NSG/567 Week 2: Preparing the Operating Budget, sample paper

From 1,900 Births to 112 Nursing Positions: Preparing the Maternity Operating Budget With Every Assumption Written Down

[Student Name]

University of Phoenix

NSG/567: Financial Resources Management in Health Care

Week 2 Assignment

[Instructor Name]

[Date]

The hospital, its service line and all figures are a composite written for a model paper.

In Week 1, I read the hospital's financial statements and the maternity service line's results. This paper prepares next year's operating budget for the three maternity units. Finkler et al. (2013) describe operating budget preparation as a sequence that begins with volume and moves through workload, staffing and costs to revenue, and this budget follows that sequence.

Step 1: Volume

Births averaged 1,850 over the past two years. A family medicine group joining the hospital's medical staff is expected to add about 80 births, and the county's birth rate is flat. The budget assumes 1,900 births. Other volumes follow from births: an assumed cesarean rate of 30%, the same as last year, gives 570 cesareans; postpartum patient days are projected at 4,370, using average stays of 2.1 days after vaginal birth and 3.0 days after cesarean; and nursery admissions are projected at 8% of births, 152, with an average stay of 9 days, 1,368 patient days.

Step 2: Workload in Labor and Delivery

Labor and delivery workload is driven less by census than by the intensity of care. Professional staffing standards for perinatal units call for one-to-one registered nurse care in several situations, including the second stage of labor and women with significant medical complications, and they set ratios for other labor situations, triage and recovery (Association of Women's Health, Obstetric and Neonatal Nurses [AWHONN], 2022). Using the unit's own time studies, the budget assumes an average of 14.5 registered nurse hours per birth in labor and delivery, including triage, labor, birth, recovery and cesarean circulating. For 1,900 births, that is 27,550 productive hours.

The unit also has a minimum staffing floor: three registered nurses in labor and delivery on every shift regardless of volume, so that an emergency can always be managed. The floor requires 26,280 hours a year, below the workload estimate, so workload drives staffing.

Step 3: Workload in Postpartum and the Nursery

Postpartum care is budgeted at 7.5 registered nurse hours per patient day for mother-baby care, giving 32,775 productive hours. The nursery is budgeted at 12 hours per patient day, giving 16,416 hours, with a floor of two nurses at all times, 17,520 hours, which exceeds the workload estimate; the floor therefore drives nursery staffing.

Step 4: From Hours to Positions

Productive hours are converted to paid hours by dividing by 0.89, since staff spend an average of 11% of paid time on vacation, holidays, sick time and education. Labor and delivery requires 30,955 paid hours, about 14.9 full-time equivalents at 2,080 hours; postpartum 36,826 hours, 17.7; and the nursery 19,685 hours, 9.5. Adding nursing assistants, unit secretaries, lactation consultants and a surgical technician team for the cesarean rooms brings the service line to about 112 full-time equivalent positions, including leadership.

Step 5: Labor Costs

Registered nurse wages average $44.80 an hour, with shift and weekend differentials adding about 6% and benefits 29% of wages. Registered nurse labor therefore totals about $6.54 million in wages and $1.90 million in benefits. All positions together total $10.9 million in salaries and benefits. The budget includes $120,000 for overtime and no agency staff, a deliberate target discussed below.

Step 6: Supplies and Other Costs

Supplies are budgeted per birth: $410 for a vaginal birth and $1,180 for a cesarean, based on last year's actual use, for $1.46 million. Pharmacy, laboratory and blood products charged to the service line add $2.1 million, and equipment maintenance, education and other expenses add $0.9 million. Direct physician coverage for the laborist program and anesthesia stipend adds $3.4 million.

Step 7: Revenue

Revenue is projected by payer. Using the hospital's current contracts, average net revenue per birth episode, including the newborn, is $16,900 for commercial insurance and $7,400 for Medicaid. With the payer mix of 44% commercial, 48% Medicaid and 8% self-pay or other at an average of $2,100 collected, total net revenue is about $21.2 million for births and newborns. Nursery stays for sicker infants add about $17.9 million, for total net revenue of about $39.1 million.

The Budget in Summary

Projected net revenue: $39.1 million. Projected direct expenses: $18.8 million in labor and supplies plus physician coverage and other costs, about $32.4 million in total. Projected contribution margin: about $6.7 million, similar to last year. The budget's most important line is not a cost but an assumption: 1,900 births, because nearly every other number moves with it.

Why Nursing Dominates the Budget

Nursing salaries and benefits make up about a third of the service line's direct costs, and across hospitals registered nurse labor alone accounts for roughly a quarter of expenditures (Welton, 2011). Because so much of the budget is nursing, the accuracy of the workload assumptions, hours per birth and hours per patient day, matters more than almost any other figure. A one-hour change in labor and delivery hours per birth changes the budget by about $116,000.

Involving Staff in the Budget

Charge nurses and the unit educator reviewed the workload assumptions before the budget was submitted. They pointed out that induction volume has risen, which adds one-to-one hours, and that the nursery's floor is sometimes insufficient when two critically ill infants are admitted at once. Their input led to the budget's contingency for occasional third-nurse coverage in the nursery.

Risks to the Budget

Four assumptions carry the most risk. Volume: if the family medicine group's births do not materialize, revenue falls faster than costs, since much of staffing is fixed by floors. Payer mix: each shift of five percentage points from commercial to Medicaid reduces revenue by about $900,000. Agency staffing: last year, vacancies led to $640,000 in agency costs; budgeting zero depends on filling four vacant labor and delivery positions. And cesarean rate: a rise would increase supply costs and length of stay.

Budget Timeline

The budget is prepared in September, reviewed with the service line's physician leaders and finance in October, revised after the hospital's overall budget review and approved by the board in December for the fiscal year starting in January. Mid-year, the volume forecast is revisited and staffing adjusted if births differ from the assumption by more than 5%. Staffing changes are made through vacancy management rather than layoffs, since the unit's floors limit how far staffing can fall and experienced perinatal nurses are hard to replace once they leave for another hospital.

Monitoring

The budget will be monitored monthly against births, hours per birth, overtime, agency use, supply cost per birth and payer mix, with variances explained as in Week 4.

Conclusion

The maternity operating budget begins with 1,900 births and turns them into workload using staffing standards, into positions using paid-hour factors and into costs and revenue by payer. Every assumption is written down, so reviewers can check the arithmetic and see which assumptions, volume, payer mix, agency use and cesarean rate, deserve the closest watch.

References

Association of Women's Health, Obstetric and Neonatal Nurses. (2022). Standards for professional registered nurse staffing for perinatal units (2nd ed.).

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

Welton, J. M. (2011). Hospital nursing workforce costs, wages, occupational mix, and resource utilization. Journal of Nursing Administration, 41(7/8), 309-314. https://doi.org/10.1097/NNA.0b013e3182250a2b