journal8constructing.pdf

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Evidence-based nursing

Constructing a nursing budget using
a patient classification system
By Deborah Kolakowski, DNP, MSN, RN

O
btaining resources for quality patient care
is a major responsibility of nurse manag-
ers. Historically, nursing department labor
budgets comprise the largest percentage

of hospital employees and expense; therefore,
careful management is essential to maintain a bal-
ance between patient care and cost-effective bud-
geting.1 Patient classification systems (PCSs) were
adopted in the mid-1970s for the purpose of un-
derstanding the utilization of nursing resources
and to allow for an objective measure of full-time

equivalent (FTE) require-
ments.2 Both goals support
the development of staffing
budgets.

The National Institutes
of Health Clinical Center
utilizes data obtained from
the PCS to assist nurse
managers in quantifying
workload measures for
acuity, hours per patient
day (HPPD), and length of
stay adjusted census
(LOSAC)—the corner-
stones of budgeting direct
care staff. PCSs also pro-
vide nurse managers with
the methodology for moni-
toring variance analysis
when meeting budgetary

performance goals. Supplying nurse managers
with the budgetary tools and evidence-based con-
cepts to plan and develop a labor budget, and un-
derstand and articulate these critical components,
establishes credible leadership when advocating
for limited resources.

Planning
The budget is founded on clear, written hospital
and departmental goals, which are translated
by the budget process into a formal quantitative

14 February 2016 Management

expression of management’s plans, intentions, and
expectations.3,4 Traditional budgeting provides a
plan of expected patient activity, communicates
operational salary and nonsalary requirements
within the organization, and lays the foundation
for evaluation and control over the next fiscal
cycle.4

Annually, the Clinical Center requests informa-
tion from institutes and centers about their intra-
mural clinical research program plans for the
coming fiscal year. The institutes and centers are
queried to forecast inpatient and outpatient activ-
ity, planned program and organizational changes,
new or closing protocols, and the projected impact
on Clinical Center department resources that
support the clinical research enterprise. Patient ac-
tivity is the main driver in developing the budget.
Inpatient admissions and days, average daily cen-
sus at midnight, outpatient visits, and length of
stay are utilized to forecast changes in patient
activity.

Volume projections
Retrospective historical data from the organiza-
tion’s financial systems and PCSs are provided in
advance of the annual budget planning process.4

The Clinical Center Department (CCND)
uses the executive information system (EIS) mid-
night census for trending patient activity. At the
Clinical Center, the midnight census includes pa-
tients who are on short-term, temporary absences
from the hospital for nonmedical reasons, or
PASS. In a clinical research setting, PASS can be
utilized to reintegrate long-term stay patients back
into the community and for the assessment of
treatment in the home setting or situations in
which patients are admitted to protocols that may
have extended periods of time between proce-
dures.

Patients on PASS are counted toward the
nursing unit midnight census; however, nursing
doesn’t staff or budget for this. For this reason, the

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Evidence-based nursing

PCS LOSAC is used to determine
patient activity for budgeting of di-
rect care staff. The difference in
LOSAC and EIS midnight census
has historically been the percentage
of PASS patients for each patient
care unit. The LOSAC doesn’t cap-
ture patients on PASS and is reflec-
tive of the actual number of pa-
tients in beds on the unit within a
24-hour period. The LOSAC sums
the length of stay for all classified
patients who were on the unit, in-
cluding patients with shorter
lengths of stay such as new admis-
sions, transfers, or discharges. In
addition to LOSAC, the CCND in-
corporates acuity workload mea-
sures and professional judgment
into the planning process to ensure
accuracy of the FTE budgetary
recommendations.5

Fixed and variable costs
The labor budget generally repre-
sents the greatest expenditure for a
patient care unit cost center and ac-
counts for fixed and variable costs.1,4

The cost center is a functional unit
within the nursing department, usu-
ally referred to as a patient care unit
for which cost control and account-
ability can be assigned.4 Individual
patient care unit cost centers are
assigned and rolled up to represent
the larger departmental budget for
salary and nonsalary expenses. It’s
our experience that nurse managers
have the most influence and control
over determining and monitoring
nursing direct care resources to
meet patient activity and workload
requirements.

