how to cope with shrinking resources or doing more with...

58 JOURNAL OF GOVERNMENT FINANCIAL MANAGEMENT SUMMER 2010

How to Cope with Shrinking Resources or

Doing More with Less:

By: James E. Sorensen, Ph.D., CPA, Emilio Vela Jr. and Linda Grant, MS, CDP

Leaders and managers of governmental and not-for-profit (NFP) human service organizations face a special challenge because organizational managers are expected to break even or show a small recov-ery of revenues over expenses. In for-profit organizations where a profit is expected and unexpected events reduce revenues or increase revenues, managers may simply expect a smaller profit. The profit margin provides a cushion to absorb reduced revenues or increased expenses. If a governmental or NFP organization faces unexpected events or chronic underpayment by a major purchaser (such as a state or third-party source), there may be no cushion—the issue is to minimize the loss. However, revolving fund reserves in the federal government may provide some cushion. In many human service organizations, the budget is often set close to a break-even level. Most state budgeting processes for human service organizations are done incrementally so building rate increases to offset the increased costs of provider services is a lengthy policy process they often cannot afford to undertake.

Actual Mechanisms Used by Governmental and Not-For-Profit Human Service Organizations1

SUMMER 2010 JOURNAL OF GOVERNMENT FINANCIAL MANAGEMENT 59

Figure 1: Outpatient Services Rate Study Division of Alcohol and Substance Abuse, State of Washington Calculation of Weighted Average Unit Cost Deficiency

Crisis in FundingProviders of addiction treatment

services in a Western state were facing a funding crisis because the primary purchaser (the state) was reimbursing2 its counties and NFP providers at only 53 percent of the cost of services.3 Figure 1 displays the 47 percent4 average dis-count by a comparison of reimburse-ment and costs by services.5 Included are the weighted average unit cost, the state reimbursement and the defi-ciency of the unit cost, the state reim-bursement and the deficiency of the reimbursement. (The services include Assessment, Case Management, Group Therapy, Individual Therapy and Opiate Substitution Treatment or OST). The studies, along with other information, influenced the state to adjust its reimbursement rates through a $16.8 million6 increase in new fund-ing from the legislature. While the effort to adjust reimbursement rates was in progress, governmental and NFP providers developed more than 30 mechanisms7 to cope with financial losses. These mechanisms are gen-eralizable to governmental and NFP human service agencies and are sum-marized below.

Emergent Coping Mechanisms The coping mechanisms used by

provider agencies can be combined into six groups:

• Changing client behavior or services

• Simulating revenues

• Reducing (or containing) expenses

• Increasing liabilities

• Depleting assets

• Changing infrastructure

Changing Client Behavior or Services

missed appointments. One effec-tive action was to reduce the num-ber of missed appointments. Missed appointments tied up personnel and, if not used, the personnel resource was wasted. Several organizations reduced missed appointments by calling to remind clients of appoint-ments. Another tactic is double-book-ing (or overlapping) appointments so a stand-by client is available if the regularly scheduled one does not

By: James E. Sorensen, Ph.D., CPA, Emilio Vela Jr. and Linda Grant, MS, CDP

Assess Case Mgt Group Individual OST Total $(100)

$(50)

$0

$50

$100

$150

$200

DeficiencyDASA Reimbursement RateWeighted Average Unit Cost

SERVICE


show. While sometimes frustrating to clients, it maximizes the use of staff.

Transportation. Available trans-portation is often critical for clients to make their appointments. Offering and subsidizing needed transporta-tion to a client by either public or private means increased client show rates.

Intensity of service. Another option was to shift the mix of staff and the intensity of service. One example was moving clients from individual to group counseling (a preferred method of treatment in substance abuse) so if clients failed to appear, the personnel resource was still used for the remaining group members. In another example, higher-priced per-sonnel were used to start staggered group sessions and then move to new sessions when replaced by novice (often unlicensed) lower-paid per-sonnel. Special times were set aside to address specific problems of clients not appropriate for a group setting.

Referral. Another option was to refer the client to another agency or service. If the organization was not able to provide the service, then an appropriate action was referral. Sometimes the client was referred to another agency with an available funded program for the specific ser-vice needed by the client. Several NFP providers referred clients, for example, to a county provider.

Simulating RevenuesIncrease revenues. As suggested

earlier, an increase in funding from the state legislature provided sig-nificant (but not complete) relief of chronically understated reimburse-ments for services. For some agencies, unrestricted and restricted grants or gifts provided increased revenues to offset program expenses.

Offset costs. Another practice was cost offset where the over-recovery of costs on one program were used to offset the costs of an under-funded program. Objections did arise in some cases, however, from the pro-grams believing they were the source of the cost offset, but in most cases the information was internal to the pro-vider and, therefore, was not known to the funding source.

