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Influential Costs to Healthcare Departments

Info: 2095 words (8 pages) Nursing Essay
Published: 11th Feb 2020

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  • Patrick Bobst

New federal laws, government regulations and the continuous rising costs of medical care have healthcare organizations facing financial revenue challenges stemming from fluctuating patient volumes to declining reimbursements. A major change in the healthcare industry has incentivized healthcare systems to keeping patients healthy and out of facilities instead of applying patient volume reimbursements. Healthcare organizations are shifting to value-based models that strategically focus on initiatives to not only reduce costs, but also improve efficiency while improving quality care. Challenges to maintain high quality care under tight budgets will be a continuous and arduous task for senior leaders. Budgeting practices are regarded as an organizational imperative if costs are to be predicted and controlled(Frow, Marginson, & Ogden, 2010). Nurse Managers with a firm grip on relevant budget information are influential to patient care and insure the patient is receiving the best and safest possible service(Dunham-Taylor & Pinczuk, 2010). Budgeting increases efficiency through planning and coordination as well provides the ability to weave together all the disparate threads of an organization into a comprehensiveplan that serves many purposes (King, Clarkson, & Wallace, 2009). Organizations today are implementing strategies to control the rising cost of healthcare are aimed at reducing medical resource consumption rates (Reiter & Song, 2013). Research has shown that shifting budget strategies away from growth and expansion of high fixed costs associated with hospital care is shifting from growth and expansion toward a focus on efficiency, maintenance and existing capital in order to achieve cost control (Reiter & Song, 2013).

Cost Concepts in Healthcare

Nurse Managers are rarely involved with revenue information but mainly involved with the spending aspect of the budget (Dunham-Taylor & Pinczuk, 2010). Understanding the relationship of cost to volume is an important concept in a manager’s role for a departmental budget. Complexity surrounds the concept of volume, especially in volume-driven healthcare revenue planning and reporting. Volume in hospitals includes not only the patient census numbers but also takes into account the patient acuity, patient insurance type, patient minute/hours/days, and number of patient visits (Dunham-Taylor & Pinczuk, 2010). “Direct supply costs are the only truly variable costs and a hospital that can be directly tied to patient volume and to cash expenditures” (Rauh, Wadsworth, & Weeks, 2010, p. 61).

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Labor can be classified into two broad categories of direct labor and indirect labor. Labor is direct when working wages can be identified with specific costing units such as departments products or sales contracts and indirect labor is identified as all other employees that cannot be directly traced to the costing units (Chiang, 2013). Distinguishing between direct and indirect labor is vital to the budgetary process in determining accurate costs, measuring efficiency, decision-making and control, and minimizing overhead allocation inaccuracies (Chiang, 2013). Costs that have a direct correlation to the department could be either a variable or a fixed cost and the sum of these components equate to the total cost. Fixed costs are those that stay the same regardless the number of patients a healthcare facility treats or admits. The hospital still has to pay fixed costs even if their services are not used or even underutilized. Examples of fixed costs include insurance premiums, rent on buildings or equipment, depreciation on buildings or equipment, taxes, utilities, and some salaried labor costs(Roberts et al., 1999). In healthcare, variable costs are expenses that fluctuate directly and proportionally with patient volume (Dunham-Taylor & Pinczuk, 2010). Variable costs comprise all direct materials related in treating an individual patient including medications, testing agents, and disposable supplies as well as the salaries of nurses and technicians. Nurse Managers are considered a direct cost to the nursing department since the salary is the same reoccurring amount each month regardless of the quantity or volume of patients. The medical supplies furnished to the nursing department will be a direct cost that will be a variable cost if the total amount of supply used in the department increases or decreases as a volume in the department fluctuates.

In estimating budgets, nurse managers determine the relationship between fixed costs, variable costs and total costs by utilizing a relevant range graph. The relevant range graph represents the likely range of activities within each cost behavior that is covered by the budget(Dunham-Taylor & Pinczuk, 2010).

