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:
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:
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 | |
Question 1. As a newly hired budget analyst, you were assigned to the Swedish Hospital’s finance...
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