Healthcare and Hospital Budgeting: A Comprehensive Guide to Financial Planning

Budgeting for healthcare is notoriously difficult.

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Operating within an environment of staff shortages, rising costs of medical care, a complex insurance system, and global events like the COVID-19 pandemic make it increasingly challenging to accurately control the budgeting process in healthcare.

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But, without adequate healthcare budgeting planning, any hospital or healthcare business will have difficulty generating a profit and maintaining quality service.

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Fortunately, with the right knowledge and good systems, effective budgeting in healthcare management is possible.

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In this article, we’ll cover everything you need to know about the healthcare budgeting process.

What Is A Budget In Healthcare?

On a basic level, a budget in healthcare is similar to any business. A healthcare or hospital budget considers revenue and operating expenses over a specific timeframe.

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By using a comprehensive budgeting process, healthcare managers look at the services they can deliver and estimate the revenue these could bring in. They also consider what capital, consumable, and staffing expenses would be incurred for providing these services. 

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Then, by subtracting expected operating expenses from forecasted revenue, leaders can make an informed prediction about expected profits.

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While the specifics of healthcare budgeting and hospital budgeting will differ by the nature of each business, the core components of revenue, expenses, and profits are always at the heart of the budgeting process in healthcare.

Types Of Budgeting In Healthcare Organizations

The types of budgets in healthcare can be broadly split into three categories: Capital expenses, operational expenses, and rolling forecasting expenses. 

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To come up with an effective overall budget, healthcare organizations should make separate calculations in each category as detailed below:

1. Capital Expenses
   Capital expenses are a big cost for healthcare organizations, especially hospitals. It involves things like:
   
   • New building and infrastructure
   • Maintenance and repairs
   • High-tech (and high-cost) equipment, like MRI scanners and ventilators
   • Beds and office space
   • Information technology (IT) infrastructure

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2. Operational Expenses
   Operational expenses are another important part of healthcare budgeting and hospital budgeting. This includes all the ongoing things needed to keep a hospital or clinic running, such as:
   
   • Staffing costs (clinical and non-clinical)
   • Medical consumables, like cotton swabs, fluid bags, and personal protective equipment
   • Meals for hospital patients
   • Ongoing software expenses

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3. Rolling Forecasting Expenses
   Rolling forecasting expenses is about being prepared for the expected and unexpected changes that often happen in healthcare. Some recent examples include events like:
   
   • The COVID-19 pandemic
   • Staff shortages and increased healthcare staffing costs
   • Insurance changes, like Obamacare
   • Fluctuations in the prices of drugs or equipment 
   • Changes in the economy

Why Is Budgeting Important In Healthcare?

Budgeting is important in healthcare because as an industry, there are many constantly changing and evolving factors that influence the medical sector. And unless your business accounts for these adequately, it will be difficult to remain competitive and profitable.

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The healthcare sector has undergone an unprecedented amount of change in recent years, the pace of which is expected to continue at an even faster rate in the future. 

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Effective budgeting allows healthcare organizations to take advantage of opportunities for change and development in areas like:

1. Digital health
2. Artificial intelligence
3. Insurance and funding models
4. Healthcare consumer purchasing habits
5. New medical discoveries and treatments

What Is The Importance Of Healthcare Accounting In The Hospital Budgeting Process?

Accounting as it relates to health systems involves the tracking, recording, summarizing, analyzing, and reporting of financial transactions within a hospital or healthcare setting.

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Considering the wide range of specialized activities undertaken in medical businesses, healthcare accountants must become experts in many aspects of hospital and healthcare revenue cycle management.

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Below is an explanation of how healthcare accounting relates to the importance of budgeting in healthcare organizations and the hospital budgeting process.  

Controlling Finances

Hospitals and healthcare businesses operate with revenue cycles of many different lengths.

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For example, an allied health practice might operate within short timeframes, where clients are expected to pay on the date of each service. Hospitals, on the other hand, can deal with lengthy admission and may wait months for reimbursement from insurers and for patients to settle their final account. And primary care practices can be somewhere in between, working with a combination of immediate payments for services, insurance reimbursement, and outcomes-based funding.

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In each case, healthcare accounting helps to control finances so there is no overspending on capital or operational expenses relative to the revenue that’s coming in.

Assigning Responsibilities

One accountant or leader can’t control every aspect of budgeting in healthcare management, so it’s necessary to delegate responsibilities to other managers throughout the organization.

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Healthcare accounting allows leaders to understand each component of the hospital budget or healthcare capital budget, making it possible to assign duties to different team members for healthcare budget planning and operations. 

