There are certain things that rarely happen in life; you win the lottery, a man lands on the moon, you travel smoothly through airport security, or a CMS surveyor asks to see your hospital’s operating and capital budget. If that last example has you scratching your head a bit, don’t worry. Most hospitals can go through multiple surveys and never get asked to “show me the money”.

But, just like a repair man showing up on time, strange things do happen. What are CMS’ expectations regarding your hospital’s budget? The interpretive guidelines under Appendix A of the State Operations Manual at §482.12(d) forms the basis for this discussion.

THE BASICS
You hospital must have what CMS calls “an overall institutional plan”. This basically means that there is a capital and operating budget that meets the following:

1. The operating budget needs to be prepared on an annual basis (the hospital determines if this a calendar or fiscal year) in accordance with generally accepted accounting principles. The budget must include all anticipated income and expenses. This does not mean that the budget must identify item-by-item every detail, but it does mean that at least the sources of income and categories of expenses are clearly documented.
2. The capital budget must provide for expenditures for at least a three-year period, including the year in which the operating budget is in play. While hospitals generally determine the dollar amount that results in inclusion into the capital budget, CMS does require you to include and identify in detail the objective of, and the anticipated sources of financing for, each anticipated capital expenditure usually in excess of $600,000 (this amount may vary depending on your State) that relates to any of the following:
   • Acquisition of land;
   • Improvement of land, buildings and equipment; or
   • The replacement, modernization, and expansion of buildings and equipment.

Early in my career, I surveyed a small community hospital in a very affluent area of the country. I think money really does grow on trees – at least in that town. When I asked senior leadership to describe their process for determining capital expenditures, they laughed and said it was really simple. If they needed a capital expenditure, they just told their Foundation, who in turn, went out and raised all the money they needed. Essentially, they had no capital budget. Never saw that before, and haven’t seen it since. Amazing!

PREPARATION OF THE BUDGET
At a minimum, CMS will expect that the governing body, hospital leadership, and the medical staff have participated in the development of both the operating and the capital budget. This is one area where a hospital can actually be at risk for a finding. It is sometimes difficult to see where the medical staff has participated in the budget planning process. In some cases, participation is informal. It occurred, but there is no documentation or evidence to support that.

There should be clear evidence that representatives of the medical staff participated in the budget planning process. This does not mean that the medical staff must be allowed to approve the budgets, only that they are provided with an opportunity to provide input. Remember that if your hospital’s Chief Medical Officer is an administrative position, he/she may not be actually representing the organized medical staff unless he/she was appointed/elected by the medical staff to do so.

SUBMISSION TO YOUR STATE AGENCY
Depending on your State, your hospital may be required to submit its budget to an appropriate health planning agency in accordance with Section 1122(b) of the Social Security Act. The purpose of this section is to assure that Federal funds appropriated under Titles XVIII and XIX are not used to support unnecessary capital expenditures made by or on behalf of health care facilities. As you can imagine, there are various rules and exceptions to this requirement that go beyond the focus of this blog. Best to check with your State regarding requirements in this area.

ANNUAL REVIEW
There should be clear documentation that the operating and capital budgets are reviewed and updated on at least an annual basis. While technically the word annual means “occurring once every year”, the implied expectation is that this generally occurs around the same time each year. Again, assure that the governing body, hospital leadership, and medical staff have been involved in the review process.

Rick's clinical background is in critical care nursing with a focus in cardiovascular and trauma service lines. He has held both clinical and executive management level positions in Quality, Risk, Education, Infection Control, and Regulatory Compliance.

Rick is a regular speaker at numerous state and national conferences on the federal regulations and accreditation standards, and is host of CIHQ's popular monthly webinars addressing key compliance challenges in today's environment.

Rick is nationally certified in healthcare accreditation, and serves as Chair of the Board of Examiners for the Healthcare Accreditation Certification Program (HACP). Rick has a degree in Nursing with a Master's Degree in Health Services Administration.