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July 5, 2004

Radiology Budgeting 101
By Beth W. Orenstein

Making that initial step into supervision or administration often gives employees their first taste of formal budgeting. A technologist turned director shares her views on tackling this crucial business task.

Had Laura McKay, BS, RT(R)(M)(QM), known the status of the budget when she became director of radiology at Maricopa Integrated Health System in Phoenix nearly four years ago, she might have turned and run the other way. The budget for the department, which includes general radiology, nuclear medicine, MRI, CT, and other specialty imaging services, was “a complete mess,” she says.

McKay, who today oversees a $9 million operating budget and 182 employees, had to start by teaching the basics of budgeting to the supervisors and managers who report to her. Many supervisors and managers were providers or caregivers who had risen through the ranks and didn’t have much experience with or knowledge of finances and budgeting, McKay says.

Contrary to many people’s opinions, a budget isn’t just a financial scorecard used by accountants and executives. Accurately forecasting, measuring, and monitoring a well-thought-out budget helps organizations set goals, plan to meet them, and track progress toward them. Budgets help leaders make decisions based on hard data, not just a vague sense. But budgeting, even for a multimillion-dollar radiology department, is not as difficult or scary as some might think, says McKay, who gives a one-hour–long presentation on budgeting basics that she developed as a result of her experiences. She calls her talk “Radiology Budgeting 101.”

“Financial terms can scare the general staff member—or the seasoned director—to death, and so my presentation breaks down all that,” she says. McKay presented her budgeting class to the second annual collaborative conference of the American Society of Radiologic Technologists (ASRT) and the Association of Educators in Radiological Sciences (AERS) held in Dallas June 11 to 15. McKay has also spoken to healthcare administrators, radiology management, and radiologic technologists at local meetings in Arizona through the Arizona State Society of Radiologic Technologists and the Radiology Phoenix Area Leadership.

While much of her presentation is radiology-specific, it can be applied to any healthcare department, she says. McKay starts by explaining operating and capital budgets. “A lot of times, people don’t know the difference,” she says. So, she frames it so everyone can relate. An operating budget covers supplies and salaries—the ongoing costs of running the department, she says. A capital budget is for buying equipment such as a new CT scanner or camera. At home, she says, your operating budget would include utilities such as heat, electricity, and groceries—items you buy every month to run your household.

“A capital budget would be for the large, one-time purchase items that you are going to buy this year,” she says. “An example would be computer equipment, a car, or perhaps a new house.”

Ongoing Monitoring
To stay on top of finances in a radiology department, McKay says it’s imperative to prepare monthly financial statements so you know what revenue is coming in and where it’s going out. Tracking purchases in each category each month is critical, McKay says.

“We run monthly distribution reports showing when the item was received, when invoices were received, and when payment was made. You do this so you know exactly what’s being spent where,” McKay says.

At her department, she runs inventory reports every month. “Different hospitals call it different things, but we use ‘period inventory,’” McKay says. “These are for items that are regularly stocked from the warehouse, small items that are used frequently, such as gloves, needles, and contrast agents.”

Again, McKay uses the household analogy. A warehouse is like a refrigerator. You take items from it each day, but you don’t replace them until you go to the grocery store. When you shop is when you spend money. The important thing with period inventories, McKay says, is to make sure the dollar and quantity amounts are correct at all times. For example, a box may hold 12 pairs of gloves while a case may hold 12 boxes.

When you order a box, check that you received 12 pairs vs. a case, which is 12 boxes. “If you received a case, you want to be sure you are being billed correctly and paying for what you ordered,” she says. It may not seem like a big deal, but little mistakes can add up to big dollars, she says.

McKay also stresses the importance of a system that permits management to track purchase orders and invoices so they’re properly accounted for when they happen. For example, she says, “If you buy an item at the end of April, it may not hit until your May’s budget, when you receive it.” Also, the invoice you receive at the end of April may not be paid until June, she adds. If an invoice hasn’t been paid, make sure you list it as a liability until paid.

The two areas in an operating budget you can somewhat manage on a day-to-day basis and make the biggest difference at the end of the month are supplies and salaries, according to McKay. Even supplies are difficult to control, but it may help to go to a just-in-time inventory strategy where supplies are ordered as needed to save storage and waste costs, McKay says. The tricks to making a just-in-time approach work include understanding your facility’s utilization pattern so you don’t get caught short and working with vendors who can support the delivery schedule you need to function with a low inventory.

When it comes to salaries—usually the largest operating cost—McKay says, the only way to control them is to limit overtime hours. Uncontrolled overtime can wreck an operating budget. If things are tight, she says, management may have to eliminate overtime and then schedule the department so no employees work extra hours in a week. Ongoing unexplained overtime frequently means management should evaluate its staffing patterns to make sure employees are working the proper schedules.

McKay adds that it’s also important to have short- and long-term strategic budget plans—and to periodically review them to make sure the financial assumptions still hold up.

Capital Budgets
Because of the need for high-tech imaging equipment, radiology departments usually have significant capital budget needs. “A radiology department has some of the most expensive toys in a hospital,” McKay says. State-of-the-art equipment can cost millions of dollars.

