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 relationships
between 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.
Ms Smith’s Approach
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 how
they 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.
Ms Smith had discovered that the following DRGs were common:
DRG Description
Average
Length of Stay
(Days) Last
Year
Number of
Patients Last
Year
Expected
Average
Length of
Stay (Days)
Expected
Number of
Patients Inlier Weight
F74Z Chest Pain 1 1,850 1 1,650 0.265199
E65B
Chronic Obstructive Airways Disease W/O
Catastrophic CC
4 760 3 750 1.13937
F73B Syncope and Collapse W/O Catastrophic or
Severe CC
2 470 2 450 0.392604
F76B
Arrhythmia, Cardiac Arrest and Conduction
Disorders W/O Cat or Sev CC
2 470 2 450 0.404471
E62B
Respiratory Infections/Inflammations W
Severe or Moderate CC
5 460 4 450 1.40111
F62B
Heart Failure and Shock W/O Catastrophic
CC
3 450 3 450 1.26491
L63B
Kidney and Urinary Tract Infections W/O
Catastrophic or Severe CC
3 380 3 400 0.612745
F42B
Circulatory Disorder W/O AMI W Invasive
Cardiac Inves Proc W/O Cat or Sev CC
3 330 3 350 0.940617
E62A
Respiratory Infections/Inflammations W
Catastrophic CC 10 335 9 350 2.41597
E62C Respiratory Infections/Inflammations W/O
CC
3 320 2 300 0.721117
Ms Smith, sensing that the hospital is keen to avoid congestion and overspending as well as dealing with
additional funding constraints (cuts), has determined that some marginal savings in the average length of
patient stay would be useful targets for the coming year. She has also determined that patient activity
should be rounded (always) to the nearest 50 patients (e.g. 501 patients would become 500 patients, and
545 patients would become 550 patients for the purposes of budgeting). She had also read in the local
newspaper (an interesting source of evidence) that there had been more cases of chest pain at the ABC
Hospital than elsewhere, so she is suggesting a reduction in activity for the coming year.
She has found out that that the following services were used for each DRG with a particular frequency:
DRG Description
Days of
Stay
No. of
X/Rays
No. of
Path
tests
No. of
Scripts
F74Z Chest Pain 1 3 9 4
E65B Chronic Obstructive Airways Disease W/O Catastrophic CC 4 4 9 6
F73B Syncope and Collapse W/O Catastrophic or Severe CC 2 4 3 4
F76B Arrhythmia, Cardiac Arrest and Conduction Disorders W/O Cat or Sev CC 2 1 4 5
E62B Respiratory Infections/Inflammations W Severe or Moderate CC 5 2 5 4
F62B Heart Failure and Shock W/O Catastrophic CC 3 4 5 2
L63B Kidney and Urinary Tract Infections W/O Catastrophic or Severe CC 3 3 5 4
F42B Circulatory Disorder W/O AMI W Invasive Cardiac Inves Proc W/O Cat or Sev CC 3 1 6 3
E62A Respiratory Infections/Inflammations W Catastrophic CC 10 4 6 5
E62C Respiratory Infections/Inflammations W/O CC 3 2 3 5
Ms Smith has applied her costing assumptions and determined that it is appropriate to use an average
cost of service. She is aware that in some cases, the average is only appropriate within the DRG and not
across all DRGs. Hence, from looking at the budgets for Imaging, Pathology and Pharmacy, she has
determined that the average cost for any patient for each DRG is:
DRG Description
Daily Cost
of Stay
(Excluding
X/Ray,
Path, and
Drugs)
Cost
of
each
X/Ray
Cost
of
each
Path
test
Cost of
each
Script
F74Z Chest Pain 880 230 95 80
E65B Chronic Obstructive Airways Disease W/O Catastrophic CC 880 160 100 140
F73B Syncope and Collapse W/O Catastrophic or Severe CC 880 100 90 75
F76B Arrhythmia, Cardiac Arrest and Conduction Disorders W/O Cat or Sev CC 880 120 100 75
E62B Respiratory Infections/Inflammations W Severe or Moderate CC 880 140 100 150
F62B Heart Failure and Shock W/O Catastrophic CC 880 100 90 80
L63B Kidney and Urinary Tract Infections W/O Catastrophic or Severe CC 880 100 100 95
F42B Circulatory Disorder W/O AMI W Invasive Cardiac Inves Proc W/O Cat or Sev CC 880 1,500 200 80
E62A Respiratory Infections/Inflammations W Catastrophic CC 880 150 120 90
E62C Respiratory Infections/Inflammations W/O CC 880 100 90 80
While the Division has more patients than covered by these DRGs, Ms Smith has determined that the
above is sufficient to build a budget, so she can commence the engagement process with the Director of
the Division. Looking at the Division’s costs for the current year, Ms Smith believes that the fixed costs for
next year can be apportioned across the Division’s activities. She estimates that the fixed costs relating to
the above work should be in the order of $2,900,000.
