary value of a health insurance plan was not subject to the wartime wage controls, was taxdeductible to the employer, and was not considered taxable income for employees. This ruling allowed employers to use fringe benefits, especially health insurance, to compete for workers, and the system gave rise to the employer-based health insurance system in place today. From the end of WWII to the late 1960s, employer-sponsored health insurance expanded greatly because of the tax benefit, the expanding economy, and the need to attract good workers. Private corporations became the primary providers of health insurance for most Americans. By the 1960s, 90% of the population was covered by health insurance (Dobbin, 1992). The 1960s was a period of remarkable prosperity in the United States, as measured by such statistics as the GNP and the unemployment rate, which was below 4%. It was easy for businesses to continue to 2208_Ch01_001-018.qxd 4 bonus chapter 1 6/23/09 11:27 AM Page 4 |Types of Budget and Health Care System Discussion

Finance pay for health insurance and other fringe benefits. Most plans were paid for by the employer, and employees were reimbursed 100% of the fee for services rendered. But during the 1970s, unemployment increased and so did the number of the uninsured. Employers could no longer bear the burden of paying for employee health insurance, so they began shifting more and more of the burden to employees. Who pays for the rising costs of health insurance and ultimately health care today? Everybody does: employees, consumers, and taxpayers. Businesses pass along a portion of the rising premiums to their workforces in the form of lower wage increases. Companies add the cost of the fringe benefits, including health insurance, to the price of their products and services. The federal government spends about 21% of the federal budget—our taxes—on health care. In 2007, expenditures on health care rose to nearly $2.3 trillion—or over eight times the $255 billion spent in 1980—amounting to over $7600 per person (National Coalition on Health Care, 2008). So today, more than ever, it is important for nurses to understand that with more and more of the financial burden falling on the individual, they must be cost-conscious.

The Cost Of Health Care The cost of health care is at an all-time high and continues to increase. When calculating the cost of doing business, businesses consider both direct and indirect costs and then add a profit margin. Direct costs involve salaries and supplies, and indirect costs include administrative fees and electricity. What is collected above these costs is the profit margin, and that amount is what enables any business to grow and account for future inflation and expenses. In terms of health care, the more the patient is treated and services provided, the more profit the institution makes. This fact is the origin of the runaway costs of health care. By the 1960s, the federal government had developed Medicare and the concept of average pricing had been established. Medicare set the standard for what it would pay for services rendered, and providers began to compete at that price or lose money. Nevertheless, prior to 1983, the health care industry experienced expansion in volume, intensity, dollars, and personnel. The cost of growth was borne by insurance companies and by patients, which helped hospitals develop healthy financial statements. Patients were clamoring for the best technology and the best treatments and wanted more elective surgeries, which increased payouts from insurance companies. Hospitals saw record profits. In 1983, as a means of controlling spiraling costs, Medicare instituted diagnosis-related groups (DRGs), which forever changed how hospitals and providers charged for their services (see later in this chapter for more information on DRGs). DRGs created billing categories and a prospective payment system (PPS). This system categorizes patients based on primary and secondary procedures, age, and length of stay. DRGs set a maximum amount that would be paid for the care of Medicare patients with certain diagnoses. Hospitals and health care providers were given an incentive to keep costs down because they would experience a profit only if their costs were less than the amount to be reimbursed by the DRG category. Thus, control of the cost of health care shifted from the insurance companies to the hospitals. The hospital now had to control costs by reducing many nonessential services and the time patients spent as inpatients. Until DRGs, hospitals looked at nonessential services as a cost of providing health care. Whatever the patient wanted the patient received, because the hospital expected reimbursement. Types of Budget and Health Care System Discussion

