One of the most stressful responsibilities EMS managers have each year is preparing their budget. Regardless of delivery model, increasing pressure to reduce operating costs is experienced by virtually every chief or chief executive who operates an EMS agency. Here are some key recommendations to consider when you’re beginning this annual process.
1) Understand the Time Table & Deadline(s) for Budget Preparation & Submission
EMS agencies operate within different annual periods for their budgets. Some use a calendar year beginning January 1 and running through December 31 every year. Others, particularly government-based EMS services, may operate within a differently defined fiscal year, October 1 through September 30 for example. Regardless, the EMS manager must be aware of the period covered and allow sufficient time in advance to do the work needed to prepare a budget.
Depending on the size of the organization, and whether it uses a fully loaded profit and loss statement or a departmental expense reporting method (see tip 2 below), it may take anywhere from 30 days to four months to properly prepare a budget.
Also, depending on the annual period defined for the fiscal year, the EMS manager may have difficulty in projecting expenses and especially revenues. As an example, if an agency operates on a July 1 through June 30 fiscal year, it will be difficult to project reimbursement rate changes from payers such as Medicare, since they mostly announce them toward the very end of the calendar year when the fiscal year is half over. In these cases, the EMS manager must predict what they expect in the way of rate changes based on historical activity and any official announcements that may have been made that would affect the fiscal year.
2) Understand Your Agency’s Form of Financial Reporting
There are basically two different ways EMS agencies report their operating expenses and income. Entities that are separate corporations or standalone organizations will typically use what is referred to as a fully loaded P&L. These are financial operating statements (P&L means profit and loss) that include every expense and all revenue associated with the entity. This includes overhead such as facility rental costs, administrative personnel wages, billing expenses, legal fees, vehicle and professional insurance, workers’ compensation expenses, payroll fees and so on. Actual revenue received from all sources (e.g., billing, subsidies and grants) are also reported and adjusted for bad debt and charity care.
These agencies must budget for interest expense and interest income. Interest expense is the cost of financing capital budgets and some operating expenses, while interest income is the gain or loss associated with any investments the company has. Interest expense is relatively easy to budget for, since it is simply a calculation based on the prevailing rate of loans associated with how much the entity expects to borrow for the coming year. However, interest income is almost impossible to get right. Since predicting the stock or bond markets is a fool’s errand, and interest income is not usually realized (meaning investments are not cashed out) during any particular year, it is usually best to assume a very conservative approach and budget no more than four percent income for this line.
Organizations using the fully loaded P&L will also use what is called Generally Accepted Accounting Principles (GAAP), the nationally recognized rules that assure standardization of a company’s fiscal reporting, to record this information, thus providing confidence in the legitimacy of such information and comparability among other entities.
Other agencies that are actually departments within larger organizations, such as a governmental entity or a hospital, use direct expensing with shared cost allocation reports. With this form of financial reporting, only the actual cost directly associated with providing the service is identified. Items such as salaries of field staff, fuel consumed by vehicles and supplies used by the service are recorded. However, overhead costs, which are shared with other departments of the larger organization, are allocated on some sort of proportional basis to the EMS division. It is also common for depreciation to be absent from these financial statements (see tip 3 below). Often, this form of reporting does not truly reflect the actual total costs or revenue the EMS department has regarding its operations.
The form of financial report your agency uses will dictate what elements of expense and income you must project and for which you must budget. In the department method of reporting, the EMS manager typically has no input or authority related to which costs are allocated to their operation, nor the amount of expense assigned to them for these elements.
It is important to note, because of the substantially different ways fiscal reporting is done between the two systems explained above, it becomes impossible to compare department agencies against standalone entities.
3) Understand Depreciation & the Difference Between Capital & Operating Budgets
Regardless of how finances are reported, there are two different kinds of budgets: capital and operating. Capital budgets account for the cost of large purchases of equipment that are intended to last, and be used, for more than a year. While organizations will define different minimum cost thresholds that qualify a piece of equipment to be placed on the capital budget, it is usually around $1,000 to $1,500. The key is that the expenditure is for a hard asset, like equipment or software, that will not recur each year. Examples would include vehicles, CADs, medical equipment, generators and so forth. These items often have to be financed in order to be acquired.
