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The taproot of an organization
Kenneth Winn
Introduction
The word budget dates back to the 15th century, meaning bag. So let’s think about a budget as a bag of something (i.e. money, procedures, statistics) set aside for a particular purpose. When we say that we are budgeting for something, what we are saying is “I’m putting money into a bag for a specific purpose”. Now when we talk about finance, we are indicating that we have finite resources. Therefore when discussing the budget and finances of a respiratory care department, we are describing a finite set of resources set aside to accomplish patient care related to respiratory care. It is important to understand that these finite resources are set aside for a specific purpose; a purpose that accomplishes a valuable service, respiratory care. This budgeted resource has been allocated to the respiratory care leadership to be used at their discretion.
When referring to financial health of an organization as the taproot, we can liken it to a tree. The taproot of a tree is the main root that grows vertically downward from the base of the tree and is responsible for anchoring the tree in the soil and absorbing water and nutrients from the ground. In some tree species, such as oak and walnut, the taproot can grow very deep, reaching several meters into the ground, while in other species, such as pine and spruce, the taproot is shorter and less prominent. As the tree grows, it typically develops lateral roots that branch off from the taproot and spread out horizontally in the soil. These lateral roots are important for the tree’s stability and ability to absorb water and nutrients from a larger area of soil. While the taproot is important for a young tree’s growth and stability, mature trees may rely more on their lateral roots for support and nutrition. In some cases, the taproot may even decay or be damaged by environmental factors such as flooding or soil erosion, but the tree can still survive and thrive thanks to its network of lateral roots.
Learning Objectives
- Develop an operating budget that supports a department/service line/program
- Understand the role of the CPT® code and the RVU
- Explain the difference between gross revenue and net revenue
- Develop a pro forma operating budget for a new service line, department, or program
Financial Health
Financial health refers to the overall state of an organization’s financial well-being. It includes factors such as income, expenses, assets, liabilities, and financial management practices.
A financially healthy organization typically has a stable income that covers their expenses and allows for saving and investing for the future. The organization has manageable levels of debt, a solid credit score, and a diversified portfolio of assets. The organization also has effective financial management practices, such as budgeting, saving, and planning for long-term goals.
On the other hand, poor financial health can result from a lack of income, excessive debt, poor credit, insufficient savings, and inadequate financial planning. It can lead to financial stress, inability to cover expenses or debts, and difficulty achieving long-term financial goals.
The Budget
A budget is typically built in one of two ways:
- Historical information from a prior fiscal year
- Estimations are used when a new department/service line is being developed
Let’s start by building a budget of procedures, statistics, and Relative Value Units (RVU) for FY 2021 from historical information. So first we need to review the first 4 to 6 months of FY 2020 and then make assumptions to build the FY 2021 budget.
| Account | Description | Jan | Feb | March | April | May | June | July | Aug | Sept | Oct | Nov | Dec | Total |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Department Volumes | ||||||||||||||
| Procedures - Observation | ||||||||||||||
| Procedures - Emergency | ||||||||||||||
| Procedures - O/P | ||||||||||||||
| Procedures - I/P | ||||||||||||||
| Total Key Statistics | ||||||||||||||
| Other Statistics | ||||||||||||||
| RVU - Observation | ||||||||||||||
| RVU - Emergency | ||||||||||||||
| RVU - O/P | ||||||||||||||
| RVU - I/P | ||||||||||||||
| Total Key Other Statistics |
Now that we have have reviewed the available FY 2020 information for procedures, statistics, and RVUs, let’s build the FY 2021 budget.
| Account | Description | Jan | Feb | March | April | May | June | July | Aug | Sept | Oct | Nov | Dec | Total |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Department Volumes | ||||||||||||||
| Procedures - Observation | ||||||||||||||
| Procedures - Emergency | ||||||||||||||
| Procedures - O/P | ||||||||||||||
| Procedures - I/P | ||||||||||||||
| Total Key Statistics | ||||||||||||||
| Other Statistics | ||||||||||||||
| RVU - Observation | ||||||||||||||
| RVU - Emergency | ||||||||||||||
| RVU - O/P | ||||||||||||||
| RVU - I/P | ||||||||||||||
| Total Key Other Statistics |
CPT® codes
Current procedural terminology, commonly known as CPT® codes is the language used to connect providers (i.e. clinicians) with payers (i.e. insurance companies). CPT® codes are medical codes used by physicians and allied health professionals to describe the procedures and services they perform. Specifically, CPT® codes are used to report procedures and services to federal and private payers for reimbursement of rendered healthcare In 1966, the American Medical Association (AMA) created CPT® codes to standardize reporting of medical, surgical, and diagnostic services and procedures performed in inpatient and outpatient settings. Each CPT® code is a description of a procedure or service. The AMA updates CPT® codes annually, releasing new, revised, and deleted codes.
There are 3 categories of CPT® codes:
- CPT® Category I —the largest body of codes consisting of those commonly used by providers to report their services and procedures
- CPT® Category II —supplemental tracking codes used for performance management
- CPT® Category III —temporary codes used to report emerging and experimental services and procedures.
In Respiratory Care, the primary focus is on CPT® Category I. Most of the Respiratory Care procedures fall under the Medical Services and Procedures section, codes that start with 9.
Sections of CPT® Category 1 Codes
- Evaluation & Management Services (99201 – 99499)
- Anesthesia Services (01000 – 01999)
- Surgery (10021 – 69990)
- Radiology Services (70010 – 79999)
- Pathology and Laboratory Services (80047 – 89398)
- Medical Services and Procedures (90281 – 99607)
Relative Value Unit (RVU)
Relative Value Units (RVUs) are a common scale for physician work. Commonly called Work RVUs or wRVU. These wRVU compare the work involved with performing a service to all other services and procedures. For example, Insert Emergency Airway (CPT® code 31500) is assigned 3.00 wRVUs. But performing Change of Windpipe Airway (CPT® code 31502) is assigned 0.65 wRVUs. The work required to do an endotracheal intubation is 4.6 times greater than the work involved to change a tracheostomy tube.
