This course explores healthcare specific financial policies and issues, analytical framework and economic transformation for financial decisions (such as investment and working capital), methods of financial management, insurance coverage and financing. In addition, the course focuses on the ability to apply economic and population health models to address health service issues and problems. NURS 6210 – Healthcare Finance and Budgeting Research Paper
You will use the knowledge gained in this course to financially structure and evaluate the opening of a private primary care medical practice with one physician provider. You will prepare an operating and capital budget as well as a narrative summary of at least 1,000 words to show your financial findings and recommendations. You will provide supporting documentation to support your findings and recommendations.
Prior to writing your narrative summary you will need to prepare an operating and capital budget for the project. The well-prepared operating and capital budgets will demonstrate a keen knowledge of the market, pricing, activity, revenues, expenses, and potential impact on cash-flow and/or profitability. The capital budget will similarly demonstrate an awareness of the capital items and associated costs for project start-up. NURS 6210 – Healthcare Finance and Budgeting Research Paper
- Prepare an annual statistical report that includes the following:
- Volume of patient visits
- Revenues (percentage of reimbursement from Medicare, Medicaid, Commercial Insurance and Self Pay)
- Expenses (Labor, Equipment, Supply, Overhead)
- Provide your assumptions to justify all volumes, revenues and expenses
- Prepare a three-year operating budget that includes the following:
- An estimate of revenue each year
- An estimate of expenses for each year
- The cash flow (negative or positive) generated from revenues and expenses
- Prepare a start-up capital budget listing the equipment you may need for this project including the cost and annual depreciation
- From your operating budget calculating the following:
- Projected cash flow over 3 years
- Break-even analysis
- Internal rate of return (IRR)
- Net present value (NPV)
- From your calculations, evaluate the financial risk involved with this project and make a recommendation as to whether this project is financially viable. NURS 6210 – Healthcare Finance and Budgeting Research Paper
- Prepare a 1000-word minimum narrative summary of your financial findings and recommendations. You will provide supporting documentation to support your findings and recommendations.
Key points on budgeting in health
No country has made significant progress towards universal health coverage (UHC) without increasing the extent to which its health system relies on public revenue sources. NURS 6210 – Healthcare Finance and Budgeting Research Paper Framing the approach to health financing policy in this way places the health sector within the overall public budgeting system and underscores the crucial role that the budget plays, or should play, for UHC. Historically, health financing discussions have been largely driven by demands to raise revenues and find new sources of funds, with much less discussion of overall public sector financial management and budgeting issues.
An understanding of the core principles of public budgeting is essential for those who have an active interest in health financing reform because the budget is a primary instrument for strategic resource allocation. Even in contexts where health insurance funds manage a core part of health expenditure, budgeting rules continue to influence flows of funds and transfers to purchasing agencies and/or health facilities.
Firstly, robust public budgeting in health, especially through the development of multi-year plans, is likely to improve predictability in the sector’s resources, which in turn increases the likelihood that defined plans can be translated in policy actions on the ground. NURS 6210 – Healthcare Finance and Budgeting Research Paper
Secondly, proactive engagement of health ministries in the budgeting process can facilitate alignment of budget allocations with sector priorities, as laid out in national health strategies and plans. In doing so, allocate efficiency within the sector’s resource envelope can be improved.
Thirdly, if budgets are better defined, budget execution can improve, which means that under spending – a common issue in low income countries – can decrease in the sector (i.e. budget is implemented according to the plan, which is defined and articulated with national priorities).
Fourthly, if the health budget is formulated according to goals and the execution rules align with this logic, it will allow a certain degree of spending flexibility and make budgets more responsive to sector needs.