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Assigning responsibilities for healthcare budgeting throughout the organization can make the entire budgeting process more efficient and accurate.

Allocating Resources

Perhaps the biggest challenge in healthcare budget planning is the fact that organizational resources are always finite.

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Different clinical departments will all be advocating for an increased share of limited resources. Healthcare accounting must make sure every team is adequately resourced to deliver high-quality care, while not having an excess allocation that may be used inefficiently.

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To allocate resources effectively, healthcare accountants need to understand the unique needs of each department within a hospital or healthcare organization, and what their operational costs are. Good working relationships are important, as discussions around resourcing can make emotions run high.

Strategic Planning

With the rapidly changing landscape in the medical sector, organizations must be engaged in strategic planning to manage risks and take advantage of opportunities.

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Healthcare accounting enables the budgeting process in healthcare to make resource allocations to plan for emergencies and pursue new avenues for revenue growth. This gives organizational leaders the confidence to take decisive action to improve business outcomes and standards of patient care. 

Motivating Staff

Because virtually every medical service requires the input of a skilled clinician, the most valuable resource in health systems is their staff. 

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There can be a significant amount of variance in the quality and volume of care delivered by each clinician, making it difficult to meet financial planning targets. But with effective financial incentives schemes, staff can be encouraged to be more motivated, efficient, and consistent.

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Healthcare accounting can set activity targets for revenue generation for each clinical department, based on their complement of staff and services delivered. When financial incentives for staff are set up well, motivation and productivity can be improved significantly.

The Benefits Of Budgeting In Healthcare?

If you’re wondering why is budgeting important in healthcare, the benefits go well beyond just good financial management.

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The core business of a healthcare organization or hospital is to provide high-quality medical care to patients. And this is only possible with good healthcare budget planning.

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Put simply, if a healthcare service has cash flow problems, can’t attract good staff, or isn’t able to use historical data well to meet financial planning targets—they will struggle to deliver care to patients. 

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When healthcare businesses budget effectively, they can:

1. Be strategic about capital equipment investments to deliver maximum revenue growth
2. Effectively use financial incentives to attract, retain, and motivate staff
3. Take advantage of opportunities to provide new services or models of care
4. Evenly distribute resources among different clinical departments
5. Control operating costs to meet rolling forecasting targets 

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Challenges Faced By Hospitals

Out of all healthcare organizations, hospitals face some of the biggest challenges with budgeting.

This is primarily because hospitals deliver the highest cost medical care, work on long revenue cycles with many different payers, and are most susceptible to health system shocks.

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Key budget-related challenges faced by hospitals include:

• Global or regional health events, like the COVID-19 pandemic that suddenly make existing budgets inaccurate
• Changes to insurance and reimbursement models, such as for Medicare, Medicaid, and new pieces of legislation
• Competition from expanding home and community healthcare services
• Staffing shortages and increasing labor costs
• Supply chain issues, such as fluctuations in price and availability of medical consumables and medications 

Best Practices For The Budgeting Process In Healthcare Budgeting Process

Despite the challenges of healthcare budgeting, it is possible to avoid many problems by following some best practices for financial management.

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Some of the main best practices to be aware of are:

• Create a detailed healthcare budget planning calendar, including dates for key tasks and who is responsible for completing them.
• Rather than aiming for perfection, try for continual improvement.
• There are a lot of variables in healthcare and hospital budgeting, so be sure to plan for them.
• Include clinical staff and management teams in accounting and budget planning. Staff who are involved and feel included are more likely to work toward common objectives.
• Provide different levels of reporting and varying types of budgets in healthcare management teams. Customize these according to staff roles and familiarity with budgeting processes.

Expert Hospital Budgeting Tips To Use Right Now You Can’t Benefit From

Keep a big-picture view

No matter the size of the organization, a bigger-picture view is always required for budgeting in healthcare management. 

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The best budgeting results come from thinking about budgeting from the perspective of all levels of the organization, while also taking a long-term view. Remember, what works to maximize short-term profits won’t always be the best for an ongoing strategy.

Optimize lighting and heating solutions

Believe it or not, lighting and heating can account for as much as 65% of a hospital's total energy consumption.

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In many cases, the initial capital equipment cost for new, more efficient lighting and heating systems can have a net positive impact on an overall hospital budget. So be sure to review all lighting and heating appliances to see if you need to make a change.   

Review service contracts and coverage levels

Healthcare organizations can end up with a very large number of service contracts and insurance coverage for various aspects of the business. If these haven’t been reviewed for a while, you could be paying more than necessary for services you don’t fully utilize.

