Declining reimbursement and financial incentives connected to quality and patient satisfaction outcomes are making finance a language requirement for every future nurse manager. If nurse leaders want to continue to have a seat at the strategic table and remain influential advocates in future healthcare decisions, they must become fluent in the language of finance.
Finance as a second language
The ability to be conversant in the language of finance is beginning to emerge in the clinical arena. One author highlights how a chief nurse executive's innovation in instilling financial awareness and accountability led to her staff having a broader perspective of the organization. She found this knowledge helped to take some of the emotion out of the budget process. The awareness of finance combined with the development of unique relationships among staff—a shared orientation about money and choice—contributed to the department saving $4.9 million in productivity while saving $7.6 million in reduced turnover costs.1
Financial knowledge is a concern of the American Nurses Association (ANA) and the Institute of Medicine (IOM).2,3 The 2010 IOM report suggests that RNs have a responsibility to become active participants in shaping healthcare and managing resources. The ANA's standard of “resource utilization” suggests that all RNs need to identify consumer care needs, the potential for harm, the complexity of the task, and the desired outcome when evaluating resource allocations. The first step to accomplish this goal is for nurses to understand the financial priorities behind healthcare business decisions.
Finance is also a vital knowledge competency for graduate-level prepared specialty nurses and advanced practice RNs. These competencies suggest nurses need to use resources effectively and maintain quality design evaluation strategies that demonstrate cost-effectiveness, cost-benefit, and efficiency factors associated with nursing practice.3 It's clear that those establishing the profession's nursing practice standards expect nurses to maintain a strong advocacy role for their units, workspaces, and, most importantly, future patient needs. This requires nurses to actively pursue, understand, and be conversant in finance.
Key financial definitions
Languages don't come easy for most people, and the language of finance is no different. Although adventuresome nurse managers have a few guidebook phrases to navigate the landscape of budgets, variances, and staffing ratios, the future requires nurse leaders to more fully engage in the conversation of finance. Learning the financial language begins with understanding key words and definitions.
The operating budget tracks expected revenues and the related expenses that generate a bottom line (revenues minus expenses). Net income/loss is the money left after subtracting revenues and expenses. You can have a net loss on a unit and yet still have an overall net income if another unit makes more money than the first unit's losses.
Budget variance is the difference between the expected budget (such as expense, revenue, number of patients, and number of exams) and the actual numbers, which may vary from month to month. Variance indicates whether adjustments to staff or supplies are necessary. Monitoring this number helps staff members understand the flexible nature of their units. A variance alerts the manager that there may need to be immediate adjustments to staffing to offset the loss of revenue that comes with not having the expected number of patients.
Gross charges/revenue is the amount an organization/unit bills its patients if they paid in full for those charges. Being aware of this number helps nurses understand the revenue generated by their unit. Knowing that most patients don't pay full charges due to contractual discounts with Medicare, Medicaid, and insurance companies helps staff become more sensitive to expenses and operational efficiencies. What remains after subtracting total expenses from the collected revenues is the net revenue. This number is similar to the remaining amount of your paycheck after taxes. The point at which total revenues (organization or unit) equal total costs is called breakeven. This is when the money coming in equals the expenses to provide services on the specific unit.
The revenue derived from joint ventures or services provided outside the scope of normal operations (such as durable medical equipment) is call nonoperating revenue. Although not a major source of income, this source is growing as hospitals begin to decentralize, diversify, and spin off certain self-contained ventures in search of additional revenue.
The operating margin or product margin is the amount of money a service contributes to covering all its operating costs (after subtracting fixed costs). This metric monitors the total costs associated with providing the specific service. It helps assess if the unit is contributing to the financial mission, and it's also useful in evaluating operational efficiency.
Cost per stay is the amount of expenses generated from an individual patient stay. Knowing the cost per stay helps staff understand how supplies and other items contribute to the cost of treating a patient. The average cost per stay indicator verifies whether a unit is in line with the costs of delivering that specific care in a best practice benchmark hospital.
The cost per stay/day includes fixed costs—expenses that continue even if a building, bed, or piece of equipment isn't used. Those costs continue even if there are no patients. Variable costs are expenses that fluctuate with use. Food, medications, supplies, and even staff are often considered variable costs. Additional patients require more food, medications, and staff. Variable costs increase or decrease with the census.
Fixed and variable costs are averaged together to get a cost per stay and cost per day, which is benchmarked with best practice facilities/units. As nurse managers become more accountable for these costs, as well as clinical outcomes, you'll learn how these fluctuations affect not only patient care, but also the financial health of the organization.
The financial health of any organization requires sufficient market share—the percentage of total procedures/admissions for a specific diagnosis that the hospital or unit has in comparison with competitors. For example, if there are 100 cardiac surgeries performed in the market and one facility provides 20, that facility would have a 20% market share. It's important to know the trends of market share data. If over the last 3 to 5 years the number is trending up, it suggests a positive benefit provided that the net revenue (after expenses) is positive. If the trend is a reduction in market share, it invariably means tighter budgets for those units not generating adequate revenue.
How do we project or know if our net revenue could go up? One way is to monitor and manage the hospital and unit payor mix—the percentage breakdown of the revenue received from all payor sources. Having a balanced payor mix is crucial for the survival of any health facility. Many healthcare facilities contract with several insurance companies providing discounts for their services. Those contracts often have a different discount rate for each company; for example, reimbursements collected from Medicare, Medicaid, individual commercial insurance carriers, and self-pay patients. Although the facility attempts to maximize reimbursement, the insurance company attempts to minimize its outlay for services rendered.
Knowing the payor mix, in combination with market share trends, can help nurses understand the revenue trends of their unit. This means that as their fluency increases, they become better at communicating their resource needs. This knowledge is especially relevant in a struggling economy with declining reimbursements and a growing number of people without access to insurance.
Hours per patient day (HPPD) is the total amount of nursing time spent to care for a single patient in a 24-hours period. Monitoring this ratio allows management and staff to know if a unit is over- or understaffed compared with past activity and relevant best practice benchmarks. The ratio helps managers understand overall nursing costs and patient cost per day/discharge, and is often used to evaluate the efficiency of existing care structures.
Although HPPD remains a staple for staffing determination, its exclusive use was being questioned more than 20 years ago.4 The financially fluent nurse manager in the 21st century must know HPPD, but must also become familiar with a number of other financial metrics. Relying only on HPPD is akin to having only four or five standard phrases to navigate a foreign country—it restricts the conversation.
It has been suggested that nurse leaders use HPPD in combination with salary expenses per patient day (SEPPD).5 In combination, SEPPD and HPPD deepen the awareness of not only how many people are needed to care for patients, but also what it costs to provide that care.
Integrating financial knowledge into the clinical arena has been a long, arduous journey. In the last 20 years, the attitude has shifted from denial or grudging acceptance to fully embracing the value of financial knowledge as more nursing schools include it in their curricula. Older nurse leaders who are self-taught in the language of finance are at the forefront of exploring additional financial metrics, including on-unit financial dashboards and balanced scorecards that link with clinical indicators.
Enrich the conversation
By choosing to learn the financial vocabulary, leaders begin the process of building a common language, bridging the current language gap between nursing and finance. By integrating key financial measures into clinical dashboards, nurse leaders create additional tools for proactively managing their units. This knowledge enriches the conversation between nurses and the C-suite (CEO, CFO, CNO, CMO), allowing nurses to better advocate for their units, workspaces, and patient needs. Future nurse leaders can expect to monitor a wider array of financial indicators and by speaking the language of finance, they can remain at the center of conversations about the strategic direction of their organization.