Operating budgets account for expenses that recur every year—staff wages, employee benefits, payroll taxes, facility rentals, supplies, fees, fuel, vehicle repair parts—regardless of the amount expended. If the cost occurs every year for the same element, or the purchase cost is less than the capital budget threshold established by the entity, it should appear in the operating budget.
The cost of the capital budget is reflected in the operating budget through depreciation. The expense of each item on the annual capital budget is divided by the estimated years of service for that item, resulting in the annual depreciation expense recorded on the operating budget. Most capital items are depreciated over three to five years, but certain accounting rules come into play that mandate specific periods be used for some assets.
For instance, an ambulance purchased for $90,000 and placed on the capital budget would generate an annual depreciation expense on the operating budget of $30,000 each year for three years.∗ In order to track all the items contributing to the depreciation line of the operating budget, a depreciation schedule must be maintained to accurately identify how much accumulated expense to account for each year in the operating budget. The EMS manager must not forget to include applicable prior-year capital purchases’ depreciation expenses on future operating budgets.
4) Utilize Zero-Based Budgeting
Many managers simply take their existing budget for the previous year and add a percentage increase in expenses to produce expected costs for the next year. They will add a certain percentage to the salary line that reflects whatever wage increase has been planned, another percentage for fuel, supply and insurance expenses based on assumptions, and usually leave benefit costs the same. If they are a standalone entity, they probably do a similar calculation for their net revenue. While this is certainly an expeditious way to draft a new budget, it is not very accurate and fails to take into account important changes that may be known for the next year.
In zero-based budgeting the manager actually builds the budget from the ground up (i.e., from zero cost, adding in calculated expenses). Starting with a blank sheet, every expense is calculated with precision and realistic assumptions for the coming fiscal year. The manager reviews their operation, determines the number of units needed to handle the projected volume for the year and calculates the cost of staff, including benefit expenses, projected from actual data about salaries. Further, the EMS manager will calculate expected increases in benefit costs based on historical usage, as well as anticipated fee increases for insurance, fuel, supplies and the actual cost of administrative, support and legal services.
This manager will totally review their prior years’ revenue experience and assumptions, including payer mix, changes anticipated in reimbursement rates by payer, volume changes reasonably assumed to be coming and so on. Likewise, they will look at their bad debt and charity care past experience and make reasonable assumptions about what they expect is forthcoming.
5) Use Widely Recognized, Authoritative Sources, Documented Historical Experience or Formal Proposals for Projected Changes
When trying to determine how much of an increase in expense to budget, the EMS manager should use sources of information that are widely recognized or authoritative in stature. They may also look to documented historical trends over time, giving added weight to recent changes and averages, in determining projected costs of certain expenses. This makes the manager’s task easier and defensible if questioned. Some examples include:
- General supplies: The regional Consumer Price Index (CPI)
- Medical supplies: The actual average increase over the last three years
- Fuel: The previous 12-month average
- Interest expense: The current prevailing finance rate for anticipated new loans
- Insurance: The actual increases proposed by the current insurer
- Utility costs: Current rates with any announced increases
- Vehicle repair costs: The currently experienced cost-per-mile for each vehicle adjusted for any changes anticipated in total miles for the whole fleet and modified by any announced increase of current suppliers and mechanic services
6) Carefully Calculate the Employee Compensation Package
Wages: If the organization is unionized, it will likely already have an agreement regarding wage increases. If so, this element of budget development is relatively easy. The wage increase for staff is known and can be simply calculated based on other factors, such as the number of units requiring staffing. However, if the entity does not have a pre-existing arrangement for wage increases, the manager will need to assess the market and determine what, if any, increase should be budgeted. This usually necessitates a salary survey of some sort to identify what other organizations that compete in the same labor pool are paying. This analysis is somewhat complicated by other elements of the employee compensation package such as health benefits and retirement plans. A basic rule that usually applies in EMS and across many industries is that lower comparative wages must be balanced by better comparative benefits in order to remain competitive in attracting and retaining staff.
