NR 533 Week 2 Budget Variance Analysis Example

Budget Variance Analysis: One March on a 12-Bed Palliative Care Unit, $47,707 Over the Static Budget, Flexed to 341 Patient Days and Split Into Volume, Hours, Pay Rate, Supplies and Pharmacy

Student Name

College of Nursing, Chamberlain University

NR 533: Financial Management in Healthcare Organizations

Instructor Name

Month Day, Year

Budget Variance Analysis: One March on a 12-Bed Palliative Care Unit, $47,707 Over the Static Budget, Flexed to 341 Patient Days and Split Into Volume, Hours, Pay Rate, Supplies and Pharmacy

Purpose

The March cost center statement for the 12-bed inpatient palliative care unit I manage shows total expenses of $281,447 against a budget of $233,740, an unfavorable variance of $47,707, or 20%. The finance office has asked for an explanation. This analysis rebuilds the month from the statement and the unit's own records. It first flexes the budget to the number of patient days that actually occurred, then divides what remains into its causes. The purpose is to separate the part of the overage that simply reflects more patients from the parts that reflect how the unit used staff, what it paid for them, and what it spent on supplies and drugs, so that each part can be managed by whoever controls it.

Step 1: Volume

The budget assumed 310 patient days in March, an average daily census of 10. The unit actually had 341 patient days, an average of 11.0. Two things drove the increase: the hospital's two contracted hospices referred more patients for general inpatient care after one of them closed its own inpatient facility in February, and the hospital's palliative consult service transferred four patients from the intensive care unit for comfort care.

A budget that does not change with volume will always show an overage when more patients arrive. Flexing the budget to 341 patient days, using the budget's own rates, is the standard first step in variance analysis for this reason (Finkler et al., 2013). The flexible budget for March is $257,114. The volume variance, the difference between the flexible and static budgets, is $23,374 unfavorable. That part of the overage reflects the unit caring for 31 more patient days than planned and is not a management failure. The remaining variance, actual spending against the flexible budget, is $24,333, and it is the part that needs explaining.

Step 2: The Remaining Variance by Line

Table 1 sets out the static budget, flexible budget and actual spending for the three lines that account for almost all of the variance.

Table 1

March Variance After Flexing for Volume

Step 3: Salaries Split Into Hours and Rate

The budget assumed 11.5 worked nursing hours per patient day at an average hourly cost of $54.00. In March the unit worked 4,053 hours at an average of $55.60, or 11.89 hours per patient day.

Efficiency variance. The unit worked 131.5 more hours than the budget allows for 341 patient days (4,053 against 3,921.5). At the budgeted rate, that is $7,101 unfavorable. Almost all of the extra hours were in the last week of March, when three patients were actively dying at the same time and each family needed a nurse present for long periods. Two nurses were added on the evening shift for four nights. I approved those shifts and would do so again, but they should be recognized as a consequence of acuity that the per-day budget does not capture.

Rate variance. The average hourly cost was $1.60 higher than budgeted across all 4,053 hours, which is $6,485 unfavorable. Part of this is the extra shifts themselves, which were paid at overtime rates, and part is a shift differential increase negotiated in January after the budget was set. The differential change is permanent and should be built into next year's rate; the overtime portion is not.

Step 4: Supplies

Supplies ran $1,162 over the flexible budget, or $41.41 per patient day against a budgeted $38.00. The difference is specialty mattress rentals for four patients with pressure injuries on admission, which are charged to the unit's supply line. The rentals were clinically necessary. The more useful question is whether the hospital should own two low-air-loss mattresses rather than rent them, which I will raise in the capital request later this year.

Step 5: Pharmaceuticals

Pharmaceuticals ran $9,585 over the flexible budget, $123.11 per patient day against $95.00. Pharmacy's dispensing reports allow this to be divided into three causes. About $4,100 came from continuous octreotide infusions for three patients with malignant bowel obstruction. About $2,300 came from a morphine shortage that required switching patients on continuous opioid infusions to hydromorphone, which cost more per equivalent dose. About $3,200 came from waste: 38 partially used infusion bags discarded after death or discharge, and emergency medication kits restocked in full when a single drug was used.

Only the last cause is controlled on the unit. The first reflects the patients' conditions and the second a national supply problem. Palliative care has been shown to reduce hospital costs overall, mainly by avoiding intensive treatments that do not serve the patient's goals (May et al., 2018), and a matched study of eight hospitals' consultation programs found lower direct costs per admission for patients seen (Morrison et al., 2008), so pharmacy spending on comfort medications should not be read as waste in itself. The discarded bags are waste, and they are the unit's responsibility. Most were 24-hour bags hung for patients who died within a few hours, a practice the unit adopted years ago to reduce the number of bag changes for families at the bedside. That reason still matters, and the change proposed below keeps it by using shorter bags only when death is expected soon.

Summary and Actions

Of the $47,707 overage, $23,374 reflects higher volume. Of the remaining $24,333, about $15,200 reflects patient need and outside factors (acuity-driven hours, part of the rate variance, bowel obstruction treatment and the drug shortage), and about $9,100 reflects decisions the unit can change or the budget should have included: the permanent differential increase, the waste, the mattress rentals and part of the overtime.

I will take four actions. First, from April, patients whose prognosis is measured in hours to days will receive 12-hour rather than 24-hour infusion bags, which pharmacy agrees is safe and should cut discarded volume by about half. Second, emergency kits will be restocked only with what was used. Third, I will ask finance to build the new shift differential into the rate for the rest of the year. Fourth, I will ask finance to report pharmacy waste as a separate line, so that the part of the pharmaceutical line the unit controls is visible each month.

References

Finkler, S. A., Jones, C. B., & Kovner, C. T. (2013). Financial management for nurse managers and executives (4th ed.). Elsevier.

May, P., Normand, C., Cassel, J. B., Del Fabbro, E., Fine, R. L., Menz, R., Morrison, C. A., Penrod, J. D., Robinson, C., & Morrison, R. S. (2018). Economics of palliative care for hospitalized adults with serious illness: A meta-analysis. JAMA Internal Medicine, 178(6), 820-829. https://doi.org/10.1001/jamainternmed.2018.0750

Morrison, R. S., Penrod, J. D., Cassel, J. B., Caust-Ellenbogen, M., Litke, A., Spragens, L., & Meier, D. E. (2008). Cost savings associated with US hospital palliative care consultation programs. Archives of Internal Medicine, 168(16), 1783-1790. https://doi.org/10.1001/archinte.168.16.1783