Controlling Budget Variance

Budget Variances in LTC Settings
Besides increasing management efficiency, the administrator can also use variance information in making budget reports. For example, a performance evaluation could include progress made in addressing controllable sources of variance. A budget justification report might review the impact on the facility of uncontrollable sources of variance.

The table illustrates three of the most common categories of budget variance, which I’ll elaborate on below.

1. Profit variance is the difference between actual profit and projected profit (or, for nonprofit institutions, net income or net surplus). Three categories of budget variance contribute to profit variance, affecting either the expense or the revenue side:

Volume variance is the difference between actual and budgeted service units-typically, in long-term care settings, measured using patient days as the “service unit,” with the actual patient days above or below budget representing volume variance. Sources of volume variance are often external and difficult to control, such as demographics or third-party reimbursement policies that limit length of stay. Negotiating contracts for skilled nursing care referrals with healthcare systems is an example of an internal source of volume variance that is controllable.

Utilization variance is the difference between the number of actual and budgeted services provided. Insurers’ reimbursement restrictions for ancillary services such as physical therapy represent an external source of utilization variance that may be uncontrollable. Implementation of clinical guidelines and quality management is an internal, controllable source of utilization variance that may reduce average length of stay and associated complication rates.

Enrollment variance (in managed care settings) refers to the unexpected changes in the enrollment in managed care health plans. This is an external source of enrollment variance that is often uncontrollable. It may be possible to control this enrollment variance to some extent if the population size, characteristics (such as including Medicare beneficiaries), or volume of services are negotiated as part of a managed care contract.

2. Rate or price variance is the difference between the budgeted cost and actual cost of personnel or nonpersonnel line items in an expense budget report. Sources of fixed-rate variance may be difficult to control; for example, if utility costs increase during the budget year, the administrator usually cannot change utility providers. In other cases, the administrator may be able to control fixed-rate variance, such as contracting for pharmacy services at a lower cost rather than maintaining an in-house pharmacy department.

A change in the price of supplies per service unit is categorized as supplies variance. A shortage of raw materials, such as the global shortage of latex that occurred several years ago, is an example of an external source of supplies variance that is uncontrollable. Sources of supplies variance may be controllable if it is possible to obtain supplies at a lower price by negotiating discounts or switching to another vendor.

A change in hourly personnel wages is known as staffing-rate variance. For example, the use of overtime or registry personnel for nursing care to augment or replace the budgeted nursing staff will likely increase hourly personnel wages and, especially with chronic staff shortages, may be uncontrollable. Staffing-rate variance is controllable to the extent that scheduling and staffing can be managed, keeping overtime and registry costs within budget limits.

Rate variance also represents the difference between the budgeted and actual revenue. Increases or reductions in the per-diem bed rate paid by third-party payers is a source of revenue-rate variance, as are changes in reimbursement denials by third-party payers. Generally caused by factors external to the long-term care setting, these variances can be difficult, if not impossible, to control. Negotiating reimbursement rates may be possible in some cases, thus allowing some degree of control.

3. Quantity or efficiency variance is the difference between the budgeted and actual number of nonpersonnel or personnel inputs used per time period or service unit. Change in the number of fixed budget supplies, or the number of supplies used per service unit, is a source of quantity variance, as is change in the number of direct care hours provided per patient day. In many cases, such sources of quantity variance are controllable. For example, staff training and supervision can reduce waste or other excessive use of supplies (including damage or theft). Adjusting staff hours and the mix of professional and nonprofessional staff helps control staffing efficiency variance.

Quantity variance occurs in revenues as well as expenses. The use of review and denial mechanisms by third-party payers is an external source of revenue quantity variance that is difficult to control, at least without considerable effort, although staff training in understanding health plan provisions and documentation may improve control. Late payments (which tend to render a portion of reimbursement as eventually uncollectible) and bad debt are additional external sources of revenue quantity variance over which control may be limited. However, an internal source of revenue quantity variance is the facility’s efficiency in billing and collections, and improvement here is, of course, controllable.

Investigating and Controlling Variance
The long-term care administrator may find it helpful to review the budget from the perspective of these types and sources of budget variance, incorporating experience in and knowledge about the external environment, as well as the long-term care facility, in formulating budget strategy. Unit managers should be involved as part of a team investigating sources of budget variances and focusing attention on those specific variances that can be controlled. Engaging all levels of management to identify and, when possible, control sources of budget variance is a key role for the long-term care administrator.

Suggested Reading
Penner SJ. Introduction to Health Care Economics & Financial Management: Fundamental Concepts With Practical Applications. Philadelphia: Lippincott Williams & Wilkins, 2004.