Retirement plans: Agencies that provide defined contribution retirement plans can budget for these costs much more easily than those providing defined benefit plans. Defined contribution plans are those to which the employee and/or employer contribute specified amounts of money on a certain annual timetable. There is no guarantee regarding what the value of these contributions will be at retirement, but the amount of the contribution for the year is known in advance. Thus, budgeting for them is fairly simple. Examples include 401(k), 403(b), IRA and ESO (employee stock ownership) plans.
Unfortunately, it is much more difficult to budget for defined benefit plans. With these retirement plans, the organization is responsible for funding the plan to whatever amount is needed to assure each retiree receives what they were promised. Four elements come into play when calculating this annual expense. The first is how many retirees, in aggregate, are expected during the year. The second is the amount of the retirement benefit. Is it a percentage of the former employee’s salary, or is it a set annual income? The third is how much interest income has the plan experienced over time. Lastly, based on the first three elements, what additional amount of cash contribution does the entity need to make in order to assure the plan is fully funded. The most common example of this type of plan is the traditional pension. Usually, the budgeting calculation for this retirement plan should be performed by a professional actuary that specializes in this work.
Health benefits: Health benefits are a component of an employee’s total compensation package and have become quite costly over the years. With national healthcare reform, significant changes have been made in the minimum and maximum levels of coverage now permissible, or required, in order to avoid substantial penalties to the employer. In budgeting for these costs, EMS managers must:
- Assess the current plan(s) offered to determine if any federal penalties will apply
- Review historical actual cost and determine if additional costs are expected (such as insurance company fee increases)
- Determine the annual average per employee expense
- Take into account any increase or decrease in the number of employees expected to be covered
7) Use Only Confirmed Volume Changes
It is always tempting to include volume changes, especially increases, in developing the next year’s budget. However, unless the change is certain, it is dangerous and somewhat misleading to actually design and submit a budget for approval that includes any significant change in volume. Certainly, if changes in volume are assured—whether by contract changes, newly secured or expanded operations that will continue into the next year, or acquisitions of other services, as examples—then they should be projected into the budget preparation.
Once decided, if volume changes are going to be used, they must be based on reliably reasonable estimates or documented historical performance. If this data is unavailable, the EMS manger may need to rely on current experience using some ratio, such as number of dispatches per 1,000 residential population, and project a calculation for the new territory to include in the budget. While not as precise, a ratio-based estimate should provide a reasonably accurate estimate and be defensible upon scrutiny.
8) Use Prior Budget Results to Improve Future Budget Preparation
A good exercise for the EMS manager to perform annually in readying for an upcoming budget preparation is to examine the variances of the previous year’s budget and decipher why they occurred. Examining where previous years’ actual expenses and revenues differed from what was budgeted will inform the manager to erroneous assumptions that may have been made, inaccurate data that was used or flawed projections that failed. This will point the EMS manager in the direction of where improvement in accuracy can be made in preparing the next budget.
As is the case with most of an EMS manager’s duties, budgeting is more difficult and time consuming than many think. Accuracy and dependability in budgeting require attention to detail and sufficient research. Budgeting is an integral and extremely important element of managing an EMS service that demands serious focus and, often, years of practice.
∗Usually, vehicles are depreciated over three years, although some companies that remount modular ambulances may choose to depreciate the chassis over three years and the box over a longer period. In this case, the depreciation schedule must reflect and track this separation of the asset into two components.
Vincent D. Robbins, FACHE, is president-elect of the National EMS Management Association, and president and CEO of MONOC, the Monmouth Ocean Hospital Service Corporation comprised of 15 acute care hospitals throughout New Jersey.