Budgeting a New Cardiac Rehabilitation Program: Operating Budget, Break-Even Volume, and a First-Quarter Flexible Budget Variance Analysis
[Student Name]
University of Phoenix
HCS/385: Health Care Finance
Week 3 Assignment
[Instructor Name]
[Date]
The hospital, program and all figures are a composite written for a model paper.
Cardiac rehabilitation reduces death and readmission after heart attacks, stent placement and heart surgery, yet participation is low. Ritchey et al. (2020), tracking Medicare beneficiaries, found that only about a quarter of eligible patients participated in cardiac rehabilitation and that relatively few who started completed the full course. A composite 250-bed hospital with an active cardiology service had no program; its patients were referred to a center 30 miles away, and few attended. The hospital decided to open an outpatient program. A program that helps patients is sustainable only if its budget is built on honest assumptions and watched closely once real patients arrive. This paper builds the program's first-year budget, calculates its break-even volume and analyzes its first-quarter results.
Budget Assumptions
Budgets begin with volume, because revenue and many costs depend on it (Pink & Song, 2020). Based on the hospital's cardiology discharges and referral patterns, the planning team estimated 220 patients in the first year. A full course is 36 sessions, but patients often complete fewer, so the team assumed an average of 24 sessions per patient, for 5,280 sessions. Using the hospital's payer mix and current Medicare and commercial rates, the team estimated average net revenue of $112 per session.
Operating Budget
Revenue: 5,280 sessions multiplied by $112 equals $591,360.
Expenses: two registered nurses at $98,000 each including benefits, $196,000; one exercise physiologist, $72,000; a half-time receptionist, $24,000; a medical director stipend, $30,000; supplies, $18,000; allocated space costs, $60,000; equipment depreciation, $25,000; and other expenses, $12,000. Total expenses are $437,000.
Projected net income is $591,360 minus $437,000, or $154,360, a margin of about 26%. The positive margin reflects that most costs are fixed and the program was budgeted to run near capacity.
Contribution Margin and Break-Even
Separating fixed and variable costs shows how sensitive the program is to volume. Supplies, such as electrode pads and wipes, vary with sessions; the other expenses are fixed within the expected volume range. Variable cost per session is $18,000 divided by 5,280, about $3.41. Fixed costs are $437,000 minus $18,000, or $419,000. Contribution margin per session is $112 minus $3.41, or $108.59. Break-even volume equals fixed costs divided by contribution margin: $419,000 divided by $108.59, about 3,859 sessions a year, or about 73% of the budgeted volume (Cleverley & Cleverley, 2018).
The break-even analysis shows that the program has a cushion but is highly sensitive to volume: because almost every cost is fixed, each lost session costs nearly the full $112 in net income.
Testing the Assumptions
Before approval, the finance committee asked how the budget would change if key assumptions were wrong. Two tests were run. If patients averaged 18 sessions instead of 24, annual volume would fall to 3,960 sessions, still above the break-even of about 3,859, and net income would fall to about $11,000. If average revenue per session were $100 instead of $112, contribution margin would fall to about $96.59, raising break-even to about 4,338 sessions, and net income at the budgeted volume would fall to about $91,000. The tests showed that the program could survive either shortfall alone but that the two together would push it below break-even, which is why the committee asked for monthly reporting of both sessions per patient and revenue per session from the first month.
First-Quarter Results
The static budget for the first quarter, one quarter of the annual budget, assumed 1,320 sessions, revenue of $147,840 and expenses of $104,750 in fixed costs plus about $4,500 in variable supplies, a total of about $109,250, for net income of about $38,590.
Actual results were 1,080 sessions, average net revenue of $110 per session and total revenue of $118,800. Actual expenses were $109,800, reflecting fixed costs as budgeted, $1,100 of unbudgeted spending on referral outreach materials and $3,950 in supplies. Actual net income was $9,000, about $29,590 below budget.
Flexible Budget Variance Analysis
A flexible budget restates the budget at the actual volume of 1,080 sessions, separating the causes of the shortfall (Pink & Song, 2020).
