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Lab Management

Effective Budgeting

QuestionAnswer
Budget A business tool used for effective resource management
Resource Management Justification of resources for expected results Cost-accounting Identifies, defines, measures, reports, and analyzes the elements of costs associated with providing a unit of output (test) Assigns allocated costs to that test Constant justification
Operating Budget (A tool for lab managers throughout the year) Overall plan for coordination of resources A plan for identification of resources and expenditures A plan for projections
Operating Budget A Communication tool to be used with internal and external customers
Types of Operating Budgets Fixed; Flexible; Program; Appropriation; Rolling Zero-based
Fixed Budget Assumes a single level of activity and the entire budget is built around that level; not a tool to monitor and control resources during change.
Flexible Budget Reflects expected lab revenue and expenses and it anticipates changes Expenses: fixed and variable
Program Budget Based on a specific program matrix Includes related activities, services, staffing, and equipment related to the program Used for short term planning
Appropriation Budget Outside agency reviews the budget in detail & authorizes specific dollars; Common in government; Dependent on outside source of funds
Rolling Budget A continuous budget that is updated periodically in preparation for the next budget cycle; A rolling budget for a 12-month period is reviewed & revised quarterly; used for cash projections
Zero-based Budget Reviewed annually Re-evaluates all activities to decide whether to eliminate or fund Project approval based on funding levels and availability as determined by priorities
Lease vs. Purchase Lump sum capital not available Monthly payments spread over time Based on purchase price plus interest, taxes, insurance, maintenance No money down 100% financing @ fixed rate
Reagent Rental Agreement Cost of instrument included in the reagent cost charged by vendor No capital costs
Successful Budgets Clear goals and objectives that guide resource allocation Detailed statistical data, economic trends, accurate information about clients
Successful Budgets Define budget period and procedures for development of the budget Reports to identify actual financial and statistical information for comparison with the budget and for variance analysis
Three Segments for the Complete Budget Income forecasting Expense budget Cash flow projections
Common Budgeting Problems Losing sight of objectives; Overbudgeting Not enough revenue; Other variances indicating something is wrong with the budget
Solutions Focus decisions toward clear objectives; Think of the Budget as a standard and focus performance against it; Analyze monthly variances; Identify ways to reduce expenses or increase income
Historical-based Budgeting Budgeting above 100% of the previous year Total monies spent in previous year is divided by 12 Add a percentage for inflation for upcoming year
Variance Explanation Go back to the original assumption Identify real problems, offer solutions Use the Budget as a guideline and process that monitors Don’t lay blame on previous years Don’t ask for a budget increase for this year based on last year’s failure
Budget Justification Compare the budget to the actual expenses Determine the accuracy of the forecast Use Budgeting Standards
Budgeting Standards Review and prepare justifications monthly; Present recommendations for corrective action; Make sure that the actual results are not manipulated; Make all staff aware of budgetary limits and goals
Percent Variance (YTD-Forecast)/Forecast
Variance YTD- Forecast
Four phases in budget preparation Development of Goals; Budget Assumptions; Forecast of Expenses; Monitoring
Phase I: Development of Goals important that the goals developed by the laboratory are in line with the organizations mission statement and strategic objectives.
Phase II: Budget Assumptions The organization projects a budget based on past earnings, cash flow, and changes in state or federal laws affecting reimbursement; lab formulates budget assumptions on annual test volume and revenue generated
Phase III: Forecast of Expenses Capital Expense vs. Operational Expense; Justification categories and priority of need Prior to any capital purchase, it is wise to do a 5-yr cost analysis comparing the cost of your current system to the cost of newer technology.
Capital Expenditures calculated for a 3-yr cycle and are considered investments; Justification categories and priority of need are required when evaluating capital expenditures
Justification Categories Replacement; New Equipment;Cost Reduction
Priority of Need Essential; Necessary; Desirable; Other
Cash Purchase advantageous for equipment expected to keep for > 5 yrs.
Equipment Lease often used with an open system – you pay a monthly fee for the use of the equipment but are free to shop for the most economical reagent system
Reagent Rental require the purchase of a fixed volume of a specific manufacturer’s reagents. The cost for the use of the equipment is calculated into the reagent cost
Prior to any capital purchase, it is wise to do a 5-yr cost analysis comparing the cost of your current system to the cost of newer technology. Equipment cost; Cost of service contract; Reagent cost; Technologist time; Cost to the client/patient; Medicare reimbursement
Operational Expenses encompass a 12-month cycle and is just what the name implies – the expenses required to operate a lab.
chart of accounts Expenditures are grouped into categories: Salaries including cost of benefits Reference lab fees Education and travel Departmental fees Transfusion service operating cost & blood supply cost Purchased service and maintenance Other direct expenses
Phase IV: Monitoring expense reports are reviewed monthly for budget variances.
Budget variances Increased volume; Vendor price increase; Changes in policy and procedure
Cost per Test/Cost per Unit of Service important because: Evaluating different methodologies To formulate managed health agreements whereby the hospital offers service at a discount Calculating the amount of free community service
Instrumentation Impact on Lab Costs Capital acquisition; Consumables; Cost per reportable; Direct costs; DRGs; Fixed costs; Lease; Marginal cost analysis; Operational efficiency; Price protection; Service Contract; Variable costs; Workstation consolidation
Capital Acquisition The purchase or lease/rental of clinical laboratory instrumentation
Consumables Disposable supplies used to produce test results
Cost per Reportable All direct costs directly related to producing a patient test result
Direct Costs Only those costs incurred as a direct result of producing a test result. Indirect costs, such as administrative costs, would not be included in this calculation.
DRGs (Diagnosis-Related Groups) A prospective payment system used by Medicare to classify all hospitalized patients into one of approx. 500 diagnosis-related groups. The hospital receives a fixed payment per DRG to cover operating costs.
Fixed Costs Costs that do not vary as test volume increases. Examples are rental payment, interest on debt, depreciation of equipment, and wages of a skeleton staff that would be employed as long as the hospital stayed in business even if it produced nothing.
Lease A contract that allows for the renting of instrumentation for a specified time under specified terms.
Marginal Cost Analysis The additional cost incurred as output expands. It is cost associated with producing an additional patient test result.
Operational Efficiency Making the fullest utilization of available inputs. Alternatively, minimizing the use of inputs to produce the desired level of test results.
Price Protection An agreement whereby the vendor agrees to limit price increases by an agreed-upon amount during the term of the agreement.
Service Contract Contracts whereby the vendor agrees to supply maintenance and repair of instrumentation. A contract could cover response time and hours and days (i.e. including weekends) during which the services will be provided.
Variable Costs Costs that change as output (i.e. test volume) fluctuates.
Workstation Consolidation Reducing the number of laboratory instruments needed to meet testing demands.
Determining the Cost of a Test All direct costs to produce a reportable patient result; Cost per test vs Cost per reportable; Determine total number of tests to be performed per month; reagent costs; monthly costs for supplies; cost per month for the capital and service of the analyzer
Technology helps minimize operating costs through Barcode readers for patient id and reagents Enhanced data management capabilities Broad test menus On-board quality control Fully automated counting analyzers Interfacing with host computer
Created by: kashe220