Healthcare Finance: Organizational Budget

Healthcare Finance: Organizational Budget

Introduction

Compared to other industries, the evolution of the budgeting process in the healthcare industry has lagged. Other industries are constantly applying data-driven and leading-edge forecasting methods due to maturity of budgeting processes. However, today healthcare organizations are investing a considerable amount of resources and time to facilitate the annual budgeting processes. Various departments, administrations and management are involved in budget negotiation discussions to develop the annual budgets (Taha & Rodríguez-Vega, 2020). The healthcare system is financed with both public and private finances, which make it essential for healthcare organizations to exercise transparent and prudent budgeting as a sign of accountability to both public and private financers. A budget cycle is crucial and begins with a plan on how to utilize resources in the coming financial year. The process of budgeting must be conducted in accordance with the health priorities set out by the health stakeholders. As a result, the budget process may be influenced by a number of environmental factors –internal and external. This proposal aims to describe the environmental factors affecting the budgeting process through a demonstration of the operating budget for the sample clinic.

Environmental Factors Affecting Budgeting

Health care facilities in the U.S. have continuously been challenged to improve their financial performance by ensuring sound financial planning and budgeting. The call is necessary, given the ever-increasing need to survive in the market in light of the dynamic demographics and legal environment (Taha & Rodríguez-Vega, 2020). For better understanding, the environmental factors affecting the budgeting in healthcare facilities will be broken down and discussed in two broad categories – organization internal environment-related and external environment-related.

Organization Internal Environment Related Factors

Strong internal organization and financial structures are necessary for healthcare facilities to overcome today’s challenges and survive the unending pressure exerted on limited resources. Very few organizations possess abundant resources to perform every task or project they wish to undertake. Limitations in resources due to strict funding by either the public or private investors poses a major challenge in budgeting for healthcare (Nurettin  2016). Healthcare organizations have to carefully plan and allocate limited resources to very ambitious healthcare growth objectives. Every organization wishes to grow. However, growth comes at a cost, and organizations have to increase their resources to achieve meaningful growth success. Additional resources are necessary for maintaining and improving current services, developing new services, improve quality and expand to new geographical areas. All these growth ambitions have to be achieved while still maintaining healthy financial performance margins.

Profitability remains the driving force for any business, including in the healthcare industry. Investing in new billing software and MRI machine will significantly impact on the ability of the clinic to make a profit next year. The clinic needs a capital outlay of $1,464,000.00 next year in addition to operating costs amounting to a minimum of $ 750,000.00. For our clinic to invest such massive amounts, the future profitability of the organization must be guaranteed. As a result, any proposed investment must meet the profitability criteria before being considered for inclusion in next year’s budget.

Another major factor internal factor influencing the budgeting process is the shareholding issue. In the budgeting process, for our clinic, which is mainly composed of physician shareholders, negotiations may take longer. Each group shareholders have their own proposals for inclusion in next year’s budgets. If not amicably discussed and agreed, the budgeting process may be marred with shareholder conflicts. As a result, maintaining objectivity and evaluating the cost-benefit analysis of proposed investments could be the only viable solution to potential conflicts.

External Environment Related Factors

To a greater extend, sometimes the external environment exerts more pressure to budgeting than the internal organization environment (Nurettin  2016).  The American healthcare legislative environment is quite turbulent. Organizations have to adhere to set healthcare guidelines while conducting the budgeting process. For instance, the Patient Protection and Affordable Care Act improves access and the affordability of healthcare. For institutions to get into the Medicaid and Medicare reimbursement programs, their service rates must meet the Centers for Medicare and Medicaid Services (CMS) guidelines. The programs allow patients to receive care at standardized rates within the country, and the costs are paid for by the federal government or respective states. As a result, healthcare facilities have no opportunity to increase charges for Medicaid and Medicare recipients which subsequently affect their revenue budgeting process.

At the same time, the reimbursement process for Medicaid, in particular, is complicated and time-consuming. Sometimes healthcare organizations have to wait for more extended periods before receiving insurance claims from the CMS for services offered to patients (Nurettin,  2016). This impacts negatively on the organizations budgeting process. Besides, Value-Based Purchasing regulation holds healthcare providers accountable for the quality and cost of care they provide and links payments to improved care performance. The program rewards best performing healthcare providers. As a result, healthcare institutions have the incentive to make capital investments that led to improved patient care.

2017 Operating Budget

Budget Alignment with Target Profit Margin

The projected operating budget for 2017 expected to grow by approximately 42.5% compared to 2016. This is mainly attributable to the expected additional operating expenses due to the purchase of the new billing software and MRI machine. The purchase of the MRI machine will increase next year’s salaries by $ 340,000.00, maintenance costs by $ 12,000.00, patent care supplies by $ 380,000.00, and staff training expenses by $10,000.00. This is in addition to the 10% projected increase in the annual operating budget. The expected growth in operating expenses will definitely have a negative impact on the clinic’s target profit margin. The clinic’s profit margins will definitely decline and could even lead to an operating loss in the year 2017.

Tracking Financial Performance

The financial performance of healthcare institutions, just like any other business, can be tracked by measuring and monitoring its financial parameters (Aliabadi et al. 2019). Tracking the performance of our clinic in 2017 will be achieved by applying a combination of the following strategies.

1. Preparation of financial statements –the profit and loss (income) statement and the balance sheet represent the two key financial statements. The income statement tracks the profitability of any business, while the balance sheet outlines the assets owned by the business and the liabilities owed to others (Malagueño et al. 2018).
2. Preparing working capital statements and financial ratios – working capital measures how prepared the business is in meeting current financial obligations. Financial ratios, on the other hand, determine how well the business is utilizing its asset in generating income for the business and in servicing its liabilities.
3. Preparing the cash flow statement – measures how liquid an organization is by monitoring how cash is flowing in and out of the business
4. Preparing aged debtors accounts – tracks how customers are paying their bills to the organization. Allows business to identify irregular accounts and defaulters to accelerate the collection rates, which include engaging external collectors (Aliabadi et al. 2019).
5. Maintaining proper inventory records – ensures proper accounting for the organization’s equipment, machinery and supplies (office or patient-related).

The above mentioned are not exclusively the only approaches for tracking financial performance. Other financial tracking strategies will be monitoring our competitors. Competitors help to provide a suitable benchmark for comparison and are essential in maintaining industry standards (Malagueño et al. 2018). Lastly, the financial performance of the clinic will be measured by preparing the income statement. The income statement demonstrates the company operating income against the company operating expenses.  The difference between the 2017 operating expenses and revenue will determine the financial performance of the company.

References

Aliabadi, F. J., Mashayekhi, B., & Gal, G. (2019). Budget preparers’ perceptions and performance-based budgeting implementation. Journal of Public Budgeting, Accounting & Financial Management.

Malagueño, R., Lopez-Valeiras, E., & Gomez-Conde, J. (2018). Balanced scorecard in SMEs: effects on innovation and financial performance. Small Business Economics, 51(1), 221-244.

Nurettin Oner, M. S. (2016). Organizational and environmental factors associated with hospital financial performance: A systematic review. Journal of Health Care Finance, 43(2).

Taha, A., & Rodríguez-Vega, G. (2020). Planning and Budgeting. In Critical Care Administration (pp. 21-41). Springer, Cham.