Labor’s Influential Department Costs

With enduring economic changes in healthcare, executives are continuously seeking how best to manage labor costs, how to efficiently allocate resources and optimize hospital staffing while reducing expenses all the while improving patient care. Twenty-five to 30% of the healthcare budget in a hospital organization stems from the nursing department (Dunham-Taylor & Pinczuk, 2010) and the variable costs of labor are often 50 to 60% of total operating expenses(Rauh, Wadsworth, & Weeks, 2010). Nursing departments are the only area where labor costs are directly related to patient volumeand the hospital’s profitability is very sensitive to changes in patient volume (Rauh et al., 2010). A hospital loses 100% of the patient revenue when volume is reduced but saves only on the cost of the direct supplies, whereas when patient volumes increase the next patient become highly profitable since revenue is captured(Rauh et al., 2010). Rauh et al. (2010) asserts, the true cost of caring for the next patients is relatively small, as the additional cost is limited to direct supplies(p. 62). As a result, nursing management will focus their attention on utilization and throughput, the driving force in any fixed cost industry (Rauh et al., 2010). With labor cost containment and productivity initiatives scrutinized, managers are implementing flexibility in staffing. Strategically integrating a flexible staffing workflow provides the ability to adjust skill mix of core staff and volume of workforce when volume cycles demand.

PACU Staffing and Productivity

The labor force of the Post Anesthesia Care Unit (PACU) is directly patient volume driven and planned differently than other units. The PACU workload resets daily, with a daily variation in census, and the workload is peaked by time of day. The unit of service indicator used for the PACU department during the budgetary process is 2.5910 hours per patient. For example, with 40 surgical cases scheduled the PACU’s productive target hours will be 103.64. Hours per patient minute (HPPM) are the numbers of hours of nursing care provided, compared to the number of patients during a 24-hour period. Actual productive HPPM is calculated by taking the total nursing hours spent providing direct patient care each month and dividing it by the actual patient minutes spent in PACU. These hours include nurses, clerical, ancillary staff, and the assistant nurse manager. The nurse manager reviews weekly reports for the target HPPM with actual HPPM, monitoring vacancy rates, and maintaining the average nurse to patient ratio of 1:2. Understanding these reports help the nurse manager make data driven budget and staffing decisions. Due to the PACU’s fluctuating workload and census, adjustments are necessary to the HPPM. In order to ensure safe patient care the PACU manager evaluates the nursing skill level each day and makes the proper skill mix adjustments. Since shift overlap overtime raises the HPPM, the nurse manager analyzes productivity reports daily. Historical data supported management’s decision to mitigate expensive nursing care hours with an adjustment in our workforce to flex positions in order to meet changing volumes. Nonproductive non-worked hours and nonproductive indirect hours are also important budgeting factors in labor. Nonproductive, indirect hours referred to the hours reserved for activities, meetings, education and orientation. Nonproductive non-worked hours include paid time off for vacation, holidays, and sick time.


Chiang, B. (2013). Indirect labor costs and implications for overhead allocation. Accounting & Taxation, 5(1), 85-96.

Dunham-Taylor, J., & Pinczuk, J. Z. (2010). Financial management for nurse managers: Merging the heart with the dollar (2nd ed.). Sudbury, MA: Jones and Bartlett.

Frow, N., Marginson, D., & Ogden, S. (2010). Continuous budgeting: reconciling budget flexibility with budgetary control. Accounting, Organizations and Society, 35, 444-461. http://dx.doi.org/10.1016/j.aos.2009.10.003

King, R., Clarkson, P., & Wallace, S. (2009). Budgeting practices and performance in small healthcare businesses. Management Accounting Research, 21, 40-55. http://dx.doi.org/10.1016/j.mar.2009.11.002

Rauh, S., Wadsworth, E., & Weeks, W. (2010). The fixed cost dilemma: What counts when counting cost reduction efforts. Healthcare Financial Management, 64(3), 60-63.

Reiter, K. L., & Song, P. H. (2013). Hospital capital budgeting in an era of transformation. Journal of Healthcare Finance, 39(3), 14-22.

Roberts, R. R., Frutos, P. W., Ciavarella, G. G., Gussow, L. M., Mensah, E. K., & Kampe, L. M. (1999). Distribution of variable versus fixed costs of hospital care. The Journal of the American Medical Association, 281, 644-650. http://dx.doi.org/10.1001/jama.281.7.644


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