Behavioral Health Budgeting in 4 Easy Steps

Budgeting for behavioral health organizations is a unique and complex challenge, distinct from traditional financial forecasting. This complexity is particularly pronounced when working with governmental agencies. Unlike most budgets that focus on straightforward expenses and revenue, the landscape changes significantly when a behavioral health entity enters contractual relationships with State or County agencies. In these cases, where funding is sourced from government entities like MediCal/Medicaid or Medicare, the budget shifts to a cost-reimbursed model.

Typically, budgets in this field are structured around fee-for-service reimbursements; for instance, a provider delivers care to a client and is subsequently compensated with a designated fee for that specific service rendered, as delineated in the associated contract.

A cost-reimbursed budget operates on three fundamental components:

1. Revenue Projection: This involves estimating the total revenue or billing the behavioral health organization anticipates over the contract duration, typically a year. The budget should reflect the total expected revenue over this period.

2. Unit Rate Calculation: In addition to the total revenue, the budget must factor in the rate per billing unit, which could be defined in minutes or hours, depending on the governmental agency's stipulations. For mental health services, this rate might be $3.00 per minute or $180 per hour.

3. Expense Management: This crucial element encompasses all expenses associated with fulfilling the contract throughout the year. It includes a comprehensive list of costs such as staff salaries, administrative overhead, building leases, office supplies, and other operational expenditures.

When an agency secures a contract amount, its costs must align seamlessly with anticipated revenue. This balance between services rendered and expenses incurred is key. For instance, if the contract stipulates $1 million, the agency must aim to bill that amount while balancing expenses at that same threshold. Utilizing the established rate per minute, the agency must serve a predetermined number of clients specified in the contract. After the contract year, a detailed cost report is generated, outlining both costs and revenue. Depending on the outcome of this report, the organization may find itself in a position of owing money to the payer or vice versa—an outcome neither party desires. This is why meticulous budget preparation is paramount.

So, faced with these multifaceted components, how can an agency navigate through them?

1. Begin with Revenue: If your organization is working with a $1 million contract, the first step is to determine your billing rates per minute. For example, if all services are billed at $3.00 per minute, you would divide $1 million by $3.00, resulting in approximately 333,333 minutes. Dividing that figure by sixty yields around 5,555 hours of staff time required to achieve that billing amount.

2. Calculate Staffing Requirements: Next, assess how many staff members are needed to meet billing targets. If each staff member can bill 20 hours per week for 48 weeks of the year—accounting for four weeks of vacation, sick leave, and holidays—that equates to 960 billable hours per individual annually. Dividing the total minutes needed (5,555) by the annual billable hours per staff member indicates a need for about 5.79 full-time equivalents, roughly six staff members.

3. Incorporate Expenses: At this juncture, it's time to quantify expenses. Calculate the staff salaries, benefits, and other operational costs mentioned earlier, ensuring they total $1 million collectively.

4. Make Adjustments: It’s essential to recognize that initial budget calculations rarely achieve accuracy on the first attempt. This stage involves revising staff hours, positions, and expenses to close gaps and ensure the final budget aligns perfectly. By methodically adjusting these variables, you can ensure that your staff capacity meets the demands of billing the full $1 million while maintaining a balanced expense sheet. This flexibility and adaptability in the budgeting process are crucial for success.

By carefully managing these interconnected elements, a behavioral health organization can build a robust budget that withstands the complexities of cost-reimbursement funding. This underscores the budgeting process's complexity and interdependence, ultimately positioning the organization for success in delivering essential services to the community.