Staff members who fluctuate in
response to changes in workload,
census, and patient acuity are con-
sidered to be variable costs.3,4 In our
organization, this includes nurses,
patient care technicians, and
behavioral health technicians. Each
patient care unit has a different
percentage of RN and patient care

technician skill mix based on the
patient population and care deliv-
ery model. Professional judgment
allows for additional budgeted
FTEs based on minimum staffing
requirements in the event of low
workload and census or to provide
resources for new programs of care.

Fixed costs remain constant de-
spite fluctuations in acuity or cen-
sus.4 The CCND determines budget
requirements for fixed FTEs based
on historical data, organizational
priorities, and administrative prac-
tices. Fixed costs include support
staff, such as unit secretaries,

summarizing FTE requirements or
utilization.

FTE is the number of hours of
work for which a full-time em-
ployee is scheduled routinely each
week.2,4 FTE is a conversion of
hours for each employee based on
his or her commitment base for
hours worked. In our organization,
1.0 FTE is defined as working 40
hours in a week. Utilizing 8-hour
shifts, one full-time employee
works 2,080 hours annually (8-hour
shift per day × 5 days per week ×
52 weeks per year = 2,080 hours
annually).6

Providing a foundation of basic financial concepts and education
courses based on evidence and best practices leads to effective
allocation and utilization of nursing resources.

clinical managers, nurse managers,
clinical nurse specialists, education
specialists, and other departmental
administrative nursing positions.
Clinical managers are considered
direct care staff members who are
budgeted as fixed costs to support
the planning of daily flexible staff-
ing requirements, monitoring of
budget variance analysis, and mon-
itoring of PCS reliability.

FTEs
It’s important to understand the
concepts of position and FTE
when developing the fixed and
variable component of the labor
budget. A position is a job classifi-
cation for one person regardless of
the number of hours that person
works. Personnel reports describe
positions by job or skill categories
and hours worked (full-time, part-
time, or per diem). Budgets and
variance analysis reports are gen-
erated using position names and

One FTE can be divided multiple
ways to allow for part-time flexible
staffing alternatives. A nurse who
works 20 hours per week would
equal a 0.5 FTE (20 hours/40 hours
for 1.0 FTE = 0.5 FTE). Nurses will
typically work alternative shift
schedules, such as 4-, 10-, or
12-hour shifts. A part-time nurse
working two 12-hour shifts
would be considered a 0.6 FTE
(24 hours/40 hours for 1.0 FTE =
0.6 FTE). Staffing budgets are con-
structed using 8-hour equivalent
shifts. After the budget is deter-
mined, the nurse manager opera-
tionalizes budgeted FTEs as
full-time or part-time, depending
on the needs of the unit to support
staffing.

Acuity workload measures
In our organization, the inpatient
PCS methodology is a flexible and
adaptive tool that’s used on all pa-
tient care units to predict workload

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Evidence-based nursing

measures used for staffing and
budgeting.1 Our patient care units
interface with the electronic medi-
cal record to automate the classifi-
cation of patient needs based on
nursing care documentation. To en-
sure accurate and credible data for
staffing and budgeting, reliability
monitoring is completed weekly.

HPPD are the hours of nursing
care provided per patient per day
by clinical staff.4 When the budget is
prepared, the HPPD explicitly
assume some determination of acu-
ity.2 It’s our experience that acuity
doesn’t fluctuate significantly to
change HPPD recommendations
unless there’s a new patient popula-
tion or new research protocols have
been implemented. HPPD are bud-
geted utilizing historical perfor-
mance data comparing budgeted,
actual, and recommended HPPD.

Replacement coverage
Budgeting of clinical staff requires
a portion of an FTE to provide
replacement coverage for earned
benefit time off and cover health-
care institutions that provide 7 days
per week coverage. Our replace-
ment coverage for benefit time gen-
erally includes sick leave, vacation,
holiday, and other paid time off.
Replacement coverage will vary
from one institution to another. At
the Clinical Center, this is budgeted
at 17% in nursing.

