Budgeting in Health Care

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Budgeting in Health Care

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Part 1: Use of budgets in the health care industry and advantages & disadvantages of
budgeting in activity based funding environment
Budgeting can be described as the process of developing a financial plan that provides an
estimate of income and expenditure for a specific period of time. Business entities are usually
involved in the preparation of budget for predicting the future financing needs and thus taking
appropriate measures for meeting the specific needs and requirements. The main purpose of
budgeting can be stated as forecasting the income and expenditure, decision-making tool and
monitoring business performance. It helps in planning different phases of a businesses and
coordinating the activities for attaining the long-term aims and objectives. The most significant
advantage of budgeting process is that it enables the managers to emphasize on their long-term
objectives by providing a forecasting plan of future growth. However, the major drawback of the
budgeting process is that it involves large time and money to be prepared and that can
overweight its potential benefits1.
Healthcare organizations are largely adopting the use of budgets to forecast the revenue
and create an adequate plan of expenditure. The healthcare companies need to develop an
outlook for their future expenses related to wages of staff as it is a major part of their operational
costs. Thus, developing an appropriate budget plan will help the healthcare companies to forecast
the financial growth in future and leading to effective staffing decisions. Budgeting is a highly
effective tool, used by the healthcare companies for streamlining the process of forecasting the
1 Tănase, G.L. 2013. An Overall Analysis of Participatory Budgeting: Advantages and Essential
Factors for an Effective Implementation in Economic Entities. Journal of Eastern Europe
Research in Business and Economics.

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income and expenditure. Thus, it will be relatively easy to forecast the trends of expenditure and
revenue and to identify the issues of major concerns. The financial planning process of
healthcare organizations with the use of budgets helps in identifying the inefficiencies in labor
investment as staffing costs accounts for large proportion of their budget2.
It is estimated that labor cost accounts for about 50% to 60% of the expenditure incurred
by healthcare companies and therefore it is highly important to gain an overview of the total cost
involved in labor. Thus, gaining an estimate of the future labor cost will help the healthcare
companies to set an annual target related to labor planning. For example, it will help in gain a
prediction of about future hiring and staffing needs so that adequate staff is available for
providing quality care to the patients. Thus, developing a better understanding of the future
workforce requirements will help the managers to set appropriate schedules for maintaining
effective number of employees. Activity-based funding is a method of funding in healthcare
where they determine their fund level on the basis of type and volume of service provided and
the complexity of patients served. The funding has become the international norm for planning
the financing needs in healthcare organizations. This type of funding activity involves
determining the future revenue realized by a healthcare organization on the basis of its activity
level3.
2 McKnight, R. 2006. Home care reimbursement, long-term care utilization, and health
outcomes. J. Public Econ 90(1-2), pp. 293–323.
3 Briesacher, B.A, Field T. S and Baril, J. 2006. Pay-forperformance in nursing homes. Health
Care Financ. Rev.30(3), pp. 1–13.

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The most significant advantage of the use of activity based funding is that it enables a
healthcare company to quantify cost as per the output level. All hospitals are provided the same
amount for carrying out their activities under the method and thus help the hospitals to monitor
the differences in the amount paid and the actual cost. It also leads to determining the incentives
for a healthcare organization to improve their outcomes and also help to plan their staffing needs
and requirements. Hospitals are able to properly manage their operational cost as per the
payment amount provided by ABF through utilizing the most effective means for increasing
revenue and minimizing the cost. This can be achieved by effective pricing and use of cost-
cutting ensures to maximize cost efficiency. This will significantly help the healthcare
organizations to improve their revenue realization and providing quality care to the patients4.
The effective utilization of resources lead to decreasing the cost of different processes in
hospitals which overall contributes to reduce the cost of operations on per patient basis. The
financial incentive provided to hospitals under ABF funding method helps in improving access
to healthcare services by significant increase in the volume of services. The increase in the
operational activities within healthcare organizations significantly reduces the waiting times and
thereby improving the quality of care. However, there are also some drawbacks associated with
the use of ABF method is that it can lead to increase in the quality of healthcare with the
significant improvement in volume of services provided Also, the authorities faces significant
problem in determining the adequate funding amount for hospital care. Thus, it can be stated
that ABF also present new challenges such as increase in spending of hospital and therefore
4 Arnaboldi, M. and Lapsley, I. 2006. Activity Based Costing in Healthcare: a UK Case Study.
Res. Healthc. Financ. Manag 10(1), pp. 61–75.