Section 3.3: Variance Analysis and Corrective Financial Actions

3.3.1 The “Why”: Variance Analysis is a Therapeutic Drug Monitoring for Your Department

As a clinician, you would never dose a narrow therapeutic index drug like vancomycin and then walk away, assuming the outcome will be perfect. That would be malpractice. Instead, you engage in a rigorous process of therapeutic drug monitoring (TDM). You order a trough level at the appropriate time, you compare that result to your target range, and if there is a deviation—a variance—you perform a systematic investigation. Was the dose timed correctly? Has the patient’s renal function changed? Is there a new interacting medication? Based on your analysis, you develop a corrective action plan: you adjust the dose, change the interval, or re-evaluate the therapy entirely. This cycle of measurement, comparison, investigation, and action is the cornerstone of safe and effective pharmacotherapy.

Variance analysis is the exact same discipline applied to the financial health of your department. Each month, you will receive a financial report that is, in essence, a lab result for your department’s budget. It will show your budgeted target for each expense account and your actual spending. The difference between these two numbers is the variance. Your job as a leader is not merely to look at the bottom line and see if it’s red or black. Your job is to perform a rigorous, systematic investigation into every significant variance, identify the precise root cause, and develop an intelligent, data-driven corrective action plan. Just as with TDM, this is not a punitive process; it is a clinical process designed to ensure the department is operating safely, effectively, and sustainably.

Mastering this skill is what separates a manager from an executive. A manager reports the variance (“We were over budget on drug spend last month.”). An executive explains the variance (“We had a $500,000 unfavorable drug spend variance in July. My analysis shows that $350,000 of that was driven by a higher-than-expected CMI and a 5% surge in patient volume. The remaining $150,000 was due to the onboarding of three new oncology patients for a new CAR-T therapy, which was a planned strategic initiative. Here is our updated forecast for the rest of the quarter reflecting this new run rate.”). This level of analysis demonstrates that you have absolute command of your business. It builds immense credibility with senior leadership and finance, proving that you are not a passive observer but an active, strategic manager of your financial resources. This section will provide you with the structured methodology to perform this “financial TDM” with the same level of clinical rigor you apply at the bedside.

3.3.2 Deconstructing the Monthly Financial Report: A Guided Tour

Every month, typically around the 10th business day, the finance department will deliver your operating statement. It may seem intimidating at first, but it is a highly structured document that always contains the same core components. Your first job is to learn how to read it fluently. Let’s deconstruct a typical report for a single cost center.

Sample Operating Statement: Inpatient Pharmacy Operations (Cost Center 75110)

Fiscal Year 2026 | Period Ending: July 31, 2025 (Period 1 of 12)

GL Account	Description	Current Month Actual	Current Month Budget	Current Month Variance	YTD Actual	YTD Budget	YTD Variance
LABOR EXPENSES
60100	Salaries – Productive	$1,250,000	$1,200,000	($50,000)	$1,250,000	$1,200,000	($50,000)
60110	Salaries – Overtime	$75,000	$50,000	($25,000)	$75,000	$50,000	($25,000)
60300	Benefits	$424,000	$400,000	($24,000)	$424,000	$400,000	($24,000)
	Total Labor	$1,749,000	$1,650,000	($99,000)	$1,749,000	$1,650,000	($99,000)
DRUG EXPENSES
70315	Drugs – Chemotherapy	$2,100,000	$2,000,000	($100,000)	$2,100,000	$2,000,000	($100,000)
70325	Drugs – Biologics	$1,550,000	$1,500,000	($50,000)	$1,550,000	$1,500,000	($50,000)
70300	Drugs – General	$2,980,000	$3,000,000	$20,000	$2,980,000	$3,000,000	$20,000
	Total Drugs	$6,630,000	$6,500,000	($130,000)	$6,630,000	$6,500,000	($130,000)
SUPPLY & OTHER EXPENSES
70100	Medical Supplies	$160,000	$150,000	($10,000)	$160,000	$150,000	($10,000)
	Total Supplies	$160,000	$150,000	($10,000)	$160,000	$150,000	($10,000)
	GRAND TOTAL	$8,539,000	$8,300,000	($239,000)	$8,539,000	$8,300,000	($239,000)

3.3.3 The Root Cause Analysis Framework: Isolating the “Why”

You’ve identified where the variances are. Now comes the critical thinking. For every significant variance, you must determine if it was caused by a change in volume (you used more stuff), a change in rate/price (the stuff you used was more expensive), or a change in mix (you used different, more expensive stuff). This framework is the key to a professional analysis.

