CMD Financial Management & Budgeting in Healthcare 2 — Questions and Answers
Question 1: A medical director reviews a budget variance report showing actual labor costs are 12% above budget. Which action is MOST appropriate as a first step?
- Immediately freeze all hiring
- Analyze the root cause by reviewing overtime data, staffing ratios, and census trends (Correct answer)
- Reduce non-labor expenses to offset the variance
- Request an emergency budget amendment from administration
Correct answer: Analyze the root cause by reviewing overtime data, staffing ratios, and census trends
Root cause analysis of variance drivers (overtime, staffing mix, volume changes) must precede any corrective action.
Question 2: Which metric BEST reflects the relationship between a hospital's short-term assets and short-term liabilities?
- Debt-to-equity ratio
- Operating margin
- Current ratio (Correct answer)
- Days cash on hand
Correct answer: Current ratio
The current ratio (current assets divided by current liabilities) measures short-term liquidity.
Question 3: A long-term care facility is considering purchasing new therapy equipment for $250,000. The medical director wants to evaluate this using capital budgeting principles. Which tool compares the present value of expected cash inflows to the initial investment?
- Break-even analysis
- Net present value (NPV) (Correct answer)
- Zero-based budgeting
- Responsibility accounting
Correct answer: Net present value (NPV)
NPV discounts future cash flows back to present value and compares them to the initial capital outlay.
Question 4: Which type of cost remains constant per unit as volume increases but decreases in total when activity rises?
- Variable cost
- Mixed cost
- Fixed cost (Correct answer)
- Step-fixed cost
Correct answer: Fixed cost
Fixed costs remain constant in total regardless of volume, but fixed cost per unit decreases as volume increases.
Question 5: A medical director is told the facility's accounts receivable days are 68, up from 52 last quarter. What does this indicate?
- The facility is collecting payments faster than before
- There is an improvement in cash flow efficiency
- The facility is taking longer to collect payments after services are rendered (Correct answer)
- Payer mix has shifted toward more commercial insurance
Correct answer: The facility is taking longer to collect payments after services are rendered
Higher days in accounts receivable means the facility is waiting longer to collect revenue, indicating a cash flow concern.
Question 6: Under a prospective payment system (PPS), a hospital is financially rewarded when it:
- Maximizes the number of ancillary services ordered per patient
- Provides care at a cost lower than the predetermined payment rate (Correct answer)
- Extends the patient's length of stay to capture additional revenue
- Bills for the highest-acuity DRG regardless of documentation
Correct answer: Provides care at a cost lower than the predetermined payment rate
Under PPS, the payer pays a fixed rate per case, so the facility profits when actual costs fall below that rate.
Question 7: Which budgeting approach requires managers to justify every expenditure from a zero base rather than using the prior year's budget as a starting point?
- Incremental budgeting
- Flexible budgeting
- Zero-based budgeting (Correct answer)
- Capital budgeting
Correct answer: Zero-based budgeting
Zero-based budgeting starts from scratch each cycle, requiring justification for all proposed expenditures.
CMD Financial Management & Budgeting in Healthcare 2
A medical director reviews a budget variance report showing actual labor costs are 12% above budget.
Which action is MOST appropriate as a first step?