Engaging in budget preparation, understanding the guiding principles of budgeting as well as the political dynamics that enable the budget elaboration and approval process, is essential for health planning stakeholders. Although health is financed by public and private funds, to make progress toward universal health coverage (UHC), a predominant reliance on public, compulsory, prepaid funds is necessary. Therefore, the way budgets are formulated, allocated and used in the health sector is at the core of the UHC agenda. This chapter outlines the overall budget process for the public sector, discusses the specific role of health within it, in particular the role of the ministry of health and other health sector stakeholders, to provide timely inputs into the budgeting process. NURS 6210 – Healthcare Finance and Budgeting Research Paper
Several surveys have been administered over the last 40 plus years to learn about capital budgeting practices of healthcare organizations. In this report, we analyze and synthesize these surveys in a four-stage framework of the capital budgeting process: identification, development, selections, and post-audit. We examine three issues in particular: (1) efficiency of for-profit hospitals relative to not-for-profit hospitals, (2) capital budgeting practices of the healthcare industry vis-à-vis other industries, and (3) effects of healthcare mergers and acquisitions on capital budgeting decisions. We found indirect evidence that for-profit hospitals exhibited greater efficiency than not-for-profit hospitals in recent years. The acquisition of not-for-profits by for-profits is credited as the primary reason for growth of multi hospital systems; these acquisitions may have contributed to the more efficient capital budgeting practices. One unique attribute of healthcare is the dominant role of physicians in almost all aspects of the capital budgeting process. In agreement with some researchers, we conclude that the disproportionate influence of physicians is likely to impede efficient decision making in capital budgeting, especially for nonprofit organizations.
The healthcare industry faces new challenges daily. Advancements in care keeps the field exciting and rewarding, while an increased population and a large generation of aging patients make healthcare tough. NURS 6210 – Healthcare Finance and Budgeting Research Paper
It isn’t just patient care that makes the field a challenge. The administrative side of healthcare has its own concerns. These concerns aren’t always centered on financials, but financial planning and healthcare budgeting can play a huge role in helping doctors, hospitals, and other healthcare facilities address some of their biggest challenges head-on.
A staggering truth about the healthcare industry is that half of hospital bills are never paid. Some of this is because of issues between insurers or Medicare and the providers. Others are due to confusion about bills or lack of ability to pay on the part of patients.
To simplify the process, the federal government passed the Medical Access and Chip Re authorization Act, or MACRA, which is meant to move providers to a more value-based payment system. In other words, the better patients are served, the better healthcare providers are paid.
For the first few years, providers will have the option to participate or not. The program will be fully rolled out in 2019 and will impact all hospitals as well as healthcare providers that service a significant number of Medicare patients. The effect on a facility’s bottom line, however, will vary throughout the roll out. NURS 6210 – Healthcare Finance and Budgeting Research Paper
To accommodate the changes, healthcare administrators that can run different scenarios with their budgets and plans will be the ones best prepared to deal with the results of value-based payments. Being able to ask “what if?” and run multiple views of a financial plan will set healthcare providers up for success as the changes related to MACRA go into effect.
Practice Cost Management
Medical professionals understand cash flow issues and how they can affect their operations, but they also understand that cash flow is important to an organization’s financial well-being.
Day to day obligations like salaries, supplies, legal fees, tools and equipment, and so on must be balanced with co-pays, insurance reimbursements and patient payments. Budgeting expenses against cash flow – and controlling costs – is a critical concern for healthcare administrators. NURS 6210 – Healthcare Finance and Budgeting Research Paper
Understanding where and how money is spent requires slicing and dicing of data and analyzing where savings can be found. Reviewing budget data against actual s and utilizing easy to understand dashboards can point to expenses that can be improved on.
Shifting Requirements and Regulations
As government regulations and laws change surrounding healthcare, it is difficult to know what will be required of providers and how payment models and overages will change. Between the financial demands of becoming compliant with technology regulations and the shifting landscape of the ACA, providers must be flexible in planning and budgeting. NURS 6210 – Healthcare Finance and Budgeting Research Paper
Volatility in financials requires systems that can change quickly and accurately. Unfortunately, spreadsheet budgets can be rigid with small errors resulting in potentially large miscalculations or reporting issues.