Reducing ExpensesAcross-the-board cuts. Dramatic

measures included across-the-board cuts such as reducing salary or ben-efits by 5 percent or other cost cat-egories such as travel, training or maintenance. In some cases, staff ben-efits were reduced. These resulted in short-run cost reductions, but in some cases produced undesirable effects on staff morale and staff turnover. Some providers lost personnel to compet-ing programs that offered benefits such as health care, continuing pro-fessional education and retirement programs. With reduced salaries and limited benefits, hiring new person-nel was hampered.

selected reductions. More mea-sured reductions examined selective cost reductions that did not impair productive capacity and/or staff morale as dramatically. For example, maintenance was deferred, out-of-state travel was limited to only core activities or raises were deferred (instead of eliminated).

Changing work loads. Another tactic to hold personnel costs constant while increasing level of service was to increase the percentage of treatment staff time spent in direct service. A related action was to reduce the num-ber of hours worked by personnel or to use part-time personnel (who often do not receive benefits). These actions maintained and/or increased current level of billable services (and rev-enues) and production beyond cur-rent levels. Often, however, the dollar

Available transportation is often critical for

clients to make their appointments. Offering

and subsidizing needed transportation to a client by either public or private means increased

client show rates.


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cap imposed by the funding agency would be reached (earlier than in the past) so increased production did not produce additional revenues.

mobile teams. In a few cases, pro-viders formed mobile treatment teams to visit clients at a location convenient for them. The mobile team approach seemed to work best in emergency situations or in rural areas where transportation issues hampered the client’s ability to get to a provider’s central location/satellite.

Consolidate programs. Another option is to combine programs that cut across several treatment popu-lations to provide more integrated services and to pool administrative personnel.

Non-monetary offsets. The conse-quences of reduced benefits, delayed pay raises, changed workloads and consolidation, however, were stagger-ing. Providers reported staff burnout, poorer staff morale, higher staff turn-over, lower quality of care and eventu-ally, lower staff productivity in some cases and in other cases providers believed clients terminated prema-turely or failed to complete a desired treatment plan. Some organizations tried non-monetary rewards to offset the effects of financial actions such as in-service training, trips to in-state professional development confer-ences and citations for outstanding performance. Some tried to recruit appropriate volunteers (namely, spouses of military personnel with appropriate education/credentials or retired professionals with appropri-ate experience) to replace lost staff.

Outsourcing services. One approach popularized in corporate America is to outsource activities that are not core organizational competen-cies. If a program or service was not inherently governmental, one could outsource the activity. In some cases, non-clinical activities were outsourced (for example, payroll). Appropriate reviews assured clinical services were accessible, timely and at the desired levels of quantity and quality. Periodic cost comparisons assured the out-sourced service was not more costly than in-house offerings. Benchmark-ing costs of like organizations were appropriate assessments.

Personnel replacement. Replacing qualified personnel with less experi-enced or lower qualified personnel led

to lower cost per unit of service, but providers were concerned the quality of service was probably lowered and the length of stay of clients in treat-ment was probably decreased.

Personnel reduction. A more dras-tic measure was the reduction of treat-ment personnel. While decreasing costs, more treatment capacity was used resulting in higher caseloads for the remaining personnel, potential dilution of quality of care, staff burn-out and varied effects on the unit cost of service. A variant of temporary staff reduction is a furlough.

Cutting administration. Reducing administration lowered expenses, but if a critical mass was not main-tained overall performance was diminished. Examples of reductions included administrative positions for human resources, chaplains, medical personnel, treatment directors and clinical managers. Administration as a percentage of total costs varied with the size of the organization. Administration, defined as the cost to direct and maintain overall opera-

tions (as opposed to costs to manage and deliver client or customer ser-vices) ranged from 10 to 208 percent with the lower percentage associated with larger budgets and the higher percentage with smaller budgets. An under-administered organization can endanger the accomplishment of the mission of the organization; an over-administered organization can drown in bureaucracy and higher costs of services.

Group purchasing. Several orga-nizations formed a cooperative to facilitate larger-scale purchasing for supplies and services. The result was lower costs of essential items normally purchased in smaller lot sizes. In some cases, the inventories of the individual organizations had to be increased. (The offsetting cost to the decreased purchase price was the increased cost of carrying the inventory.)

