BUSI 523 Week 7 Budget Project Example

A First-Year Budget for a Hospital Diabetes Self-Management Education Program: Operating, Capital and Cash Budgets for 420 Patients

Program Overview

The hospital's primary care network cares for about 6,100 adults with type 2 diabetes, and about a third of them have an A1C above 9%. The hospital has no structured education program, so patients are referred to a program 40 miles away, and few attend. The proposed program would offer each patient an individual assessment with a nurse holding the diabetes educator credential and a series of group classes, supported by medical nutrition therapy with a registered dietitian, in person and by video. Harrington (2016) emphasizes that budgets translate an organization's plans into expected revenue, expenses and cash, and that each budget depends on explicit assumptions about volume and payment. The assumptions below are this sample's own and should be replaced with an organization's contracted rates and salary data.

Assumptions

Revenue Budget

The revenue budget starts from what each patient would generate at Medicare rates and then adjusts for each payer. Commercial plans are assumed to pay 20% above Medicare and Medicaid 30% below, a pattern Harrington (2016) describes as typical of the gap between private and public payers. Self-pay and charity patients are budgeted at zero rather than at their gross charges, because the hospital's financial assistance policy will write off most of those balances and counting them as revenue would overstate the program's results. The average of 13 group units, rather than the full 16 the curriculum offers, reflects the attendance falloff that education programs commonly see after the first few classes.

Expense Budget

Personnel make up nearly four-fifths of total expenses, which is why staffing decisions matter more than any supply line. The educator position is budgeted at a full-time salary because one certified specialist can carry roughly 420 patients a year in combined individual and group formats, while the dietitian works part time and also bills nutrition therapy visits. The space allocation charges the program for the classroom it will occupy in an existing outpatient building, even though no new rent is paid, so the budget shows the program's true cost to the hospital. Depreciation replaces the capital outlay, consistent with accrual accounting.

Operating Budget Summary

Capital Budget

The capital items are depreciated on a straight-line basis over their expected useful lives, so the operating budget absorbs $8,400 a year rather than the full $60,000 in the year of purchase. The renovation converts an underused conference room into a classroom with a demonstration kitchen counter, and the tablets let patients who cannot attend in person join classes by video, which should reduce attrition among working adults and rural patients.

Quarterly Cash Budget

Q1 disbursements include the full $60,000 capital outlay. Receipts for the year total $134,082, and $26,816 of fourth-quarter revenue is collected in year 2. Disbursements exclude depreciation, which is not a cash expense.

Breakeven and Sensitivity

Fixed costs are $250,244, the total expenses less the per-patient materials and the billing cost that varies with revenue. Net revenue per patient is $383.09 and variable cost per patient is $40.99, leaving a contribution margin of $342.10. Breakeven volume is therefore $250,244 divided by $342.10, or about 732 patients a year, far above the 420 the program can reasonably enroll in its first year. Each additional 50 patients improves the margin by about $17,100, while moving a tenth of the patient panel from commercial coverage to Medicaid would reduce net revenue by about $5,300. The program's finances are most sensitive to enrollment and attrition, since group units drive most of the revenue.

Narrative and Recommendation

On billing revenue alone, the program loses money, a common result for education services because payment per unit is low and attendance falls off over a series of classes. The case for the program rests on what it prevents. Chrvala et al. (2016) reviewed 118 interventions and found an average absolute reduction in A1C of 0.57 percentage points compared with controls, with the largest gains among programs that paired one-on-one visits with classes and when contact time reached ten hours or more, which matches this program's design. Strawbridge et al. (2017) followed Medicare beneficiaries newly diagnosed with diabetes and found that those who used diabetes self-management training had 14% lower odds of any hospitalization in the following year than matched nonusers. Under the hospital's accountable care contract, which shares savings from avoided hospital use, those effects have direct financial value.

I recommend that the board approve the program with three conditions: an annual transfer of $75,000 from the accountable care organization's shared savings budget, enrollment targets of 420 in year 1 and 560 in year 2 reviewed each quarter and a report each year on participants' A1C change and hospital use. Joseph advised Pharaoh to set aside a fifth of the harvest during seven good years so the land would not perish in the years of famine (English Standard Version Bible, 2001/2016, Genesis 41:34-36). A program that loses money on paper but keeps patients out of the hospital is a store set aside for leaner years, as long as the hospital measures whether the harvest comes in. The hospital should hold a cash reserve equal to the first year's $184,976 shortfall before launch.

References

Chrvala, C. A., Sherr, D., & Lipman, R. D. (2016). Diabetes self-management education for adults with type 2 diabetes mellitus: A systematic review of the effect on glycemic control. Patient Education and Counseling, 99(6), 926-943. https://doi.org/10.1016/j.pec.2015.11.003

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Harrington, M. K. (2016). Health care finance and the mechanics of insurance and reimbursement. Jones & Bartlett Learning.

Strawbridge, L. M., Lloyd, J. T., Meadow, A., Riley, G. F., & Howell, B. L. (2017). One-year outcomes of diabetes self-management training among Medicare beneficiaries newly diagnosed with diabetes. Medical Care, 55(4), 391-397. https://doi.org/10.1097/MLR.0000000000000653