HA 620 Unit 4 operating budget variance analysis example

Operating Budget Variance and Margin Recovery in a Four-Site Primary Care Group

Student Name

Healthcare Administration Program, Herzing University

HA 620: Healthcare Economics, Finance, and Resource Management

Instructor Name

February 9, 2026

Operating Performance Against Plan, Six Months Ended June 30

Riverbend Family Health Network is a composite primary care group operating four clinic sites with 11.4 physician full-time equivalents and 4.0 advanced practice full-time equivalents. The board approved a fiscal year plan of 62,400 visits and net patient service revenue of $12,480,000, an average of $200 per visit. For the six months ended June 30 the plan called for 31,200 visits and $6,240,000 of net revenue. Actual volume was 29,016 visits and actual net patient service revenue was $5,513,040, an unfavorable variance of $726,960, or 11.7 percent of the planned figure. The group entered the year with a budgeted operating margin of 12.0 percent and closed the first half at negative 0.1 percent.

The expense side does not explain that shortfall on its own, which is why each line is read against plan before any of it is judged. Provider compensation, a largely fixed cost under salaried contracts, was planned at $2,808,000 and came in at $2,842,000, unfavorable by $34,000. Clinical support labor was planned at $1,310,400 and came in at $1,298,000, favorable by $12,400 on its face. Medical supplies were planned at $436,800 and came in at $399,000. Occupancy and fixed overhead ran $7,000 over a $624,000 plan. Purchased services were planned at $312,000 and came in at $348,000, carrying the one-time implementation cost of a scheduling platform approved in the second quarter. Total operating expense was $5,518,000 against a plan of $5,491,200.

Placed together, those figures produce an operating loss of $4,960 against a planned operating gain of $748,800, a swing of $753,760 in six months. Two expense lines appear favorable in that presentation, and both readings are misleading, because a static budget compares actual spending at one volume with planned spending at a different one (Cleverley et al., 2018). A group that saw 2,184 fewer patients should spend less on supplies and less on support hours; the open question is whether it spent less by the right amount. Answering that question is the work of the next section, and it changes which line management should act on first.

Variance Decomposition: Volume, Rate, and Efficiency

The revenue variance splits cleanly in two. Holding the planned rate of $200 constant, the 2,184 visit shortfall accounts for $436,800 of the gap. Holding actual volume constant, realized net revenue of $190 per visit against a planned $200 accounts for the remaining $290,160, and the two components sum to the reported $726,960. The volume component has a traceable cause. One family medicine physician resigned in the second month and one advanced practice provider was on approved leave from the fourth, removing roughly 194 scheduled half-day sessions at a historical average of ten visits per session, or 1,940 of the 2,184 missing visits. Vacancy, not demand, produced the shortfall, and that distinction decides whether the correct response is recruitment or marketing.

The rate component has two drivers of unequal size. Commercial visits fell from 41 percent of the total to 36 percent while Medicaid visits rose from 22 percent to 27 percent, and at the group's realized rates of $268 and $121 respectively, that five point shift alone moves average net revenue per visit down by about $7.35. National expenditure data show the same directional pressure on ambulatory payer mix (Centers for Medicare & Medicaid Services, 2024), so the group should build it into next year's plan rather than treat it as an anomaly. The remaining $2.65 per visit is not a mix effect at all. Denial write-offs rose from 3.1 percent to 4.4 percent of gross charges, a revenue cycle failure of the kind standard performance metrics exist to expose (Healthcare Financial Management Association, n.d.).

Flexing the budget to actual volume reverses the reading of the support labor line. At the planned variable rate of $42 per visit, 29,016 visits should have consumed $1,218,672 of clinical support labor. Actual spending of $1,298,000 is therefore unfavorable by $79,328, not favorable by $12,400, and the true cost per visit was $44.73. Scheduled support hours were held flat while volume fell, so the group paid for capacity it did not use, and its ratio of support staff to provider full-time equivalents drifted to 4.6 against an internal standard of 4.0 drawn from its benchmarking set (Medical Group Management Association, 2024). Medical supplies, flexed the same way, are genuinely favorable by $7,224. One variable line was managed to volume and the other was not.

Recommendation and Expected Effect on the Second Half

Three actions follow from the decomposition, and each is sized against the figure that produced it. First, cover the vacant panel with locum tenens support across the remaining two quarters at a contracted $84,000. Restoring roughly 970 visits, about half the sessions lost, at a contribution margin of $134 per visit, being the $190 of net revenue less $56 of variable support and supply cost, returns about $129,980 against that outlay (Gapenski & Reiter, 2016). Second, tie support staffing to booked volume by session rather than to a fixed roster, bringing labor cost per visit back toward $42.50 and recovering roughly $66,000. Third, add pre-visit eligibility and benefit verification to return denial write-offs to 3.1 percent, worth about $77,000 at current volume.

Two obvious candidates are rejected. Cutting the scheduling platform would recover $36,000 of a one-time implementation cost while removing the automated eligibility check the third recommendation depends on, so that saving would be paid for twice. Reducing provider compensation is likewise the wrong lever, since the line ran only 1.2 percent over plan, it is contractually fixed, and the group's difficulty is too few provider sessions rather than too many. The discipline is that a recommendation must attach to a variance the analysis actually isolated. Occupancy ran $7,000 over on a $624,000 base, which sits inside ordinary variation and does not merit management attention this cycle.

Taken together the three actions add roughly $189,000 of operating margin in the second half, which moves the full year from a projected loss near $10,000 to a gain near $179,000, an operating margin of about 1.6 percent on projected net revenue of $11.4 million. That remains far short of the 12.0 percent the board approved, and the analysis should say so plainly rather than present partial recovery as a rescue. The year is missed; the question is by how much. Management therefore reports four figures monthly to the finance committee: visits against plan, net revenue per visit, support labor cost per visit, and denial rate, each with a named owner and a threshold that triggers escalation.

References

Centers for Medicare & Medicaid Services. (2024). National health expenditure data: Historical. https://www.cms.gov/data-research/statistics-trends-and-reports/national-health-expenditure-data

Cleverley, W. O., Song, P. H., & Cleverley, J. O. (2018). Essentials of health care finance (8th ed.). Jones & Bartlett Learning.

Gapenski, L. C., & Reiter, K. L. (2016). Healthcare finance: An introduction to accounting and financial management (6th ed.). Health Administration Press.

Healthcare Financial Management Association. (n.d.). MAP keys: Industry-standard revenue cycle performance metrics. https://www.hfma.org/

Medical Group Management Association. (2024). MGMA DataDive cost and revenue. https://www.mgma.com/