Frequently Asked Question (FAQ)

Because preparing a budget gives you the best opportunity to ensure that you are as efficient and productive as possible with the resources at your disposal.  Although you might have been profitable in the past, that is no guarantee of future results. I would follow your question up with another question: Were you as profitable as you could have (or should have) been?

  When you prepare a budget, you are projecting what your financial results should be based upon the operational assumptions identified/projected for the upcoming year.  The results of your budget will then be based on the level of detail at which the budget is drafted.  A budget will give you (monthly/annual) values you then have to measure your actual results against.  And this comparison (i.e., Budget-to-Actual) should be done on both the whole dollar results as well as on a per unit basis where possible.

Additionally you can compare the budgeted ratios you have established (e.g., expense as a % of revenue; overhead cost as a % of direct cost, Medicare revenue as a % of Total revenue, etc…) with your actual results.  Through this you are able to better manage and impact your actual results.  Financial management becomes a proactive activity as opposed to a reactive one.  Furthermore, as we move toward ‘Pay-for-Performance’, budgeting will become a much bigger issue and the organizations that do it the best will have an inherent advantage over those that do not.

Budgeting is a skill, but first must be learned to coincide with the applicable industry. When they taught budgeting in schools, they did not have the home health industry in mind; an industry that receives reimbursement via a PPS methodology. But budgeting is an important business tool as long as there is an inherent connection between ‘how you budget’ and ‘how the industry works’. Often there is a disconnect between the two which reduces the benefit of preparing a budget. A budget is a ‘static document’ that you use to measure your actual results against and this can and should help you throughout the year. However, the tool that really is beneficial to you throughout your year is called a Forecaster. Based on my experience in our industry, Budgeting is rarely done. I’d venture less than 50% of agencies do an annual budget and of those that do, less than ½ of those actually do anything with it during the Budgeted Year and I have NEVER seen anyone doing Forecasting that I didn’t start (and that’s over 22 years).

* * Budgeting: I’d venture to guess that only a small fraction might budget appropriately for our industry as most just apply a % to revenues and expenses (and quite often there’s not even a correlation between the revenues and the expenses!), and don’t pay any attention to the true drivers of that budget. For example, from a revenue perspective what you will see (from the majority of those that do) is that they will say: I want to see an increase in revenues of X%. But X% is based on what; ownerships desire to see revenues grow by X%? That’s not a driver of revenues, so now, when your actual results fail to meet budget (be it + or -), the question is why? What changed? Well, what changed is the Reimbursement Rates from your Payors and/or your patient census from your Payors! There are your drivers for revenues: Patient Census by Payor. Now when you have fluctuations in your revenue, the first place you look is at your ADC and compare that to your budget to start to identify what happened. Once you know why, you can adjust as needed; but if you make adjustments without truly knowing the root cause, you might make things even worse (and I have seen this happen time and time again!).

* * Forecasting: This is your living budget that you will enter data into and make changes as necessary throughout the year, and if used properly helps an agency to more accurately predict what their year-end results will be at any time of the year than any other financial tool in existence! However, you need to know how to budget well to start with, as your Forecaster uses your Budget as its’ starting point and as you close each month, that month’s actual data is entered into the Forecaster, replacing the budgeted amounts. A good Forecaster will also allow you to make changes to your budget assumptions for the remainder of your year to better reflect what is actually happening throughout the year to better predict what your year end results are going to be.

I recommend budgeting to the greatest level of detail possible based on your company’s financial constraints.  I would always recommend budgeting off of your specific general ledger (G/L) accounts.  Budgeting at the branch level and consolidating the branches to generate the agency budget is better than budgeting at the agency level.  However, budgeting at the agency level is better than not doing a budget at all.  It is just a matter of time and resources and the greater the detail, the greater the time and resource needs will be.  But also, the greater the detail of the budget, the better the Budget-to-Actual review will be.  Budgeting down to the per unit (e.g., ‘per-visit’, ‘per episode’,  ‘per-patient’, etc…) basis based on the drivers (e.g., admits/census by payor, etc…) would be best.

First you need to understand the basic difference between a budget and a forecaster.  A budget is a ‘static’ document; once completed it does not change.  A forecaster is a ‘dynamic’ document that is changed each and every month.  It is the budget combined with the actual results of each and every month.  The budget is a projection for the upcoming year based upon a set of assumptions.  The forecaster uses the budget as its’ basis, but as each month’s results are incorporated into it, it gives you a more accurate and timely projection of what your year-end results could be.  And a good forecaster model will also allow for adjustments to many of the budget assumptions to enable it to more accurately predict year-end results.

There is no absolute answer here.  It all depends to what extent it is used and what level of review it allows the user.  To be considered good it really should give you both a ‘budget-to-actual’ as well as a ‘current year-to prior year’ review; and these should be at the branch level (assuming you have branches).  Better ones will include the aforementioned reviews, with a ‘budget-to-actual’ on a per unit basis.  And the best ones would tie-into an automated financial analysis that provides a multi-tiered level of review so that if/when aberrant values are identified there is already several layers of review to help isolate and identify the cause of the concern.

