Healthcare Business Budgeting

Issues of Concern

In "Budgeting for Results," Ross writes that instead of viewing budgeting merely as a tool to estimate revenues and expenses, organizations should utilize budgeting as a process to translate organizational values into operational roadmaps.[1]

Further, this process can be completed through joint efforts among senior leadership, mid-level management, and corporate finance departments. Ross discusses the five fundamental budgeting systems as listed below:

• Incremental budget: This budgeting system estimates the total cost of production based on current and historical expenditures. This system adjusts the budget based on the estimated changes in the price of inputs and outputs and the estimated changes in the quantity of the results. The primary focus of the incremental budget is to control the total cost to be within budget. Also known as the fixed or static budget, the incremental budget commonly induces the "use it or lose it" mentality among sub-division managers. For example, the nursing staff of an inpatient unit is allocated an annual budget of $10,000 for all social events; if the team doesn't use all of the $10,00 that year, the remainder will not carry over to the following year. The staff either uses it or loses it.
• Flexible budget: In contrast to the incremental budget, the flexible budget acknowledges that future output could fluctuate; therefore, the budgeted amount could also change. Managers of this budgeting system need to know their operations' fixed and variable costs so the budgeted output can be updated as circumstances evolve. The primary focus of the flexible budget is to control the average cost per unit of output to be within budget. For example, an ophthalmology surgical center newly offers an advanced cataract surgery procedure and thus adjusts its budget based on fluctuating levels of output (i.e., surgical cases).
• Zero-based budget: This budgeting system rejects the assumption that historical expenditures should dictate future budgets. The primary focus of the zero-based budget is to minimize the marginal cost of production, which is measured by changes in total cost over changes in total output. In zero-based budgeting, managers are required to answer three questions: (1) whether a product needs to be produced, (2) how it should be produced, and (3) at what scale it should be produced. In other words, the zero-based budget aims for the optimal product mix, production method, and quantity. For example, an in-house wellness clinic at a large manufacturing company adjusts its product offerings (e.g., physical therapy, weight management, smoking cessation) based on its employees' utilization.
• Program budget: This budgeting system is distinguished by its long-term, multi-department, and top-down approach to budgeting. This budgeting system starts at the executive level of an organization based on overarching objectives, then is passed down to mid-level management to produce department-level budgets. The primary focus of the program budget is to use the budget process to achieve organizational goals. For example, the National Health Service (NHS) in Great Britain allocates funding for its functions of direct medical care, public health endeavors, and medical research based on the organization's priorities in a given budget year.
• Activity-based budget: This budgeting system is the most operationally focused budget. Budget planners examine the step-by-step activities required to produce a specific output and estimate the costs generated from such activities. Activity-based budgeting is the composite summation of the cost associated with each production activity multiplied by the quantity of each production activity. The primary focus of the activity-based budget is to maximize effectiveness, efficiency, and throughput. For example, an outpatient surgical center conducts value stream mapping by illustrating a patient's care experience from initial referral to surgery to post-operative care; the center then estimates the cost associated with each step.

A subset of the activity-based budget is time-driven activity-based costing (TDABC), which is important in the era of value-based care.[5]

In value-based care, healthcare organizations are judged by the outcome of care divided by the cost of delivering the care. Medicare designed prospective payment rates based on diagnostic-related groups (DRGs) in the 1980s for hospital reimbursements. The DRG-based payment system is a version of value-based care in which the cost of care is directly tied to the diagnosis and the severity of the illness.[6]

As a result, TDABC has emerged as an all-encompassing yet relatively efficient cost-accounting method that examines the entire care delivery process. Kaplan and Porter developed the 7-step method of TDABC that examines the care delivery roadmap, incorporates direct and indirect costs, estimates time spent per activity, evaluates capacity cost rate, and ultimately generates the cost of the entire care process.[5][7]

Clinical Significance

Individual Level

For individual patients, a well-budgeted healthcare operation can positively impact their care experience, quality, and outcome. In wound care management, 15% of costs are from dressings and materials, 35% are from nursing care time, and 50% are from hospitalization.[8]

If a wound care clinic erroneously increases the budget for dressings and materials but reduces the budget for nursing staff, then this budgetary decision would directly reduce nursing wound care time, worsen wound healing, and ultimately increase hospitalization and associated costs.

Organizational Level

Ross emphasizes that budgeting is an important management tool that enables a healthcare organization to translate its visions into actions.[1] Rather than viewing budgeting as a tedious cost-control mechanism, Ross argues that organizations should evaluate whether their budget reflects their long-term objectives at the executive level, whether the budget process successfully performs and functions at the management level, and whether the process honors the constraints and opportunities at the finance level. A well-budgeted healthcare organization enables buy-in from its employees at all levels.

Community Level

If healthcare budgeting is considered complex for a single organization, one could imagine how interwoven and intricate the process can be for a local government or state. The State of Maryland, for example, has been operating under an all-payer global budget system since 2014, which has led to cost savings and demonstrated collaboration among stakeholders, including hospital leaders, state and federal regulators, and payers.[9]

National Level

At the national level, healthcare budgeting directly impacts access, delivery, staffing, and quality of care. In the United Kingdom, the National Health Service (NHS) is tasked with delivering care to the public. In 2021, the NHS announced that it would add £5.9bn ($8.1bn) to its annual budget to tackle the long waiting time for diagnostic studies and elective medical care.[10] Regardless of the level and scale of budgeting, the same principles mentioned above still apply.

Nursing, Allied Health, and Interprofessional Team Interventions

Healthcare budgeting is an extensive interprofessional process in any healthcare organization. When performed well, healthcare budgeting invites interdisciplinary participation from clinical staff (e.g., physicians, advanced practitioners, nurses, and pharmacists), operational staff (e.g., clinical engineering, environmental services, and nutrition services), and administrative staff (e.g., executives and managers). Nurse managers play a vital leadership role in budgeting, as evidenced by Baker, Lindholm, and Searle, because they can combine clinical experiences with operational understanding to make sound budgetary decisions.[2][8]

Given the importance of budgeting to patient care, organizational success, and public health, it is ever more critical for healthcare professionals to understand the fundamental principles of budgeting.