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Chapter 13 Notes

Overview

• Understand and use common sizing

• Understand and use trend analysis

• Understand five types of forecast assumptions

• Understand capacity level issues in forecasts

Common Sizing, Trend Analysis and Forecasted Data

The process of common sizing puts information on the same relative basis. It involves converting dollar amounts to percentages. Converting dollars to percentages allows for comparative analysis. Common Sizing is also referred to as Vertical Analysis because the computation of percentages is vertical.

An example of converting dollars into percentages is if Total Revenue is $200,000 and that is all of the revenue, it would represent 100%. Therefore, if Radiology Revenue is $20,000 then that would represent 10% of the total ($20,000/$200,000=10%).

These comparisons are usually performed within an organization, but a better comparison is comparing a particular situation with other entities. This will determine how you rate and compare to other similar organizations. See Table 13-1 and 13-2 in the textbook.

Trend Analysis

The process of trend analysis compares figures over several time periods. This is similar to common sizing but takes the comparisons a step forward by comparing across time.

An example is if Radiology Revenue was $20,000 for the current period and $15,000 for the previous period, the difference is $5,000. This equates to a 33 1/3% difference because the trend analysis is compared to the base year which is the earlier year. $5,000/$15,000= 33 1/3%. Trend Analysis is sometimes referred to as Horizontal Analysis.

See Table 13-3 and 13-4 in the textbook for examples of Horizontal Analysis.

Analyzing Operating Data

Managers will often need to analyze their own organizations data and that’s why it’s important to become familiar with both horizontal and vertical analysis.

Importance of Forecasts

The dictionary definition of forecasts is to calculate or predict some future event or condition, usually as a result of study and analysis of available pertinent data.

Managers use forecasts to gather information for purposes of planning for the future. Forecasts can be short range (next year), Intermediate range (five years from today) or long range (the next decade and beyond). Forecasts are often required when producing budgets. Assumptions made by managers directly affect the results of forecasts.

Forecasting Approaches

There are three different sources of information and forecast assumptions.

1. The first level derives from personnel directly involved in the operation of the department. They know the operation and can provide important ground level information.

2. The second level comes from electronic and statistical information, including trend analysis.

3. The third level represents executive level judgement that is typically applied to a preliminary rough draft of the budget. An example is adjusting volume based on anticipated future impact of local competition.

Common Types of Forecasts in Healthcare Organizations

The three most common forecasts in healthcare include revenue forecasts, staffing forecasts and operating expense forecasts.

Revenue Forecasts

Operating Revenue Forecasts

Operating Revenue forecasts are inputs into the operating budget.

Types of Revenue Forecasts

Forecasts of revenue can cover different time periods. Usually, a short range forecast is completed as information required is more readily available. Long range models are utilized in order to project or predict what the organization will look like in future years.

A single year forecast is generally for the coming year and is thus a short-range forecast.

Building Revenue Forecast Assumptions

Five important issues regarding revenue forecast assumptions are as follows:

1. Utilization Assumptions

Significant changes in utilization patterns can be occurring that need to be taken into consideration in forecast assumptions. In hospitals there has been a shift to shorter lengths of stay which effect incoming revenue. With government revenue sources looking for ways to reduce costs, rates are decreasing. In nursing homes, the switch to community based programs such as home care has a negative impact on census.

1. Patient Mix Assumptions

There is a need to specify the utilization by payor source, i.e. Medicare, Medicaid, HMO, Private etc.

1. Contractual Allowance Assumptions

The forecasted utilization of a service is multiplied by the appropriate rate or charges. It’s important to understand that gross charges are not an accurate way to project revenue. Allowed charges should be used because all payers pay different rates for the same service. To handle this, a contractual allowance is used which is the difference between the gross charge and the allowed charge. It is recorded as a reduction of the gross charge for the current period.

1. Trend Analysis Assumptions

By performing trend analysis, we compare data between or among years to see trends. If trends are identified, it makes sense to incorporate them into your forecast.

1. Payer Change Assumptions

Trend analysis uses historical date from a past period. Forecasting is prospective, that is projecting into the future. Changes in regulations going forward need to be included in your forecast.

Staffing Forecasts

Staffing forecasts are inputs into the operating budget. There are three important considerations when preparing staffing forecasts.

Controllable vs. Noncontrollable Expenses

Controllable costs are subject to a manager’s own decision making, whereas, noncontrollable costs are outside the manager’s power.

Required Minimum Staff Levels

Regulatory healthcare standards may set minimum staff levels for providing service in a particular unit. This is becoming much more prevalent in healthcare today. This aspect cannot be ignored in the forecast process.

Labor Market Issues in Staffing Forecasts

Certain geographical parts of the country have shortages of professional healthcare staff. Other areas may have an abundance of professional staff. The status of the local labor market plays an important role in staffing forecasts.

Staffing Forecast Components

In many cases, a staffing plan is first created and the staffing forecast follows.

The staffing components are:

• Scheduling Requirements

• Master Staffing Plan

• Computation Sequence to Annualize the Master Staffing Plan

Scheduling Requirements should encompass all hours and all days required to cover each position.

Master Staffing Plan should cover all units and all hours and days required to cover all positions within the units.

Computation Sequence to Annualize the Master Staffing Plan sequencing is:

See Figure 13-4 in Chapter 13 and Exhibit 9-4 in Chapter 9

• Compute productive and nonproductive days and net days paid

• Convert net days paid worked to an annual factor

• Calculate annual FTE’s using the factor

Capacity Level Issues in Forecasting

Capacity relates to services in the healthcare industry. The ability to produce and provide specific healthcare services.

Space and Equipment Availability

The ability to provide healthcare services is limited by the availability of both space and the proper equipment.

Staffing Availability

Review Exhibit 13 – 1.