Leased facilities and equipment. Asset replacement (with assumed debt) used a lease instead of a pur-chase. The lease payment and lease


Reduce quality of servicesFactor (or sell) accounts receivable

Furlough employeesAsk for cash advances from funders

Delay payments on accounts payableDo across-the-board cost cuts

Defer maintenance costsMerge with another agency

Borrow money (long-term)Convert investments into cash for operations

Sell off long-lived assetsReplace personnel with less expensive staff

Close satellite officesBorrow money (short-term lines of credit)

Drawn down cash reservesOutsource services

Reduce number of personnelChange mix of staff (using less expensive)

Share facility with another agencyLease instead of buying

Increase staff workloadsRefer clients to another service or agency

Offset cost of one program with anotherConsolidate programs (or services)

Cut administrative costsObtain gifts

Use group purchasingDiversify mix of services

Offer client transportationOffer non-monetary offsets (e.g., training)

Do selected cost cutsObtain grants

Reduce broken client appointments

Figure 2: Usage of mechanisms for dealing with a financial crisis

agreement was evaluated against a purchase decision—with debt and interest payments—to ascertain the effects on cash flow and risk. The lease agreement often avoided a down pay-ment needed in a purchase.

satellite closure. Closure of satel-lite operations reduced out-of-pocket expenses such as travel or rent, but accessibility by targeted client popu-lations was decreased as well.

Defer maintenance. Deferred main-tenance or asset replacement reduced cash needs. This holding action worked for some period of time, but mainte-nance and asset replacement eventu-ally had to be addressed.

merger. Merging with another provider (or agency) could eliminate duplicate administrative or clinical efforts and could reduce the overall cost of operations. The unit of cost of service could decrease as well.

Increasing LiabilitiesDelay liability payments. Another

tactic to slow cash outflows was to delay paying accounts payable. While con-serving cash in the short run, eventu-ally current liabilities had to be paid to remain operational. Some governmen-tal funders, however, are not permitted to defer payments. Several counties, however, made prompt invoice pay-ments to help provider’s cash flow.

short-term loans. Short-term loans (or lines of credit) improved current cash flows, but planning was required on how these loans will be liquidated in the future.

Long-term loans. Long-term loans were secured using existing long-lived assets (namely, building and land) as collateral. If these loans are not paid off, financial failure could lead to the loss of the assets, bankruptcy, closure of the agency and a loss of services to the clients.

0%

Never & Not ApplySeldomRegularly & Often

Furlough employeesMerge with another agency


Sell off long-lived assetsBorrow money (long-term)

Ask for cash advances from fundersOutsource services

Convert investments into cash for operationsReduce number of personnel

Close satellite officesShare facility with another agency

Do across-the-board cost cutsBorrow money (short-term lines of credit)

Delay payments on accounts payableReplace personnel with less expensive staff

Change mix of staff (using less expensive)Obtain gifts

Defer maintenance costsLease instead of buying

Consolidate programs (or services)Offer client transportation

Offer non-monetary offsets (e.g., training)Obtain grants

Refer clients to another service or agencyDrawn down cash reserves

Use group purchasingCut administrative costsDiversify mix of services

Reduce broken client appointmentsDo selected cost cuts

Increase staff workloadsOffset cost of one program with another

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Merging with another provider (or agency)

could eliminate duplicate administrative or clinical efforts and could reduce

the overall cost of operations.


Figure 3: Usage of mechanisms for dealing with a financial crisis

0%

Not Matter or Not ApplyOpposeFavor


Furlough employeesAsk for cash advances from funders

Delay payments on accounts payableDo across-the-board cost cuts

Defer maintenance costsMerge with another agency

Borrow money (long-term)Convert investments into cash for operations

Sell off long-lived assetsReplace personnel with less expensive staff

Close satellite officesBorrow money (short-term lines of credit)

Drawn down cash reservesOutsource services

Reduce number of personnelChange mix of staff (using less expensive)

Share facility with another agencyLease instead of buying

Increase staff workloadsRefer clients to another service or agency

Offset cost of one program with anotherConsolidate programs (or services)

Cut administrative costsObtain gifts

Use group purchasingDiversify mix of services

Offer client transportationOffer non-monetary offsets (e.g., training)

Do selected cost cutsObtain grants

Reduce broken client appointments

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Depleting AssetsOther actions included draw-

ing down cash reserves, converting investments into cash for operations, factoring accounts receivable, lower-ing inventory levels or selling long-lived assets not essential to operations. All of these actions had finite limits.

Changing Infrastructureshared facility. Another tactic was

to build a shared facility with long-term leases using funding derived from the providers, county and state. This had the effect of reducing infrastructure expenses and cash flows. While cash flow demands for future operations were lower, the fair-market value of the donated facilities appeared in the cost per unit computations. To determine the unit cost of services, all resources used to produce the service needed to be considered, regardless of the source—direct payment or donated.

Usage of and Preference for Mechanisms

The usage of mechanisms9 for deal-ing with a financial crisis is shown in Figure 2. Offsetting the cost of one pro-gram with another, selected cost cuts and increased staff workload were among the most popular mechanisms. Furloughing employees and merging with another agency were the least. The preferences for mechanisms (Figure 3) were headed by reducing missed client appointments, obtain-ing grants and performing selected costs cuts. Furloughing employees, selling accounts receivable and reduc-ing quality of services were among those most highly opposed. Other actions can be assessed by reviewing Figures 2 and 3.