Volume variance. At the budgeted rate of $112, revenue for 1,080 sessions would have been $120,960, which is $26,880 less than the static budget. Variable supplies at the budgeted $3.41 per session would have been about $3,682, about $818 less than budgeted. The net volume effect is about $26,062 unfavorable.
Price variance. Actual revenue per session was $110 rather than $112, so revenue was $2,160 less than the flexible budget, reflecting a higher share of Medicare patients than assumed.
Spending variance. Actual expenses of $109,800 exceeded the flexible budget of about $108,432 (fixed costs of $104,750 plus flexed supplies of about $3,682) by about $1,368, from the outreach materials and supplies used slightly faster than planned.
The three variances sum to the total shortfall: $26,062 plus $2,160 plus $1,368 equals $29,590. Almost 90% of the gap is volume.
What the Manager Should Do
The analysis points to volume, not cost control, as the problem. A review of referral data found two causes. Cardiology referrals were slower than expected because referral orders were not built into the discharge order set for heart attack and stent patients, so referral depended on each cardiologist remembering. And many patients were stopping after about eight sessions, often citing copayments. The manager proposed three actions: work with cardiology to add an automatic referral to the discharge order sets, a practice associated with higher participation; call every patient who misses two consecutive sessions; and connect patients facing copay barriers with the hospital's financial counseling office. The manager also recommended keeping expenses unchanged, since cutting staff would reduce capacity just as referrals were expected to rise.
Conclusion
Building the program's budget from volume assumptions produced a healthy projected margin, but break-even analysis revealed a cost structure in which almost all costs are fixed and net income depends heavily on volume. The first-quarter flexible budget analysis confirmed it: of a $29,590 shortfall, about $26,000 came from lower volume, with small price and spending variances. Financial planning is not only about building a budget but about using it to find where results diverge from plans and why, so the manager can act on the right problem.
References
Cleverley, W. O., & Cleverley, J. O. (2018). Essentials of health care finance (8th ed.). Jones & Bartlett Learning.
Pink, G. H., & Song, P. H. (2020). Gapenski's healthcare finance: An introduction to accounting and financial management (7th ed.). Health Administration Press.
Ritchey, M. D., Maresh, S., McNeely, J., Shaffer, T., Jackson, S. L., Keteyian, S. J., Brawner, C. A., Whooley, M. A., Chang, T., Stolp, H., Schieb, L., & Wright, J. S. (2020). Tracking cardiac rehabilitation participation and completion among Medicare beneficiaries to inform the efforts of a national initiative. Circulation: Cardiovascular Quality and Outcomes, 13(1), Article e005902. https://doi.org/10.1161/CIRCOUTCOMES.119.005902
How this HCS 385 Week 3 example is structured
The University of Phoenix library guide for HCS/385 lists Week 3 as Everything to Know about Financial Planning. The paper follows the planning cycle a department manager lives through: build the budget from assumptions, test it with break-even analysis and then compare it with actual results using a flexible budget. Every figure is calculated in the text, so the reader can check it, and the variance analysis ends in decisions, which is the purpose of budgeting. Students search this week as HCS 385 Week 3, HCS385 Wk 3 or HCS/385 Wk 3; all three are the same assignment.
HCS/385 Week 3 questions, answered
What does HCS/385 Week 3 usually ask for?
The University of Phoenix library guide for HCS/385 lists Week 3 as everything to know about financial planning. Many sections ask students to prepare or analyze a budget for a health care program or department, often including break-even or variance analysis.
What is a flexible budget?
A flexible budget restates the original budget at the actual volume achieved, so managers can separate the effect of volume from the effects of price and spending. Comparing actual results with a flexible budget shows whether costs were controlled given the volume that actually occurred.
What is break-even volume?
The number of units, such as sessions or visits, at which total revenue equals total costs. It equals fixed costs divided by contribution margin per unit, where contribution margin is price minus variable cost per unit.
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