The monetary value of an RVU is determined by the annual conversion factor. The 2020 Medicare conversion factor, as defined in the Medicare Physician Fee Schedule final rule, is $36.0896. This means Medicare will pay $36.0896 per RVU in 2020. For example, CPT code 94640 (Ventilator management initial day) has 1.99 RVUs, so Medicare will pay $71.8183.
Measures included in the wRVU
wRVUs account for 3 stages of the work:
- Pre-service work (i.e. reviewing records, discussing procedure with peers, preparation)
- Intra-service work (i.e. patient encounter time)
- Post-service work (i.e. updating documentation)
*All wRVUs assigned to CPT® codes are a quantitative measure of the time involved with delivering a service
Gross Revenue, Net Revenue, and Operating Revenue
It is very important to understand that most Respiratory Care departments will only have access to their departments operating revenue and operating expenses. It is very easy to confuse gross revenue, operating revenue, and net revenue.
Let’s walk through a small and simple scenario.
A patient is referred to your Pulmonary Function Testing (PFT) lab for a simple spirometry by their primary care provider (PCP). The PCPs office calls your PFT lab to schedule an appointment with the Respiratory Therapist (presumably a Registered Pulmonary Function Technologist (RPFT). Your PFT lab schedule template is setup for 1 hour appointments to ensure that the RPFT has time to schedule patients and take care of any administrative tasks necessary to run a PFT lab. The RPFT successfully schedules the patient’s appointment and performs the simple spirometry. After the patient leaves the PFT lab, the RPFT “drops” the charge in the electronic medical record (EMR) and goes moves on to others duties as assigned. After the RPFT “dropped” the charge ($850.00) for a simple spirometry, the hospital billing system translates a simple spirometry procedure to CPT® code 94010 (Breathing Capacity Test) and sends a bill to the patient’s insurance company. This patient’s insurance company is Medicare. Several weeks later, Medicare pays the hospital with agreed upon cost ($6.1352) of a Breathing Capacity Test (CPT® code 94010).
In this small and simple scenario, the operating revenue (what the hospital bills) was $850.00 and the gross revenue was $6.1352. Now let’s take a moment to calculate the net revenue, which deducts any related expenses. Expenses for a simple spirometry include:
- RPFT salary
- PFT lab utilities (i.e. lights, cleaning, water, etc…)
- Some portion of managements salary (i.e Respiratory Manager/Director/Supervisor/hospital administrator/secretary/etc…)
- Disposables (i.e. mouthpiece)
So…if your PFT lab performs 1 simple spirometry per hour for Medicare only patients, your PFT lab is losing money. We don’t even need to do the math to figure that out.
In summary:
- Operating Revenue is what is billed to the payer/patient
- Gross Revenue is how much the payer/patient actually pays for the service
- Net Revenue is how much money is left over after expenses are deducted
Most respiratory care departments only have access to see the operating revenue and will never see the net revenue of their services. Therefore, it is very difficult to assume that your respiratory care department is pulling a profit for your organization.
Pro Forma
| Company Name | 3 Year Pro Forma | |||||||
|---|---|---|---|---|---|---|---|---|
| INCOME | 2020 | 2021 | 2022 | |||||
| Operating Income | ||||||||
| Category 1 | ||||||||
| Category 2 | ||||||||
| Category 3 | ||||||||
| Category 4 | ||||||||
| Other | ||||||||
| Total Operating Income (OI) | 0 | 0 | 0 | |||||
| Non-Operating Income | ||||||||
| Interest Income | ||||||||
| Rental Income | ||||||||
| Gifts Received | ||||||||
| Donations | ||||||||
| Other | ||||||||
| Total Non-Operating Income | 0 | 0 | 0 | |||||
| Total INCOME | 0 | 0 | 0 | |||||
| EXPENSES | ||||||||
| Operating Expenses | ||||||||
| Accounting and Legal | ||||||||
| Advertising | ||||||||
| Depreciation | ||||||||
| Dues and Subscriptions | ||||||||
| Insurance | ||||||||
| Interest Expense | ||||||||
| Maintenance and Repairs | ||||||||
| Office Supplies | ||||||||
| Payroll Expenses | ||||||||
| Postage | ||||||||
| Rent | ||||||||
| Research and Development | ||||||||
| Salaries and Wages | ||||||||
| Taxes and Licenses | ||||||||
| Telephone | ||||||||
| Travel | ||||||||
| Utilities | ||||||||
| Web Hosting and Domains | ||||||||
| Other | ||||||||
| Total Operating Expenses | 0 | 0 | 0 | |||||
| Non-Recurring Expenses | ||||||||
| Furniture, Equipment and Software | ||||||||
| Gifts Given | ||||||||
| Other | ||||||||
| Total Non-Recurring Expenses | 0 | 0 | 0 | |||||
| Total EXPENSES | 0 | 0 | 0 | |||||
| Net Income Before Taxes | 0 | 0 | 0 | |||||
| Income Tax Expense | ||||||||
| NET INCOME | 0 | 0 | 0 | |||||
| Owner Distributions / Dividends | ||||||||
| Adjustment to Retained Earnings | 0 | 0 | 0 |
Key Takeaways
- Be sure to understand how your organization establishes the annual budget
- Diligence with continual productivity modeling is required to ensure staffing is optimized
- When you do the right thing, the dollars will follow
- When considering a change in operations to better align a Respiratory Care department with the strategic objectives of an organization, document a pro forma, even if it’s for your own records