Healthcare providers need FP&A systems that provide for rapid changes and projections. Some providers may even consider switching to rolling forecasts, allowing for changes to be incorporated more quickly.
Healthcare providers face change and uncertainty, but must still plan financials like any other business. The key to doing so effectively is having a system that tolerates changes well, is flexible without adding significant operational overhead, provides accurate and easy to understand reporting and offers scenario planning. With these tools available to administrators, providers can be prepared for whatever lies ahead. NURS 6210 – Healthcare Finance and Budgeting Research Paper
Funding for fundamental science and early-stage translation al medicine is becoming scarcer, and at the worst possible time—when we now have the scientific and engineering expertise to make major breakthroughs in our understanding of the molecular basis of many deadly diseases and how to treat or prevent them. The dearth of funding for translation al medicine in the so-called “Valley of Death” can be attributed to several factors, but a common thread among them is increasing financial risks in the bio pharma industry and greater uncertainty surrounding the economic, regulatory, and political environments within the biomedical ecosystem. Increasing risk and uncertainty inevitably leads to an outflow of capital as investors and other stakeholders seek more attractive opportunities in other industries.
By applying financial techniques such as portfolio theory, secularization, and option pricing to biomedical contexts, more efficient funding structures can be developed to reduce financial risks, lower the cost of capital, and bring more life-saving therapies to patients faster. By taking this course, students will gain the background, resources, and framework to influence the healthcare industry.
Health systems financing
Health financing systems are critical for reaching universal health coverage. Health financing levers to move closer to universal health coverage lie in three interrelated areas: NURS 6210 – Healthcare Finance and Budgeting Research Paper
- raising funds for health;
- reducing financial barriers to access through prepayment and subsequent pooling of funds in preference to direct out-of-pocket payments; and
- allocating or using funds in a way that promotes efficiency and equity.
Developments in these key health financing areas will determine whether health services exist and are available for everyone and whether people can afford to use health services when they need them.
Guided by the World Health Assembly resolution WHA64.9 from May 2011 and based on the recommendations from the World Health Report 2010 “Health systems financing: The path to universal coverage”, WHO is supporting countries in developing of health financing systems that can bring them closer to universal coverage.
Health financing system
A good health financing system raises adequate funds for health, in ways that ensure people can use needed services and are protected from financial catastrophe or impoverishment associated with having to pay for them. Health financing systems that achieve universal coverage in this way also encourage the provision and use of an effective and efficient mix of personal and non-personal services. NURS 6210 – Healthcare Finance and Budgeting Research Paper
Three interrelated functions are involved in order to achieve this:
- the collection of revenues from households, companies or external agencies;
- the pooling of prepaid revenues in ways that allow risks to be shared – including decisions on benefit coverage and entitlement; and purchasing;
- the process by which interventions are selected and services are paid for or providers are paid.
The interaction between all three functions determines the effectiveness, efficiency and equity of health financing systems.
Like all aspects of health system strengthening, changes in health financing must be tailored to the history, institutions and traditions of each country. Most systems involve a mix of public and private financing and public and private provision, and there is no one template for action. However, important principles to guide any country’s approach to financing include:
- raising additional funds where health needs are high, revenues insufficient and where accountability mechanisms can ensure transparent and effective use of resources;
- reducing reliance on out-of-pocket payments where they are high, by moving towards prepayment systems involving pooling of financial risks across population groups (taxation and the various forms of health insurance are all forms of prepayment); NURS 6210 – Healthcare Finance and Budgeting Research Paper
- taking additional steps, where needed, to improve social protection by ensuring the poor and other vulnerable groups have access to needed services, and that paying for care does not result in financial catastrophe;
- improving efficiency of resource use by focusing on the appropriate mix of activities and interventions to fund and inputs to purchase;
- aligning provider payment methods with organizational arrangements for service providers and other incentives for efficient service provision and use, including contracting;
- strengthening financial and other relationships with the private sector and addressing fragmentation of financing arrangements for different types of services;
- promoting transparency and accountability in health financing systems;
- improving generation of information on the health financing system and its policy use.