Ms Smith understands that the national efficient price is $5,800 and that the inlier weight is used to
determine how much of this price the hospital will get for any patient for a given DRG. Ms Smith has
been assured that at the ABC General Hospital, all patients stay within the inlier patient range.
Ms Smith is going to prepare a budget. She believes that the Director of the Division will see the value in
extending the work to cover all the activity undertaken by the Division.
Your Tasks
- 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.) - 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? - 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.
(Hint: if you set up your spreadsheet well, you should be able to handle any level of price change by
only changing a single spreadsheet cell)
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.
(Hint: the level of detail you show in the table should be useful for part b of this question.)
b) What advice regarding the budget should Ms Smith give to the Clinical Director based on this
information? - 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. - 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.
(Hint: are there other opportunities for savings that can be made that are less likely to require the
Divisional staff to implement significant effort? If so, show the impact using a table or graph.) - 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?
Video Presentation
This part of the assignment should be submitted as a recorded video. The video can be recorded with a
smartphone, iPad, laptop etc. and the file submitted via LO. (Be careful regarding file size. You may need
to ensure that you do not record in High Definition).
Alternatively, you may post your recording to YouTube (as you did with your introductory video at the
beginning of the study period) and provide the YouTube link in your report. (Please refer to the guidelines
provided in Module 2 regarding the preparation of the video.)
You have 5 minutes to present your results to the hospital’s CEO. As the CEO is travelling overseas, you
have been asked to create a short video report. The aim of the recording is to summarise and present
your findings in relation to Questions 1- 6 to the CEO in no more than 5 minutes.
You should appear in the video, and you may also use a whiteboard (or paper stuck on a door, etc.), your
computer screen etc. (e.g. slides) to support your presentation.
An example of a student presenting work can be found at:
https://www.youtube.com/watch?v=Ma6xi2GI7IE&feature=youtu.be
Note: this example comes from a Mathematics student. You are not expected to show the calculation of
your answers as part of the recording. Your calculations are already incorporated in your Excel
Spreadsheets.
The key is to summarise and explain your findings – in 5 minutes. You have experience in submitting an
introductory video and thus, you have already learned the skills necessary to create a recording and
upload the video.
Your video will be assessed upon the following basis:
• Presentation and communication of your findings (20%)
• Judgment on determining how long to spend communicating different parts of your analysis
(Hint – some questions will require more explanation as the findings will be of greater importance
in relation to decision making) (10%)
• Demonstrated understanding of the key issues the CEO might need to consider (30%)
• Correctly presented analysis/calculations (40%)
The assessment is not about your movie-making skills, but please try to keep your phone or other
recording devices steady.
Videos that exceed the 5-minute threshold will be penalised.
Reflection
What insights have you gained regarding the budget setting process in your workplace as a consequence
of undertaking this topic? If you are not currently working, think about a place where you have previously
worked. You will still have gained insights, so detail those. (As a guide – a single A4 page with single line
spacing should provide sufficient content for a good reflection).
Remember to:
• Read the requirements of the assignment and plan your spreadsheet first before creating the
spreadsheet.
• List any assumptions that you make when preparing your budget information.
• If you can construct a single spreadsheet that can demonstrate the answers, then do so. Just
paste your spreadsheet results into your Word document.
• If you need to construct a variety of spreadsheets to answer the questions, you may do so. This
may increase the number of worksheets you have in your Excel file, but there is no penalty for
this (other than it may take you longer to do this).
• Submit both the Excel and Word files on learnonline.
• Answers should be prepared as though you were submitting them in a business setting. This
means:
o The assignment should be well formatted
o Including a title page and a table of contents
o There should be no spelling mistakes
o You can use dot points, but use appropriate sentences (You cannot answer the whole
assignment as a series of dot points).
• This is also an academic exercise – so please use referencing where appropriate.
• The word limit is an indication only. Answer the questions to the best of your ability. There is no
penalty for exceeding the word limit. However, unduly lengthy answers will be penalised, as will
answers that do not provide sufficient detail.
• Complete the self-assessment template and also submit that on learnonline.
Note – the number of tests, images, pathology and pharmaceutical items per DRG,the costs and the
scenarios used in this exercise are purely fictitious.
Sample Solution