For providers across the long-term post-acute care continuum, 2021 budget planning should be top of mind these days.
Developing accurate budgets is critical for making informed purchasing decisions. Likewise, it’s essential in analyzing financial performance.
This was a year of unprecedented challenges for most LTPAC organizations, and 2021 could follow a similar trajectory in many ways. Therefore, rather than simply assuming similar performance from year to year, we recommend focusing on key financial items below and reflecting any changes as necessary.
- Census: It’s no secret that census drives revenue for LTPAC organizations, as well as an array of operating expenses. Accordingly, it’s best to carefully consider the payer mix of this occupancy. Payer mix is the source of your room and board revenue. If your facility is involved in marketing efforts to enhance census, for example, with a hospital, reflect that expected change when completing the census projection. The payer mix causes large variations when it comes to total revenue dollars and cash flow planning.
It will be challenging to project census for 2021. Most providers have experienced an extreme decrease in occupancy in recent months, so basing projections off the previous year isn’t ideal.
Additionally, it’s wise to stay conservative with census projections in the beginning of the year. Remember: A provider is allowed to utilize Provider Relief Funds through June 2021, assuming the impact will still be felt during that part of the year. Also, if those funds won’t be fully expended by the end of the year, consider budgeting for these remaining amounts since they will help offset the negative impact of the pandemic. That said, tread carefully, as this should only contain the portion of the funds that are offsetting healthcare-related expenses or lost revenues due to the pandemic.
Capital expenditures: Is your organization or facility planning renovation projects? Are you aware of capital items that must be replaced in facilities? With answers in hand, review your depreciation expense to make sure any planned capital expenditures are being accounted for in the totals. Renovations around the country were likely delayed in 2020 as the pandemic evolved. Be sure to account for additional expenses around projects your organization has put on the back burner.
Wage accounts: Ask any LTPAC accounting or financial professional, and they’ll agree that wage accounts are tedious components of the budget process. A facility’s projected census directly correlates to its budgeted full-time employees, so not properly budgeting this can yield large variances in your monthly numbers. Ask yourself: Have you accounted for any new positions? Overtime pay? Raises? Check to ensure months with holidays are properly accounted for. Are there certain times during the year when people will be working longer hours? All of these variables must be considered when planning out wage expenses for the year. Consider some additional issues around wage accounts:
If your organization or facility uses total hours worked from your current year positions to determine the number of full-time employees for next year’s budget, consider additional time that was put in as a result of the pandemic for that calculation.
Pay attention to hazard pay or additional bonuses that will need to be budgeted in the beginning of 2021.
If you are expecting significant reliance on contract labor in 2021, consider that when budgeting staffing expenses.
Rates: You must ensure that all rates are updated, and any known funding issues must be reflected when calculating revenue. Budget conservatively to avoid hardships if rates decrease in the future. Consider some additional recommendations:
Ensure that your contractual allowance rate (i.e., the difference between gross revenue and what you are actually paid by the provider) is accurately factored into your revenue totals.
Make sure you budget for changes in your rates when you know they take place (e.g., Medicaid).
Vendor contracts: If your organization or facility signed new contracts with insurance providers or contracted staff, make sure increases or decreases have been broken out properly in the correct months of service. Traditionally, contract labor has been a difficult item to budget, especially if you weren’t used to using it before the pandemic. Be realistic about when contract labor expenses will be needed.
Once assumptions are finalized, review the budget to ensure all formulas are calculating correctly and all general ledger accounts have been accounted for in your budget. Next, give department heads an opportunity to review their budgets. They have insight on specific, typical monthly spending and can help head off unpleasant surprises.
Additionally, if you have to meet lender covenants, make sure your numbers ensure that will happen. Finally, compare your yearly budget total to what has occurred historically. If sizable differences stand out, verify the reasons behind them so you can ensure the variances are legitimate. Ideally, every LTPAC wants high revenue and low expenses, but it’s necessary to be as accurate as possible to avoid disappointment when the actual numbers come in.
Liz Lane, CPA, is manager of accounting services for Richter. She specializes in helping clients maintain quality levels, ensure profitability and enable future growth.