Health Care Funding
In the United States, health care providers (such as doctors and hospitals) are paid by the following:
- Private insurance
- Government insurance programs
- People themselves (personal, out-of-pocket funds)
In addition, the government directly provides some health care in government hospitals and clinics staffed by government employees. Examples are the Veteran’s Health Administration and the Indian Health Service.
Private insurance can be purchased from for-profit and not-for-profit insurance companies. Although there are many health insurance companies in the United States, a given state tends to have a limited number. NURS 6210 – Healthcare Finance and Budgeting Research Paper
Most private insurance is purchased by corporations as a benefit for employees. Costs are typically shared by employers and employees. The amount of money employers spend on an employee’s health insurance is not considered taxable income for the employee. In effect, the government is subsidizing this insurance to some degree. People may also purchase private health insurance themselves.
The Patient Protection and Affordable Care Act (PPACA, or Affordable Care Act [ACA]), which became effective in 2014, is U.S. health care reform legislation intended, among other things, to increase the availability, affordability, and use of health insurance (see also the U.S. Department of Health & Human Services ACA official site). Many of the ACA’s provisions involve an expansion of the private insurance market. It creates incentives for employers to provide health insurance and requires that nearly all people not covered by their employer or a government insurance program (for example, Medicare or Medicaid) purchase private health insurance (individual mandate). NURS 6210 – Healthcare Finance and Budgeting Research Paper
The ACA requires creation of health insurance exchanges, which are government-regulated, standardized health plans that are administered and sold by private insurance companies. Exchanges may be established within each state, or states may join together to run multistate exchanges. The federal government also may establish exchanges in states that do not do so themselves. There are separate exchanges for individuals and small businesses. The ACA requires that private insurance plans do the following:
- Put no annual or lifetime limits on coverage
- Have no exclusions for preexisting conditions (guaranteed issue)
- Allow children to remain on their parent’s health insurance up to age 26
- Provide limited variations in price (premiums can vary based only on age, geographic area, tobacco use, and number of family members)
- Allow for limited out-of-pocket expenses (currently $5950 for individuals and $11,900 for families)
- Not discontinue coverage (called rescission) except in cases of fraud
- Cover certain defined preventive services with no cost-sharing
- Spend at least 80% to 85% of premiums on medical costs
Recent and impending changes that will affect the ACA include:
- Stopping government funding of premium tax credits and cost-sharing reductions
- Expansion of association health plans (AHPs) and health reimbursement arrangements (HRAs), which are less expensive and less comprehensive than ACA marketplace plans
- Reduced regulatory burden imposed by the Notice of Benefit and Payment Parameters (NBPP), which will give states more leeway in defining essential health benefits NURS 6210 – Healthcare Finance and Budgeting Research Paper
- Repeal of the individual mandate
These changes are intended to reduce government and individual spending on health plans, but some authors warn that overall spending on health care may not be reduced and that there may be increased numbers of uninsured or inadequately insured people.
Alternative financing methods
User fees – direct charges to users for health services – have been implemented in many countries for a number of years now. Proponents of user fees suggest that fees could make the health system more efficient by guiding demand to cost-effective health care at the appropriate levels. Further, they could improve equity if revenues generated from fees are allocated to addressing the health needs of the poor. Others, though, argue that this reallocation is not guaranteed, and in the absence of exemption policies or other forms of financial protection, user fees actually price the poor out of the market for health care. The discussion paper below reviews the African experience with user fees. NURS 6210 – Healthcare Finance and Budgeting Research Paper
Innovative financing methods
In addition to the traditional methods of financial risk protection, there are a variety of other financing mechanisms with which countries are experimenting. The need for these additional sources of funds is driven by rising demand for health care services, escalating costs of care, rapid increases in technology, and a limit on how much can be raised through a traditional tax base.
