Task:
A new business manager, Ms Smith, has been appointed to work with the Medical Division at the ABC General Hospital. While such appointments have occurred elsewhere, this is the first such appointment at the ABC General Hospital.
While Ms Smith is a qualified accountant and has some years of experience in preparing budgets, this is her first appointment inthe health industry.
After her first week on the job, Ms Smith was talking to the Director of Finance regarding her experience in the hospital so far:
“I will have to make some assumptions to create the new budget, but I do not feel comfortable doing so given the level of knowledge I have 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 to learn about the hospital and begin the engagement process with the clinical staff.
The Director of Finance reminded Ms Smith 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 executives are hoping that the appointment of Ms Smith will demonstrate to the clinical staff the benefit of establishing a close working relationship between finance staff and clinical staff. Consequently, 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 relationshipsbetween the clinicians and corporate services back considerably.
In previous years, the Finance Department has set divisional budgets without the significant involvement of the clinical directors. Additionally, the budgets have only shown the costs of providing services and not the hospital’s income for providing the services.
While Ms Smith is a qualified accountant and has some years of experience in preparing budgets, this is her first appointment inthe health industry.
After her first week on the job, Ms Smith was talking to the Director of Finance regarding her experience in the hospital so far:
“I will have to make some assumptions to create the new budget, but I do not feel comfortable doing so given the level of knowledge I have 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 to learn about the hospital and begin the engagement process with the clinical staff.
The Director of Finance reminded Ms Smith 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 executives are hoping that the appointment of Ms Smith will demonstrate to the clinical staff the benefit of establishing a close working relationship between finance staff and clinical staff. Consequently, 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 relationshipsbetween the clinicians and corporate services back considerably.
In previous years, the Finance Department has set divisional budgets without the significant involvement of the clinical directors. Additionally, the budgets have only shown the costs of providing services and not the hospital’s income for providing the services.
After the weekend and having had a chance to reflect on the Director of Finance’s words, Ms Smith 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 howthey might control it.
Creating an entire budget would require a significant investment of time. So Ms Smith decided to create a budget based solely on types of inpatient activity work undertaken in the Division.
Creating an entire budget would require a significant investment of time. So Ms Smith decided to create a budget based solely on types of inpatient activity work undertaken in the Division.
Your Tasks
1. Prepare a budget for the Division of Medicine based on the material that Ms Smith as available to her.
a) The budget does not need to be cash-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 Ms Smith met the Clinical Director of the Division to discuss the sample budget, the Clinical Director’s only concern was the reductions in the patient number activity that Ms Smith had applied. Based on the actual patient number activity levels over the last 3 years, the Clinical Director believes that a 4% increase in patients (i.e., the number of patients will increase by 4%) is likely to occur 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 the involvement of the operational team?
3. The Central Health Department that funds all of the general hospitals has determined that 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 Ms Smith 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.
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.
b) What advice regarding the budget should Ms Smith give to the Clinical Director based on this information?
4. Ms Smith believes that she can convince the Clinical Director of the Division that there are possible means to reduce costs and improve the bottom line. She believes that reducing 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. Then 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 Ms Smith is proposing (and what she is proposing is possible although she has not had experience in implementing change in a hospital), they have already experienced many reforms over the last five years. They believe that the service is currently as efficient as possible based on the changes 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 Ms Smith’s ideas are implemented. Do you believe the likely proposed savings warrant the effort required by the Director to engage a reform weary staff? Justify your answer.
6. What might be the issues that the Director of Finance has to contend with in attempting to roll 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?
1. Prepare a budget for the Division of Medicine based on the material that Ms Smith as available to her.
a) The budget does not need to be cash-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 Ms Smith met the Clinical Director of the Division to discuss the sample budget, the Clinical Director’s only concern was the reductions in the patient number activity that Ms Smith had applied. Based on the actual patient number activity levels over the last 3 years, the Clinical Director believes that a 4% increase in patients (i.e., the number of patients will increase by 4%) is likely to occur 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 the involvement of the operational team?
3. The Central Health Department that funds all of the general hospitals has determined that 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 Ms Smith 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.
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.
b) What advice regarding the budget should Ms Smith give to the Clinical Director based on this information?
4. Ms Smith believes that she can convince the Clinical Director of the Division that there are possible means to reduce costs and improve the bottom line. She believes that reducing 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. Then 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 Ms Smith is proposing (and what she is proposing is possible although she has not had experience in implementing change in a hospital), they have already experienced many reforms over the last five years. They believe that the service is currently as efficient as possible based on the changes 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 Ms Smith’s ideas are implemented. Do you believe the likely proposed savings warrant the effort required by the Director to engage a reform weary staff? Justify your answer.
6. What might be the issues that the Director of Finance has to contend with in attempting to roll 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?
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