In acquiring that equipment, McKay notes that it probably helps that radiology is one of the two major revenue-producing departments in the hospital (surgery being the other). Top management can more easily approve spending large amounts when it’s confident there will be a real return. Still, when evaluating new equipment for the radiology department, McKay says, you need to forecast the technology’s impact in several areas, such as return on investment and quality of care.

In some cases, competition may be another factor. Does the hospital down the street have that equipment? Will patients choose to go to that hospital or facility over yours because it does?

Maricopa Integrated Health System, where McKay works, is a county hospital. Before coming to Maricopa, which has a 451-bed acute care hospital and several off-site clinics and health centers, McKay worked at a community hospital in Scottsdale, Ariz. The Scottsdale hospital had some generous benefactors and could make decisions on equipment it wished to purchase based on donations, she says. “They could do that because they have people donating.” Maricopa doesn’t have that same luxury, she says.

The hospital bought a $3.2 million GE PACS for its radiology department in 2001.
Before the purchase, McKay prepared a return on investment for the administrators making the decision. It showed that the hospital would break even within three years. Her budget calculations were based on what the hospital would save on staff, film, film storage, and not having to upgrade its current equipment that would be antiquated in five years.

Ahead of Schedule
It turned out, with the exception of service and upgrades, that the hospital was able to break even within the first year. Maricopa Medical Center had 14 film processors and seven laser printers. Now it has two film processors and four laser printers. “We decided on four printers so if patients need film from the PACS, they could get it, and we needed two for mammography.”

McKay explains that the hospital still needs film for mammography because of the 1992 federal law requiring mammography images to be available for the patient’s lifetime, “and to go digital with older films in mammography is incredibly expensive.”

Before the PACS conversion, the hospital was spending more than $350,000 per year to buy film and more than $100,000 per year in processing that film. The hospital would also save approximately $90,000 per year from purchasing fewer processing chemicals and other supplies, such as film jackets.

The hospital’s film system required 15 staffers to manage the files. Going digital, McKay estimated she could cut the staff to seven. File clerks were earning an average of roughly $18,500 per year. Eliminating eight positions would save the hospital at least $148,000 per year, plus benefits savings.

Of course, there were expenses associated with the digital system, McKay says. For example, the remaining file clerks would need a salary increase to reflect their added duties, and a PACS administrator was needed. “Eliminating most film wasn’t budget-neutral,” she says.

The digital system also enabled the hospital to collect a higher percentage of its bills for diagnostic imaging because with digital storage, far fewer files were lost than with film. Nearly one year after the PACS installation, McKay says, “we were able to bill for 98% of the exams we did, compared to 63% the previous year.” Budget analysis also showed that monthly film costs were cut from $56,800 in March 2001 to $4,200 in March 2002.

Analyzing Purchases
During her talk, McKay also examined a proposal to buy a $350,000 4-D ultrasound unit for the hospital. The plan would have sold keepsake fetal videos to parents-to-be. The proposal was to buy this equipment and charge pregnant mothers $95 for the video of their child in the womb.

“The benefit to the patient,” McKay says, “is that they can view their unborn child in real time and record and share the moment with their child years later.”

First, McKay says, the group looking at the purchase had to examine the market. How many ultrasounds would the hospital perform? What were the birthrates in the area? And who had 4-D equipment? What would Maricopa’s competition be?

Next, McKay says, the group had to weigh the risks. What were the legal and ethical implications of providing the video image keepsakes? Would the hospital be able to recruit a skilled sonographer to produce the videos? Would the physicians support the program? How would the hospital market the video service?

“Whenever you are looking at making a long-term strategic move,” McKay says, “you want to be able to look at the risks as well as the benefits. If you are adding a new line, you must determine whether people are going to come in for it.”

The hospital was doing roughly 7,300 ultrasounds per year. Installation of the 4-D ultrasound equipment would take approximately three months. In the end, McKay says, the steering committee decided against buying the equipment. “Because of the clientele we have, we did not feel the site we selected for the equipment would be able to attract the market we needed,” she says.

Even though this time the answer was no, McKay says, the exercise was useful and should be applied to any new imaging equipment a hospital or department is considering. The bottom line with such investments, she adds, “is how quickly are you going to get paid back.”

In this environment, some may need to see a quicker return than others and should consider that time when planning for the future, McKay says.

Career Move
To make the career switch into administration, McKay says it certainly helps to have a bachelor’s degree. Today, she adds, many healthcare organizations “are looking for people with master’s degrees because healthcare has become so highly competitive and is similar to big business.”

Still, McKay says, a lot of budgeting is on-the-job training. For those interested in budgeting, McKay also suggests reading some books on hospital financing. Two titles she recommends are The Financial Management of Hospitals and Healthcare Organizations: Problems and Cases by Michael Nowicki, EdD, FACHE ($81, an Association of University Programs in Health Administration/Health Administration Press book copublished with the Healthcare Financial Management Association); and Health Care Administration: Planning, Implementing, and Managing Organized Delivery Systems by Lawrence F. Wolper ($83.95, Jones & Bartlett Publishers).

— Beth W. Orenstein is a freelance health writer and regular contributor to Radiology Today.

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