Now that hospitals were receiving a flat rate for a diagnosis, reigning in the cost of caring for a patient became paramount. It was imperative for the care provided to represent only what the patient needed, nothing more. Much unnecessary spending had arisen from administrative costs, nosocomial infections, and unnecessary medical tests. Patients had wanted every test and procedure done to help determine a diagnosis. Now hospitals and physicians needed to be cost-conscious about what care they provided and how, for the consequences of providing unnecessary patient care could create a financial deficit for the hospital. The shift of financial responsibility from the insurance company to the hospital created a burden for hospitals, especially if something happened to a patient that kept him or her hospitalized beyond the DRG guideline. The hospital would not get reimbursed for the cost of treating the patient if the initial diagnosis was incorrect or if the patient had a secondary diagnosis unrelated to the initial admission. Patients who have an extended admission because a nurse or other health care provider 2208_Ch01_001-018.qxd 6/23/09 11:27 AM Page 5 bonus chapter did not wash their hands between patients, causing a nosocomial infection, are not responsible for the added costs of their stay. The hospital is financially responsible for all extra costs. What impact did this have on providing quality patient care? Because of the shift in reimbursement practices, hospitals began providing patients with the lowest level of care possible to control costs. Hospitals increased scrutiny of length of stays, encouraging early discharges. Then the concern became whether patients were being discharged too quickly. Hospitals also began to discourage admissions of patients who might require expensive services. If the DRG reimbursement rate did not cover those expensive services, the hospital would lose money. DRGs were slow to change. New pharmaceuticals and technological advancements were typically assigned to an existing DRG, and so it took several years for the increased costs related to the new technology or pharmaceutical to be included in the DRG payment.

Finally, in 2003, Medicare implemented its New Technology Add-On Payment System to account for the use of innovative technologies in inpatient care settings. Following strict guidelines, Medicare will provide, for technologies that qualify, additional payment above and beyond the standard DRG payment. This is why it is important for every nurse to understand what services provided will be reimbursed. Remember, if a patient’s length of stay increases due to a nosocomial infection, the hospital bears the cost of that increased stay without reimbursement. Also, if a DRG does not include the cost of new technology, the hospital will not be able to cover the cost of both caring for the patient and acquiring the equipment. Medicare DRGs became the standard by which all insurance companies paid for hospital and provider services. In place of the traditional fee-for-service payment system, insurance companies adopted a reimbursement system similar to Medicare’s based on negotiated rates, contracts, and outcomes. So today, there is typically no significant difference in benefits or reimbursement over and above Medicare’s DRG from one insurance plan to another. Using the Medicare DRG reimbursement rate, a nurse can determine what most insurance companies will pay for any given admission (see Box 2). To maximize profit, nurses need to think continually about providing care that achieves optimal outcomes with minimal costs. Nursing services are billed as a flat rate, lumped into the “room rate” of 1 | Finance 5 Box 1–2 DRGs DRGs classify hospital admissions by grouping patients with similar ICD-10 codes, thereby providing a means of relating the types of patients that a hospital treats to the costs that the hospital incurred. The first application of DRGs occurred in New Jersey (NJ). The NJ State Department of Health used DRGs as the basis of a prospective payment system (PPS) in which hospitals were paid a fixed DRG specific amount for each patient. Under PPS, hospitals cannot charge for all costs incurred for patient care. Reimbursement relies on a predetermined price set by the DRG. Hospitals are paid a flat-rate reimbursement on the discharge diagnosis regardless of the patient’s length of stay, tests, procedures, or the supplies used. a hospital stay; nursing services, along with supplies and procedures, should be used with an eye on cost containment, efficiency, and positive patient outcomes.

Nurses have the power, knowledge, and skill to increase reimbursement by reducing unnecessary expenses. Types Of Health Insurance It is important to understand the various forms of insurance available to patients. It is also important to understand how the insurance may affect the decision a nurse makes when caring for patients. The following sections discuss the major providers of insurance: Medicare, Medicaid, and the various managed health care options. Medicare Founded in 1965, Medicare is an insurance program that was signed into law by President Lyndon B. Johnson and administered by the Centers for Medicare and Medicaid Services (CMS), an agency of the U.S. government. Medicare is our country’s health insurance program for people aged 65 or older. Certain people younger than age 65 can qualify for Medicare, such as those who have disabilities and those who have permanent kidney failure or amyot … Types of Budget and Health Care System Discussion