Root Cause Analysis of the ($99,000) Labor Variance

The report shows a ($50,000) variance in productive salaries and a ($25,000) variance in overtime. The remaining ($24,000) is in benefits, which is just a percentage of the salary overage. The key questions to investigate are:

Variance Type	Investigative Question	Data Source to Pull	Likely Root Cause
Volume Variance	Did we work more hours than we budgeted?	Pull the payroll report for your cost center. Compare the total “Worked Hours” for the month to your budgeted worked hours (based on your productivity target).	If actual worked hours are higher than budget, this is a volume issue. This is almost always tied to higher-than-budgeted patient volume (APD). You need to get the hospital’s volume report to confirm.
Rate Variance	Was the average cost of an hour of labor higher than budgeted?	From the payroll report, calculate the actual average hourly rate paid. Compare this to the blended rate used in your budget.	This can be caused by using more expensive staff than planned (e.g., using a pharmacist to do technician work) or by higher-than-expected premium pay (overtime, on-call, shift differentials). In our example, the high overtime is a major rate driver.
Mix Variance	Did we use a more expensive mix of employees than planned?	Analyze the breakdown of hours worked by job code (e.g., Pharmacist vs. Technician).	If you had to replace a technician call-out with a pharmacist, you have a negative mix variance. You used a much more expensive resource to do the same work.

Root Cause Analysis of the ($130,000) Drug Variance

We know the variance is concentrated in Chemotherapy ($100k over) and Biologics ($50k over). The analysis follows the same logic.

Variance Type	Investigative Question	Data Source to Pull	Likely Root Cause
Volume Variance	Did we use more units of these drugs than budgeted?	Pull your purchasing or dispensing records (e.g., from your ADC or wholesaler). Compare the number of vials of key drugs (e.g., Keytruda, Darzalex) dispensed vs. what was forecasted.	This is the most common driver. It’s almost always tied to higher-than-budgeted patient volume (e.g., more oncology visits) or higher acuity (more patients qualifying for these therapies).
Price Variance	Did we pay more per unit than we budgeted?	Compare the actual acquisition cost per vial from your invoices to the price used in your budget.	This could be due to a mid-year manufacturer price increase that was higher than your inflation forecast. It could also be due to losing access to a special contract or having to make an off-contract purchase due to a shortage.
Mix Variance	Did we use a more expensive mix of drugs than planned?	Analyze the utilization data. Did a new, more expensive chemotherapy agent get added to the formulary and take market share from an older, less expensive one?	This is a classic driver of unfavorable variance. The launch of a new, clinically superior but far more expensive drug will cause a negative mix variance as prescribing patterns shift.

3.3.4 From Analysis to Action: Developing a Corrective Action Plan

The final step of the process is to translate your analysis into a concrete plan. A corrective action plan is not about making excuses; it is a forward-looking strategy to manage the variance in the coming months. For every major unfavorable variance, you must be prepared to answer two questions from your leadership: What happened? and What are you going to do about it?

Masterclass Playbook: The Variance Report Narrative

Many organizations require a written explanation for any variance exceeding a certain threshold (e.g., 5% or $50,000). This document is your opportunity to present your analysis professionally. It should be concise, data-driven, and action-oriented.

To: Jane Doe, Chief Financial Officer
From: [Your Name], Director of Pharmacy
Date: August 12, 2025
RE: Pharmacy Cost Center Variance Report – July 2025 (Period 1)

Overall Summary: For the month of July, the Pharmacy department experienced a total unfavorable expense variance of ($239,000) against the budget. This was primarily driven by higher-than-budgeted patient volume and acuity, which impacted our labor, chemotherapy, and biologics expenses. The following is a breakdown of the key drivers and our corresponding action plan.

1. Labor Variance: ($99,000) Unfavorable

• Root Cause Analysis:
  • Volume/Acuity: Hospital-wide APD for July were 4% above budget, which drove the need for increased staffing hours.
  • Overtime ($25k Unfavorable): The volume surge, combined with 2 unplanned FMLA leaves in our technician group, required significant overtime to maintain service levels. We utilized 850 hours of overtime against a budget of 550 hours.
• Corrective Action Plan:
  • We are actively recruiting for two technician positions to backfill the FMLA vacancies, with an anticipated start date in mid-September.
  • We are reviewing our staffing grids with the leadership team to determine if a permanent increase in budgeted FTEs is required to support the sustained higher patient volume. A formal request will be submitted if the volume trend continues through August.

2. Drug Spend Variance: ($130,000) Unfavorable

• Root Cause Analysis:
  • Chemo ($100k) & Biologics ($50k): The oncology service line saw a 7% increase in patient visits versus budget. Additionally, we had three unexpected new patient starts on CAR-T cell therapy, accounting for approximately $150,000 of the variance. This represents a strategic investment in a new, high-acuity service line.
  • Favorable Generic Performance ($20k): Our generic drug spend was favorable due to a successful initiative to convert from branded IV acetaminophen to the generic equivalent ahead of schedule.
• Corrective Action Plan:
  • The variance driven by the CAR-T program is expected and will be ongoing. We are working with finance to have this added to our forecast and potentially re-budgeted for the remainder of the year as it represents a new baseline of activity.
  • Our P&T committee is reviewing two new biosimilars for formulary addition in Q2, which are projected to generate annualized savings of approximately $400,000, helping to offset the growth in oncology spend.