Financial modeling is a cost accounting technique that performs an analysis down to the lowest incremental value/driver possible (e.g., visit, patient, day, etc…). This can and should be done for the financials (revenues and expenses and even some balance sheet (BS) accounts such as Accounts Receivables {A/R}) identifying ‘per-unit’ (e.g., per-visit, per-patient, per-day, etc…) values and trends. This is the root of financial analysis and enables you to know and understand the ‘what’s’, ‘how’s’ and ‘why’s’ of that which impacts your business.

Yes. Although the concepts of financial modeling/analysis are quite uniform and consistent, they should always be tailored to your specific wants and needs. The model must be able to summarize the results of its’ analysis in a manner that enhances management’s decision making process.

Two thoughts immediately come to mind: Propaganda and Apathy. Propaganda having to do with the perception of the home health industry in general that is orchestrated by many influential parties, including CMS, the OIG, MedPac, etc. What is that perception? That perception is that the home health industry is very profitable for the owners/operators of HHAs and that it is an industry rife with fraud and abuse. In 2011 HH accounted for approximately 5.4% of total Medicare spending; yet a very large portion of Medicare fraud and abuse was attributed to the home health industry. Any corrections to those home health fraud and abuse allegations never appear on the front page, so that does not resonate as well. Additionally, MedPac is continually reporting extremely high Medicare Margins for HHAs, implying high-profitability. In fact, the most recent MedPac Report to Congress (March 2013) identified the following:

* * Medicare Margins for all HHAs in 2009: 18.7% (further stating that ‘Fairly Efficient HHAs were at 24.8%’ and that ‘All Other Providers were at 17.6%’)

* * Medicare Margins for all HHAs in 2010: 19.10% (further stating that ‘Fairly Efficient HHAs were at 23.8%’ and that ‘All Other Providers were at 18.5%’)

* * Medicare Margins for all HHAs in 2011: 14.8%

* * And Medicare Margins averaged 17.7% between 2001 and 2010

MedPac further states: “Medicare has always overpaid for home health services under PPS.” Further emphasizing from their perspective the very profitable nature of operating an HHA!

I use Apathy as a term to describe lack of involvement of home health providers to make a difference in their own future. I focus my point here on what the industry does in response to the Proposed Rule that CMS puts out just about each and every year regarding the subsequent years’ reimbursement and regulatory changes. On average, CMS only receives several hundred comments annually from what is presented in the Proposed Rule each year. This, from an industry that has approximately 13k HHAs and at its’ lowest point still had around 7k agencies. Statistically speaking, there are comments submitted from the equivalent of somewhere between 2.5 – 5% of the HHAs that will be affected by each year’s rule. That’s apathy because of the lack of involvement. Many don’t know that they have this opportunity, but again, it is a direct result of one’s own lack of involvement. The Home Health Industry does not have the ‘deep pockets’ and/or connections/lobbyists of the Hospitals and Doctors, so we as an industry have to make a difference ourselves by being involved: Step 1 – comment on the Proposed Rule when it comes out later this year; probably sometime in early July.

A Cost Report presents the demographic, statistical, operational and financial information in a prescribed format. This is one of the most important documents that you will produce on an annual basis as CMS and others continually use the information to adjust regulations and reimbursement. When you are preparing your Cost Report, please be sure that you are using someone that is reputable, knowledgeable and understanding of the Cost Reporting process as well as Medicare laws and regulations. If you do not have this skill and knowledge, please do not assume obtaining good software is going to help you. The errors that you can easily make can cause your cash-flow to be terminated immediately until such errors are corrected. Another issue is the lack of understanding and/or training of those preparing Cost Reports. Misidentifying costs is another significant issue that will negatively impact the industry. An example of that would be the difference between Marketing and Community Education. Both are allowable activities, but only Community Education costs are allowable by Medicare. Many if not most agencies have the same individual doing both but don’t bother to separate the costs and then all the costs get disallowed. The problem with this is that it has the effect of understating what the true cost of servicing your Medicare clientele actually is. This has the effect of overstating what your (and the industry’s) Medicare Margins are: See MedPac’s 2013 Report to Congress that states the industry averaged Medicare Margins of 17.7% from 2001 to 2010, and that overstatement continues today. This will help MedPac & CMS show that they pay too much for home health services and cause a reduction in reimbursement for our industry; and the industry will have done it to its’-self. This is an example of why it is so important to have someone knowledgeable and understanding of Medicare Rules and Regulations helping you prepare your Cost Report; because otherwise, costs, etc… are not properly reported and ultimately with have a negative impact on Medicare reimbursement to your agency specifically, and the industry overall.

The Home Health Care Resource Planner is a quick and easy to use patient-specific budget program that allows you to estimate the financial results (projected profit/loss) of an episode of care, regardless of payor. The program takes about 1 to 3 minutes to complete and allows for ‘what-ifs’ by adjusting the projected resource usage.