By comparing usage (assigned a negative value) with preferences (assigned a positive value) in Figure 4, forced options used were highlighted as a negative value (namely, actions exceeded preferences). Opportuni-ties to expand actions to meet expec-tations were shown as a positive value (namely, preferences exceeded actions). If preferences and usage were equal, the difference would be zero. Increases in staff workloads, off-setting costs of one program against another, and drawing down cash reserves were seen as actions forced on providers (net negative values) while obtaining grants, obtaining gifts and offering client transporta-tion were viewed as preferences not fully explored by actions of providers (net positive values). Other actions can be reviewed in Figure 4.

Figure 4: Differences between preferences and usages of mechanisms


Mechanism DifferenceLess Preferred

UseOpportunity to

ExpandIncrease staff workloads -36% x

Offset cost of one program with another -32% x

Draw down cash reserves -29% x

Defer maintenance costs -20% x

Delay payments on accounts payable -12% x

Cut costs across the board -10% x

Replace personnel with less expensive staff -10% x

Lease instead of buying -7% x

Borrow money (short-term lines of credit) -5% x

Cut administrative costs -5% x

Refer clients to another service or agency -5% x

Reduce quality of services -3% x

Convert investments into cash for operations -2% x

Change mix of staff (using less expensive) 0%

Close satellite offices 0%

Ask for cash advances from funders 0%

Factor (or sell) accounts receivable 0%

Borrow money (long-term) 2% x

Sell off long-lived assets 5% x

Furlough employees 5% x

Diversify mix of services 5% x

Merge with another agency 7% x

Reduce number of personnel 7% x

Cut costs selectively 10% x

Consolidate programs (or services) 10% x

Share facility with another agency 10% x

Outsource services 10% x

Use group purchasing 15% x

Reduce broken client appointments 18% x

Offer non-monetary offsets (e.g., training) 22% x

Offer client transportation 27% x

Obtain gifts 29% x

Obtain grants 37% x


ConclusionNo one coping mechanism pro-

vided salvation for any single organi-zation. A combination of approaches, however, did provide a financial bridge until rate adjustments could be achieved. Many of the approaches, however, represent opportunities to improve financial management and could be pursued even if a financial crisis were not present. Actual usage and preferences were assessed. Some actions taken may be forced while oth-ers were identified as opportunities for further pursuit. In all actions, care should to be taken to avoid reductions in the quality of services, disrupting client treatment plans, poor client out-comes, decreasing staff morale and undesired staff turnover.

End Notes1. The authors express their appreciation

to the members of the Comprehensive Rate Study Advisory Committee (formed by the Division of Alcohol and Substance Abuse, Department of Social and Health Services, state of Washington) for their insight and as-sistance in formulating this manuscript.

2. Washington’s Outpatient Services Extended Rate Study, Division of Alcohol and Substance Abuse, Department of Social and Health Services, state of Washington, November 2006; Washington’s Outpatient Services Rate Study, Division of Alcohol and Substance Abuse, Center for Substance Abuse Treatment, Contract No. 270-99-7070, Substance Abuse and Mental Health Services Administration, U.S. Department of Health and Human Services, July 2006.

3. Washington’s Outpatient Services Extended Rate Study, op. cit. p. 12.

4. Washington’s Outpatient Services Extended Rate Study, op. cit.

5. Washington’s Outpatient Services Extended Rate Study, op cit. p. 25.

6. Final State Operating Budget, State of Washington, e-mail from Sharon Case [email protected].

7. Qualitative interview reports were col-lected from governmental providers, namely counties and cities, and not-for-profit agen-cies that contracted with the state to provide comprehensive substance abuse services in the state of Washington. Interviews are provider self-reports collected from March 2006 to August 2007.

8. Outpatient Services Extended Rate Study, op. cit., p. 14.

9. The sample (2008) consisted of 42 programs with about one-third governmen-tal agencies (namely, cities, counties, tribes) and two-thirds nonprofit agencies all under contract to DASA. Most included outpatient services (88 percent), about half included youth (48 percent) and intensive outpatient (40 percent) services while detoxification, long-term residential, PPW residential and recovery house were in the teens (19 percent to 12 percent). About one-third had total budgeted expenses of $1 million or less, another one-third between $1 million and $5 million and the last third were greater than $5 million.

James E. Sorensen, Ph.D., CPA, is professor of accountancy and the Piccinati Endowed Profes-sor in the School of Accountancy at the University of Denver.

Emilio Vela Jr., is a Treatment and Prevention senior policy analyst, Division of Be-havioral Health and Recovery (DBHR), State of Washington.

Linda Grant, MS, CDP, is the executive direc-tor for Evergreen Manor, a nonprofit chemical depen-dency program with outpatient, residential, detox, transitional hous-

ing and outreach services serving more than 3,000 patients a year.

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