NUR 5113 Module 2 Unit Operating Budget Example

Budgeting the Hours We Used to Call Overtime: A Next-Year Operating Budget for a 20-Bed Behavioral Health Unit, From Patient Days to FTEs

Student Name

American College of Education

NUR5113: Management of Financial Resources in Nursing

Module 2 Assignment

Instructor Name

May 11, 2027

Forecasting Volume

Every line of a unit operating budget depends on the volume forecast, so it comes first. The composite 20-bed behavioral health unit described in Module 1 had 6,424 patient days last year, an average daily census of 17.6. Over the past three years its census has risen by about 2% a year, and the emergency department is holding more psychiatric patients waiting for beds, which suggests demand exceeds capacity. The budget therefore forecasts an average daily census of 18.0 next year, or 6,570 patient days, which would put occupancy at 90%. A higher figure was considered and rejected: at occupancy above 90%, a unit that admits around the clock has too few open beds to absorb the day-to-day swings in admissions and discharges.

The Staffing Standard

The unit staffs by worked hours per patient day (HPPD), the number of direct care hours worked for each patient day. Penner (2017) describes HPPD as the bridge between volume and the labor budget, because once the standard is set, worked hours rise and fall with the census. There is some evidence that staffing to a set HPPD standard protects patients. In Western Australia, Twigg et al. (2011) found that after hospitals introduced a nursing hours per patient day method, several nursing-sensitive outcomes, including mortality and length of stay, decreased, although that study was of medical and surgical units, not psychiatric ones.

The unit's standard for next year is 6.0 registered nurse HPPD and 4.0 mental health technician HPPD, a total of 10.0, unchanged from this year. On top of that, the budget adds a separate line for one-to-one observation. The 9,860 observation hours of the past year were almost all paid as overtime or supplied by float staff at premium rates, because the budget assumed none. The new budget plans for 8,000 observation hours worked by mental health technicians, a figure below last year's because the unit intends to review each observation order every shift, a change discussed with the psychiatrists and expected to shorten unnecessary observation. A cost that happens every year is not a variance; it is a budget line nobody wrote.

The lower observation figure is not a hope; it rests on evidence that observation is often used more than safety requires. In a longitudinal study of acute psychiatric wards, Stewart et al. (2009) found no significant association between the use of constant observation and self-harm, and noted wide variation in its use between hospitals and wards, which led them to conclude that observation could be reduced without compromising safety. A later systematic review found that more than half of the interventions studied had some positive effect on the use of constant observation, and that teamwork interventions in particular could reduce its frequency safely, although the studies varied too much to recommend a single approach (Reen et al., 2020). The unit's plan is modest by comparison: a structured review of each observation order at every shift handoff, led by the charge nurse with the psychiatrist on call, so that no patient stays on one-to-one observation only because nobody asked whether it was still needed.

From Worked Hours to Paid FTEs

Worked hours are calculated by multiplying patient days by HPPD. Registered nurse worked hours are 6,570 times 6.0, or 39,420. Mental health technician worked hours are 6,570 times 4.0, or 26,280, plus 8,000 observation hours, a total of 34,280.

Staff are paid for hours they do not work on the unit: vacation, holidays, sick time, education and orientation. On this unit those nonproductive hours average 12% of paid hours, so worked hours are divided by 0.88 to reach paid hours. That gives 44,795 paid registered nurse hours and 38,955 paid mental health technician hours. Dividing by 2,080 paid hours per full-time equivalent (FTE) yields 21.5 registered nurse FTEs and 18.7 mental health technician FTEs. The unit also has fixed positions that do not vary with census: the nurse manager at 1.0 FTE and unit secretaries at 1.4 FTEs.

Pricing the Budget

Salaries use next year's average hourly rates, which include the planned 3% increase and shift differentials: $46.50 for registered nurses, $21.00 for mental health technicians, $58.00 for the nurse manager and $20.00 for unit secretaries. Registered nurse salaries total about $2,083,000, mental health technician salaries about $818,000 and fixed positions about $179,000, for total salaries of about $3,080,000. Benefits are budgeted at the hospital's rate of 30% of salaries, about $924,000, bringing labor to about $4,004,000.

Supplies, including medications stocked on the unit, linen, meals for patients and group therapy materials, come to $38 for each patient day once last year's rate is adjusted for inflation, or about $250,000 in total. Total direct expenses are therefore about $4,254,000, or $647 per patient day. Physician salaries, social work, therapy staff and the unit's share of hospital overhead are allocated by the finance department and are not controlled by the nursing budget.

Revenue follows the payer mix analyzed in Module 1. At a blended net revenue of $895 per paid day, and assuming that 4% of days will be denied, down from 5% last year as documentation improves, the unit expects 6,307 paid days and revenue of about $5,645,000. That exceeds direct expenses by about $1,391,000, which is the unit's contribution toward the allocated costs it does not control.

Assumptions and Risks

The budget rests on five assumptions, each of which could fail. The census may not reach 18.0 if the unit cannot staff all beds. Observation hours may exceed 8,000 if the unit admits more patients at high risk of violence or suicide, and each additional 1,000 hours would cost about $31,000 including benefits. Nonproductive time may rise if turnover forces more orientation. The denial rate may stay at 5%, which would reduce revenue by about $59,000. And the payer mix may shift toward Medicaid, as Module 1 showed can happen for reasons outside the unit's control. The nurse manager will review the census, observation hours and denied days monthly against this budget, and Module 3 will analyze the first variances that appear.

What the Budget Changes

Compared with this year, the new budget adds no new positions for direct care, yet it raises the mental health technician line by about 4.4 FTEs, because hours that were previously bought as overtime at time and a half are now planned as straight-time hours for permanent staff. At the average technician rate, paying 8,000 hours at straight time rather than overtime saves about $84,000 before benefits, enough to cover the cost of recruiting and orienting the new technicians. The change also makes the unit's performance readable. Under the old budget, every month showed a large unfavorable labor variance that everyone had learned to ignore, because it was built into the way the budget was written. Under the new one, a variance will mean something has actually changed, and the manager can respond to it. The next module tests that promise against the first quarter's results.

References

Penner, S. J. (2017). Economics and financial management for nurses and nurse leaders (3rd ed.). Springer Publishing.

Reen, G. K., Bailey, J., Maughan, D. L., & Vincent, C. (2020). Systematic review of interventions to improve constant observation on adult inpatient psychiatric wards. International Journal of Mental Health Nursing, 29(3), 372-386. https://doi.org/10.1111/inm.12696

Stewart, D., Bowers, L., & Warburton, F. (2009). Constant special observation and self-harm on acute psychiatric wards: A longitudinal analysis. General Hospital Psychiatry, 31(6), 523-530. https://doi.org/10.1016/j.genhosppsych.2009.05.008

Twigg, D., Duffield, C., Bremner, A., Rapley, P., & Finn, J. (2011). The impact of the nursing hours per patient day (NHPPD) staffing method on patient outcomes: A retrospective analysis of patient and staffing data. International Journal of Nursing Studies, 48(5), 540-548. https://doi.org/10.1016/j.ijnurstu.2010.07.013