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Ideally, you should review service contracts and insurance coverage annually. However, service contracts that get used regularly might benefit from a quarterly review. Remember, all your providers will have competitors, so don’t be afraid to ask for a better deal.

Thoroughly explain expenditures

In all different types of budgets in healthcare, expenditures should be explained accurately and in detail.

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Make sure you thoroughly explain the reasons for each expense, along with a clear rationale for why certain financial decisions are being made. This will ensure a smooth experience with your finance department, accounting, and clinical team leaders.

Work to reduce readmissions

Readmissions can cause big problems with a budget for healthcare. In most cases, insurers won’t pay for readmission for the same complaint, as they already funded one round of treatment for the condition.

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Reducing readmissions requires a collaborative effort between different hospital teams and primary health services. The main focus should be on having robust post-discharge services so patients stay well after they’ve been sent home.

Examine shipping strategies

Shipping costs have increased dramatically since COVID-19. While it’s very easy to think of this simply as “the new normal,” you may be able to save considerable money by examining shipping strategies.

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In particular, look at how many different providers you are using and if ordering processes can be streamlined to become more efficient (e.g., reducing order frequency). Again, remember to negotiate costs with vendors to see if they can reduce your shipping rates.

Analyze inefficiencies in the emergency room

Due to their unpredictable nature and the high proportion of uninsured patients walking in for treatment, emergency rooms (ER) can cause problems for hospital budgeting.

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Including senior ER leadership in healthcare budget planning can be helpful, as it encourages a collaborative approach to analyzing and working through inefficiencies. It’s also a good idea to have processes in place for when uninsured patients self-present, as in many cases they can be covered by public insurance. 

Keep a database of warranties

Repairs and maintenance of medical equipment is a big part of managing a healthcare capital budget. These can be incredibly costly, in some cases costing almost as much as the equipment itself.

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To reduce the cost of repairs and maintenance, keep a database of warranties that is easy to access by relevant staff. In many cases, machines are still under warranty, but because details aren’t available technicians don’t know to ask for costs to be covered by warranty.

Make employee well-being a priority

Absenteeism, low productivity, and workers’ compensation claims can be a big drain on healthcare budgets. But costs for these can be drastically reduced with a good employee well-being plan.

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There are now many providers offering dedicated employee well-being plans specifically for healthcare workers. If you don't have a plan in place already, see what’s on offer. Many healthcare businesses find that prioritizing employee well-being has a positive impact on their budget.

Set pricing agreements with vendors

In addition to keeping track of equipment warranties, you may also be able to negotiate a maximum lifetime cost with medical equipment vendors.

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The best approach is to figure out what you can allocate from your capital equipment budget to a specific item, then negotiate with vendors to provide a set price, including ongoing servicing and maintenance. 

Streamline inventory tracking

The cost of lost, stolen, or difficult-to-access equipment can make the budgeting process in healthcare very difficult. Aside from the replacement cost of missing items, a lot of staff time can be wasted trying to find items that are not easily located.

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Consider investing in a new inventory tracking management system, or refining the current processes you have in place. Many companies now offer outsourced solutions for this issue, which further reduces the time your staff has to spend on locating inventory.   

Pharmbills' Approach to Healthcare Budgeting

If you need help with budgeting for a healthcare business or hospital of any size — Pharmbills can help.

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Through our innovative outsourcing and outstaffing solutions, we can provide fully qualified, experienced, and professional staff from a variety of backgrounds, for all your healthcare budgeting needs. 

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As an added bonus, because our staff are located offshore, they are available at a fraction of the price of local talent. This almost guarantees that our healthcare budgeting solutions will provide your business with a positive return on investment. 

Whether you need staff for accounting, financial analysis, budget planning, or something else, our efficient five-step process ensures easy setup, collaboration, and swift, long-lasting results:

1. Sign on with Pharmbills
2. Select your customized team
3. Sync up IT infrastructure
4. Integrate with your team
5. Monitor performance

Conclusion

Having an effective healthcare budgeting process is vital for the success of any hospital or healthcare organization.

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Without proper budgeting, healthcare businesses will have difficulty with cost overruns, problems with revenue cycle management, and find it challenging to mobilize resources to take advantage of new opportunities in the market.

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All of these issues make your organization less competitive, reduce profitability, and can negatively impact patient care.

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While the healthcare environment is renowned for being difficult to budget for, with the right complement of skilled staff, it is possible to set up and implement effective budgeting processes in healthcare.

To find out how Pharmbills can help you with hospital and healthcare budgeting — contact us. Our team of experienced professionals are experts in the healthcare, pharmacy, and real estate sectors. But we can also work with businesses of other types, no matter the industry, location, or size.