While many hospitals take a high-level approach to budgeting revenue, some see added value in budgeting revenue at the chargemaster level. Recently, we talked with clients about their approach to hospital revenue budgeting.

Budgeting at this level of detail is tedious work, and department managers may be overwhelmed by the task.

Our clients using this detailed approach follow the 80-20 rule. They focus on the 20 percent of charges that make up 80 percent of the volume and revenue for a department. Low-cost, low-volume items can be budgeted using historical trends. With the “80 percent” identified, department, budget, and reimbursement managers can focus on changes that may have a significant impact on revenue. For example, the surgery department’s initial room charge and the additional minutes charged (two specific charge codes) comprise 80 percent of that department’s revenue. The remaining 20 percent of the department’s revenue is generated from 50 other individual charge codes.     

Our clients using this approach believe it allows the budget team to ensure that Centers for Medicare & Medicaid Services’ coding changes are incorporated into the budget. Teams can plan appropriately for codes to activate, deactivate, and quickly understand the impact of bundled charges. This approach also highlights new and existing procedures that may be costlier than others (e.g., Coronary Artery Bypass Grafting [CABG], hip or knee replacements), thus prompting department managers to pay closer attention to their supply and labor costs.

Once the gross revenue budget is complete, a charge-level budget can be an effective tool to plan for price increases and planned reimbursement. Rather than an across-the-board price increase, pricing can be targeted to specific charges, paving the way for easy results reporting and analytics. Reimbursement analysts can use this information to review key volume changes and advise on price increases for the new year, allowing the organization to optimize revenue for specific charges. When asked if it’s worth the effort, one client noted, “Overall, the process gives our leaders a higher level of comfort with the budgeted revenue for the year.”

Sometimes things just don’t go as planned, and leaders will want to understand the variances. Analysis of actual-to-budgeted charges quickly identifies differences between the plan and the results. New procedures, shifts in volumes, or delays in physician recruitment may be more quickly identified not just for revenue variances, but also, in some cases, for productivity targets. Clients often will use relative value units associated with specific charges for productivity reporting; thus, labor variances to target may also be more easily explained.

This approach is not for every organization. When determining what’s best for your budget process, consider your organization’s size, reporting needs, and source systems. The devil is in the details.


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*Contribution from University of Wisconsin Healthcare (UWHC)