An analysis of the costs of various activities can help the hospital management to improve the actual performance of various departments in the hospital. The analysis can also help the health policymakers to determine the best curative care that can be delivered in hospitals and investigate the various tradeoffs that exist among the primary curative, preventive, and secondary curative provisions in use (Cleverley, Cleverley, & Song, 2011). Budget planning is therefore, a delicate process because the budget has to support the healthcare professionals in the institution and simultaneously provide the level of care that is needed by the patients (Wolper, 2004).
The actual cost analysis of an ER department against its budget for a duration of one month is reported in this paper. A variance analysis helps to determine the deviation from the budget. Variance in this case refers to the difference between the budgeted figure and the actual figure (Wolper, 2004). The variance can be favourable or unfavourable. In one month, the ER department had actual patient days of 630 days, which was 30 patient days more than its budgeted 600 patient days. As a result, the non-chargeable medical surgical supplies were above the budget by $1,609 because the budgeted supply had been placed at $8,118.
The budget rate from this data gives a value of $13.53 whereas the actual rate is given as $15.44. To determine the unit cost variance, we find the product of the difference between the budget rate and the actual rate, and the actual patient days. Thus,
Unit cost variance = ($13.53-$15.44)(630) = ($1,203.30)
The volume variance can be determined by multiplying the difference in the patient days and the budget rate. Thus, volume variance = (600-630 days) ($13.53) = 405.9
The total variance is thus (1,203.30) + (405.9) = ($1,609.2).
These figures suggest that $1,203.30 or about 75% of the unfavorable variance is attributed to the cost increase in supplies that are not covered by the increase in patient days. $405.9 on the other hand or 25% can be attributed to the increase in usage of the supplies exclusively because of the increase in number of patient days.
Cost variances arise due to external and internal factors. Internal causes include technological advancements, changes in nurse efficiency or hospital/department policy (Cleverley, Cleverley, & Song, 2011). External factors include changes in prices of supplies, census changes, and the type of staff at the department (Cleverley, Cleverley, & Song, 2011). The increase in patient days and the unfavorable variance can be attributed to overuse of the ER department. The variance can be reduced by redesigning primary care services and providing alternative sites of primary care for conditions that are not urgent. Examples of practices under the two suggestions of aligning the actual budget is the use of an extended practice hours program and telemedicine where patients can access instant consultations for primary care over the telephone instead of visiting the ER.
Budget, Income and Costs
For one month, the hospital budget, income and costs were as follows
Budget Costs Interpretation and Variance
8,118 9,727 1,609, Unfavorable
Cleverley, W. O., Cleverley, . O., & Song, . H. (2011). Essentials of health care finance. New York, NY: Jones & Bartlett Learning.
Wolper, L. F. (2004). Health care administration: Planning, implementing, and managing organized delivery systems. New York, NY: Jones & Bartlett Learning.
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