MMHA 6400 Week 7 Flexible Budget Variance Report Example

Busy Quarter, Smaller Margin: A Flexible Budget Variance Report for the Alder Bend Imaging Department

Student Name

Walden University

MMHA 6400: Healthcare Finance

Instructor Name

Month Day, Year

Busy Quarter, Smaller Margin: A Flexible Budget Variance Report for the Alder Bend Imaging Department

Summary

In the first quarter, the outpatient imaging department performed more procedures than budgeted but earned a margin of $164,300 against a static budget of $286,200. Higher volume, on its own, would have raised margin by about $74,600. The shortfall came from a shift in payer mix toward Medicaid managed care, a mid-quarter rate cut by one commercial insurer, higher contrast media prices and use, and overtime. All figures are illustrative and come from the department's Week 6 budget, with dollars in the tables shown in thousands.

Static, Flexible and Actual Results

The static budget is the first quarter of the annual plan. The flexible budget recalculates it at the procedures actually performed, keeping budgeted rates, prices and use per procedure. Comparing the static budget with the flexible budget isolates the effect of volume; comparing the flexible budget with actual results isolates everything else (Finkler et al., 2013).

Table 1

First Quarter Static Budget, Flexible Budget and Actual Results (Dollars in Thousands)

F = favorable; U = unfavorable. Fixed lines are not flexed, since they do not change with procedure counts. Totals may differ by 0.1 because of rounding.

Revenue: Volume, Mix and Rate

Revenue ran $87,400 above the static budget because of volume, mostly CT, where procedures exceeded plan by 260. Against the flexible budget, however, revenue fell $137,400 short. Two causes explain nearly all of it. First, payer mix shifted. Medicaid managed care accounted for 20% of procedures instead of the budgeted 16%, and commercial payers for 28% instead of 32%. At budgeted contract rates, that mix lowers the blended net rate by about $14 for CT, $18 for MRI, $8 for ultrasound and $3 for X-ray, which across actual volume reduces revenue by about $119,100. Second, one commercial insurer, which covers about 40% of the department's commercial patients, cut its imaging rates by 6% effective February 1. Applied to that insurer's procedures in February and March, the cut cost about $18,400.

The mix effect is the larger and more lasting problem. It reflects a change in who lives in the hospital's service area and which plans they carry, and it will not reverse on its own. The rate cut is a contracting matter: the finance office should confirm whether the insurer applied the reduction as the contract allows and whether the change was negotiated or imposed.

Contrast Media: Price and Quantity

Contrast media cost $19,200 more than the flexible budget. Table 2 divides that difference into a price effect and a quantity effect.

Table 2

Contrast Media Variance by Cause

Price variance = (actual price minus budgeted price) times actual doses. Quantity variance = (actual doses minus budgeted doses) times budgeted price.

Behind the price variance is a supplier increase of about 7% on the CT contrast agent, announced in December and applied from the first invoice of the quarter. The quantity variance traces to the CT contrast use rate, which rose from the budgeted 50% to 54% of studies. A review of orders found that most of the increase came from emergency department referrals for abdominal pain, where protocols call for contrast. That use may be clinically appropriate, but radiology leadership should confirm it with the emergency physicians rather than assume it.

Salaries and Fixed Costs

Salaries and benefits exceeded budget by $36,000. The budget treated staffing as fixed, but CT ran 8% above plan, and the department covered the extra studies with about 600 hours of technologist overtime. The overtime is therefore partly a volume effect that the fixed budget could not show. If CT volume stays at this level, extending a technologist shift would cost less than continued overtime. Service contracts, the MRI lease and depreciation matched budget exactly, as expected. Other fixed costs ran $2,600 over because of an unplanned repair to the ultrasound room's air handling unit.

Actions

1. Payer mix: report the shift to the revenue cycle and managed care teams, and build the new mix into the remaining quarters' forecast rather than treating it as temporary.

2. Commercial rate cut: have the managed care office confirm the contract terms and the effective date, and quantify the full-year effect, about $70,000 if volumes hold.

3. Contrast price: ask purchasing to review the group purchasing contract and price alternatives for the CT agent.

4. Contrast use: have the radiology medical director review emergency department contrast protocols for abdominal pain with emergency medicine leadership.

5. Staffing: model an extended CT shift against current overtime and decide before the second quarter.

Taken together, the report shows that the department's margin problem is not volume. It is revenue per procedure and the cost of each procedure, and both can be managed once their causes are separated (Finkler et al., 2019). The same finding should shape the second quarter's forecast. Reforecasting at the new payer mix and the reduced commercial rate, rather than at the original budget, gives the manager a realistic target and keeps the next report focused on new problems instead of repeating this quarter's. Because net revenue per procedure is the product of contract terms and payer mix, the finance office and the department manager share responsibility for it, and the report should go to both (Reiter & Song, 2021).

References

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

Finkler, S. A., Smith, D. L., & Calabrese, T. D. (2019). Financial management for public, health, and not-for-profit organizations (6th ed.). CQ Press.

Reiter, K. L., & Song, P. H. (2021). Gapenski's healthcare finance: An introduction to accounting and financial management (7th ed.). Health Administration Press.