Some of these methods are nationally based, such as:
- hypothetical taxes, e.g. ‘sin taxes’ for tobacco and alcohol
- national and state lotteries dedicated to health
- public-private partnerships between governments and the private sector to co-fund health care.
Other mechanisms are internationally focused, such as:
- the (recently proposed) International Finance Facility (IFF). This would front-load development assistance by selling government bonds secured by future aids flows
- debt for health swaps, in which both public and private financial institutions can be involved in the conversion of the debt
- the use of public-private partnerships to develop new products using capital markets. NURS 6210 – Healthcare Finance and Budgeting Research Paper
It is clear that with the rising costs of health care, countries will begin to explore more of these ideas to augment traditional sources of health financing.
Budgeting in health care systems
During the last decade there has been a recognition that all health care systems, public and private, are characterized by perverse incentives (especially moral hazard and third party pays) which generate inefficiency in the use of scarce economic resources. Inefficiency is unethical: doctors who use resources inefficiently deprive potential patients of care from which they could benefit. To eradicate unethical and inefficient practices two economic rules have to be followed: (i) no service should be provided if its total costs exceed its total benefits; (ii) if total benefits exceed total costs, the level of provision should be at that level at which the additional input cost (marginal cost) is equal to the additional benefits (marginal benefit). This efficiency test can be applied to health care systems, their component parts and the individuals (especially doctors) who control resource allocation within them. Unfortunately, all health care systems neither generate this relevant decision making data nor are they flexible enough to use it to affect health care decisions. There are two basic varieties of budgeting system: resource based and production targeted. The former generates obsession with cash limits and too little regard of the benefits, particularly at the margins, of alternative patterns of resource allocation. NURS 6210 – Healthcare Finance and Budgeting Research Paper The latter generates undue attention to the production of processes of care and scant regard for costs, especially at the margins. Consequently, one set of budget rules may lead to cost containment regardless of benefits and the other set of budget rules may lead to output maximization regardless of costs. To close this circle of inefficiency it is necessary to evolve market-like structures. To do this a system of client group (defined broadly across all existing activities public and private) budgets is advocated with an identification of the budget holder who has the capacity to shift resources and seek out cost effective policies. Negotiated output targets with defined budgets and incentives for decision makers to economize in their use of resources are being incorporated into experiments in the health care systems of Western Europe and the United States. Undue optimism about the success of these experiments must be avoided because these problems have existed in the West and in the Soviet bloc for decades and efficient solutions are noticeable by their absence.
Budgeting is important in any organization. In healthcare, department level budgeting is often managed by healthcare professionals and managers with little or no financial background. Managers may be promoted from the front lines as they have demonstrated a strong understanding of department function, or are hired with significant work-related experience and/ or possess advanced education. Unfortunately, many healthcare managers that are placed in entry level management positions lack either formal or informal training for financial management. These managers generally possess a strong understanding of how to deliver quality patient care services but are not adequately prepared to operate the department respecting a business model. A basic foundation in financial management is critical to ensure that department management goals are aligned with the strategic vision of the organization and operate with projected budgetary targets. NURS 6210 – Healthcare Finance and Budgeting Research Paper
Managers must possess or obtain a basic understanding of financial principles such as: financial statements, operating budgets, capital budgets, and how to perform a basic analysis of this information to make sound business decisions. Budgeting requires careful consideration and effective planning. Budgeting is considered an essential component of management to ensure that the department operates effectively and ensure the organization remains solvent.
