A budget is a financial plan that turns the organization's goals into expected revenues and expenses for a set period (usually a fiscal year). It is both a planning tool (deciding how resources will be used) and a controlling tool (comparing actual results with the plan).

Types of budgets

Types of costs

• Fixed costs — do not change with volume in the short term (rent, depreciation, manager salary, equipment leases)
• Variable costs — change with volume (supplies, medications, meals per client)
• Step-fixed (semi-fixed) — fixed within a range, then jump (adding a nurse when census passes a threshold)
• Direct costs — traced to a specific service (nursing staff on the unit)
• Indirect (overhead) costs — shared across units (administration, housekeeping, information technology)

Budgeting approaches

Budget process: gather data and forecast volume → set goals and priorities → prepare the budget → review and negotiate → approval → implement → monitor monthly with variance analysis → revise.

Staffing measures

• Full-time equivalent (FTE) — 1.0 FTE = 40 hours/week = 2,080 hours/year; 0.9 FTE = 72 hours per 2 weeks
• Productive hours — time spent working on the unit; nonproductive hours — paid time off, holidays, sick leave, education
• Hours per patient day (HPPD) — nursing care hours divided by patient days

Worked example 1 — FTEs. A unit averages 25 clients per day with a target of 8 HPPD.

• Daily care hours = 25 × 8 = 200 hours
• Annual care hours = 200 × 365 = 73,000 hours
• FTEs if all hours were productive = 73,000 ÷ 2,080 = 35.1 FTE
• If 10% of paid hours are nonproductive, each FTE gives 2,080 × 0.9 = 1,872 productive hours → 73,000 ÷ 1,872 = 39.0 FTE must be budgeted

Worked example 2 — Variance. Supplies were budgeted at $10 per patient day for 5,000 patient days ($50,000). Actual: 5,500 patient days, $56,000 spent.

• Total variance = $56,000 − $50,000 = $6,000 unfavorable
• Flexible budget for actual volume = 5,500 × $10 = $55,000 → volume variance $5,000 (explained by more clients)
• Remaining price/use variance = $1,000 unfavorable (actual $56,000 − flexible budget $55,000) — the manager investigates this part

Worked example 3 — Break-even. A new clinic has fixed costs of $120,000/year, receives $100 per visit, and has variable costs of $40 per visit.

• Break-even volume = fixed costs ÷ (price − variable cost) = 120,000 ÷ 60 = 2,000 visits per year

Who pays for US health care

ACA key provisions: health insurance Marketplaces, coverage of pre-existing conditions, dependent coverage to age 26, preventive services without cost sharing, Medicaid expansion option, and payment and delivery reforms.

Payment methods and their incentives

Medicare value-based programs for hospitals

• Hospital Value-Based Purchasing (VBP): withholds 2% of base DRG payments and redistributes it as incentive payments based on quality, safety, efficiency, and patient experience (HCAHPS) scores
• Hospital Readmissions Reduction Program (HRRP): reduces payments (up to 3%) for excess 30-day readmissions for selected conditions (e.g., heart failure, pneumonia, COPD, acute MI)
• Hospital-Acquired Condition (HAC) Reduction Program: 1% payment reduction for hospitals in the worst-performing quartile (Total HAC Score above the 75th percentile)
• Medicare does not pay the higher DRG rate for certain preventable conditions that were not present on admission (e.g., stage 3–4 pressure injuries, catheter-associated urinary tract infection, falls with injury) — accurate admission assessment and documentation matter
• Accountable care organizations (ACOs) share savings when they meet quality and cost targets

• Understand the unit budget and how daily choices (supplies, overtime, length of stay) affect it
• Manager: prepare the budget with staff input, justify requests with data, monitor monthly, explain variances, and take corrective action
• Staff nurse: use supplies wisely, avoid waste, charge supplies accurately, and suggest cost-saving ideas that keep quality
• Prevent hospital-acquired conditions and readmissions — this is both good care and financial survival
• Document conditions present on admission accurately (e.g., existing pressure injuries)
• Start discharge planning and teaching on admission, especially under DRG payment
• Advocate for staffing based on client acuity, not budget alone

• Cost control must never compromise safety — the nurse's primary commitment remains the client (ANA Code Provision 2)
• Billing and charting must be truthful; billing for services not provided is fraud under federal law (False Claims Act) and can lead to civil and criminal penalties and exclusion from Medicare
• Justice concerns: payment incentives can lead to underuse (capitation) or overuse (FFS); nurses advocate for appropriate care
• Staffing decisions must follow any state staffing laws and employment laws

Case 1. A manager plans next year's supply budget by adding 3% to last year's actual spending. Approach: incremental. If she required every line item to be justified from zero, it would be zero-based.

Case 2. Under DRG payment, a hospital receives the same payment for a client with pneumonia whether the stay is 4 days or 8 days. Nursing implication: early mobilization, infection prevention, and early discharge teaching reduce length of stay and complications.

Case 3. A unit needs ten new glucose meters costing $300 each and one new cardiac monitor costing $12,000, in a hospital whose capital threshold is $5,000 per item. Budget: the glucose meters are an operating expense (each item is below the threshold, even though the total is $3,000); the monitor is a capital expense. Why: capital thresholds usually apply to the cost of each item, not to the total of a group of low-cost items.

Case 4. A client admitted from a nursing home has a stage 3 pressure injury that is not documented on admission. Problem: it may be counted as hospital-acquired, affecting payment and quality scores. Correct action: thorough skin assessment and documentation on admission.

• Thinking DRGs pay per day or per service — DRGs pay a fixed amount per stay
• Confusing capitation (per member per month) with fee-for-service (per service)
• Classifying supplies as fixed costs — supplies are variable
• Believing incremental budgeting eliminates waste — zero-based budgeting does
• Forgetting nonproductive hours when calculating FTEs
• Judging a unit over budget without adjusting for volume (use a flexible budget)
• Thinking Medicare Part D covers hospital care — Part A covers inpatient hospital care; Part D covers outpatient drugs

• Operating (annual daily expenses), personnel (largest), capital (items lasting over 1 year with a per-item cost above the threshold), cash budgets
• Incremental = last year + %; zero-based = justify everything; program = all costs of one program; flexible = adjusts to volume
• Fixed vs variable costs; direct vs indirect
• 1.0 FTE = 2,080 hours/year; include nonproductive time
• Variance = actual − budget; explain volume vs price/use
• Medicare A (hospital), B (outpatient/provider), C (Advantage), D (drugs); Medicaid = federal–state, low income
• FFS rewards volume; capitation risks underuse; DRGs pay per stay and reward efficiency
• VBP 2% withhold; HRRP up to 3% for excess readmissions; HAC program 1% reduction
• No extra Medicare payment for certain conditions not present on admission