As described earlier, FTE em-
ployees work 8-hour shifts, 5 days a
week. Replacement coverage for the
additional 2 days to provide for a
7-day operation is essential. The
weekend replacement coverage
is calculated as 8 hours/day ×
2 days/week × 52 weeks per year =
832 hours/year. 832 hours per
year/2,080 hours per FTE = 0.4 FTE
or four 8-hour shifts. Therefore, our
replacement coverage for both ben-
efit time and weekends based on
one FTE is calculated as (1.0 + 0.4) ×

(1.0 × 0.17) = 1.6. For each FTE bud-
geted, 0.6 FTE is required to cover
time off and weekend coverage.

Case study
Step one: calculating direct care
FTE requirements. To calculate
direct care FTE requirements, the
LOSAC, HPPD, and replacement
coverage are determined. In our
example, a divisor of 8 is utilized
based on FTE staff working 8-hour
shifts. 8 hours/day × 2 days/week
× 52 weeks per year = 832 hours/
year. 832 hours per year/2,080
hours per FTE = 0.4 FTE or four
8-hour shifts. For a 32-bed medical-
surgical oncology patient care unit’s
direct care FTEs:
• (22 LOSAC) × (12 HPPD) × (1.4
weekend replacement) × (1.17 bene-
fit replacement)/8 hour shifts = 54.1
direct care providers
• An additional 0.5 FTE is added
for professional judgment for com-
plex pharmacokinetic drug studies
• total variable direct care FTEs re-
quired = 54.6 FTEs.

This unit has an 89% skill mix
component, which will provide 48.6
RNs and 6 patient care technicians.

Step two: calculating fixed FTE
requirements. This patient care
unit has a total of 6.0 fixed FTEs to
support administrative and clinical
operations, which includes the
nurse manager, clinical manager,
and administrative support staff.

Step three: calculate total FTE
requirements. Variable direct care
hours are added to the fixed hours
to determine total required FTEs.
Variable direct care FTE 54.6 + fixed
FTE 6.0 = 60.6 FTEs budgeted.

Implications for nurse managers
Nurse managers and staff responsi-
ble for making staffing decisions
must be familiar with the business
administrative tasks associated
with budgets and financial moni-
toring.7 It’s been our experience

16 February 2016 Management

that providing a foundation of basic
financial concepts and education
courses based on evidence and best
practices has led to effective alloca-
tion and utilization of nursing re-
sources.

The next step is the development
of competencies as clinical staff
members expand their roles within
the organization to manage nurs-
ing resources at the unit level.
Utilizing a PCS provides nurse
managers and staff with the ability
to objectively allocate staffing re-
sources based on fluctuations in
census and acuity. Variance analy-
sis reporting of actual HPPD com-
pared with the budget provides
trending information for produc-
tivity performance and future bud-
geting requirements. NM

REFERENCES
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dialogue and patient classification system
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2. Finkler SA. Flexible budget variance analy-
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Health Care Manage Rev. 1985;10(4):
21-34.

3. O’Byrne A. Budget monitoring: understand-
ing the concepts. Top Hosp Pharm Manage.
1984;3(4):33-41.

4. Rundio A, Wilson V. Nurse Executive Review
and Resource Manual. 2nd ed. Silver
Spring, MD: American Nurses Credentialing
Center; 2013:157-165.

5. Ghosh B, Cruz G. Nurse requirement plan-
ning: a computer-based model. J Nurs
Manag. 2005;13(4):363-371.

6. Beglinger JE. A critical competency: deter-
mining and communicating the number of
nurses you must hire. Nurs Econ. 2007;
25(3):174, 177.

7. Lim JY, Noh W. Key components of finan-
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Nurs Health Sci. 2015;17(3):293-298.

Deborah Kolakowski is the service chief of
Oncology and Critical Care at the National
Institutes of Health Clinical Center in
Bethesda, Md.

The author has disclosed no financial rela-
tionships related to this article.

DOI-10.1097/01.NUMA.0000479449.43157.b5

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Copyright © 2016 Wolters Kluwer Health, Inc. All rights reserved.

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https://DOI-10.1097/01.NUMA.0000479449.43157.b5