In most developed countries, two factors are certain: first, health care costs are consistently exceeding GDP growth year after year; and second, health care resources are increasingly scarce and competitive. Managers must understand that many factors that may impact or influence the operating budget and capital budget decisions. In the U.S., budgets available to various departments depend on many organizational factors which may include billing and coding practices, shareholder investment, potential to increase capital, potential for return on investment from equipment or services, percentage of private insured payers versus Medicaid or Medicare clients, impact of competition on the bottom line, availability of new or updated technology, and many other factors. The solvency of the organization can significantly impact budgets from year to year and even threaten the future of a department or service if it proves unprofitable or expendable. NURS 6210 – Healthcare Finance and Budgeting Research Paper
Managers must have some basic knowledge of where costs fit into the budget. They must understand the difference between an operating budget and a capital budget. Durham-Taylor and Pinczuk (2006) explain that an operating budget covers day-to-day operations and may include such things as wages, office or medical supplies, equipment rental, and education,etc. Gruen, and Howarth (2005) explain that staff costs is the largest “cost item” in a healthcare operating budget and managers must understand how hiring decisions can affect the budget. Although staffing is generally a ‘fixed’ cost and is relatively static, managers must understand the impact of payout of overtime hours, overstaffing, and agency hiring to replace staff, on their overall operating budget. After salaries and benefits, the second largest cost for many units relates to supplies. Understanding how to cost audit and analyze budgetary items can have a significant positive impact on the department goal of staying within an operating budget.
This differs from capital budgeting that covers fixed assets such as land, buildings, and long-life capital projects financed over two or more years. MacLean (2003) explains that capital budgeting is based on the overall operating plan and is part of the strategic vision for the organization. Bett (2010) states “capital budgeting refers to the analysis of investment alternatives involving cash flows received or paid over a certain period of time” (para 2). Capital projects are often funded from a combination of internal savings and/or through external sources of funding via financing or grants. Understanding how a capital budget for fixed assets differs from an operating budget for day-to-day operations is critical to understand how and why management, executives, trustees, accountants and other key stakeholders make the decisions that they do. NURS 6210 – Healthcare Finance and Budgeting Research Paper
Bull (1993) explains that capital budget and planning has become increasingly important due to competition and a focus on long-term stability of the organization. Twenty years on, this is critically important, particularly in healthcare organizations where resources are increasingly scarce. Gairns (2006) cites Dufresne stating “capital planning is a way of defining how you’re going to spend money to get the most impact for your organization and its mission… Capital budgeting is knowing what you’re going to spend your money on in the next year (or two or three)” (para 2). Boundless.com (n.d.) explains that capital budget planning is essential to determine if investments and expenditures are worth pursuing. An investment appraisal helps decision-makers discern between proposed projects and prioritize its investment decisions. Ongoing care and maintenance of equipment and human resource costs must also be factored into capital budget proposals and decisions. NURS 6210 – Healthcare Finance and Budgeting Research Paper
Healthcare Budget Variance
Budgeting is an important activity within every healthcare organization. The particular challenges encountered, however, can vary depending on the type of organization. A state or federally funded organization, for example, will likely have a budget that is allocated to it, and it needs to follow specific guidelines on how the money can be used. A for-profit organization, by contrast, will typically have more influence and flexibility in setting up its budget and making choices on matters such as how much to spend on marketing, patient care, or incentives for employees.
In addition to preparing budgets, as a healthcare administrator, you must also be able to evaluate whether or not you have achieved your budget using variance analysis. This is important because variance analysis measures the differences between the budget and actual results, and provides administrators with a starting point for correcting financial performance. For this Assignment, you conduct a variance analysis for a healthcare organization. NURS 6210 – Healthcare Finance and Budgeting Research Paper
To prepare for this Assignment, review the Week 7 Assignment document provided to you by the Instructor. Examine the budgeted and actual revenues and expenses for a hospital. Reflect on concepts of budgeting and variance. Refer to Chapter 10 and Chapter 11 of Financial Management of Health Care Organizations: An Introduction to Fundamental Tools, Concepts and Applications
Using an Excel spreadsheet to show your calculations, address the following:
•Determine the total variance between the planned and actual budgets for Surgical Volume. Is the variance favorable or unfavorable? NURS 6210 – Healthcare Finance and Budgeting Research Paper
•Determine the total variance between the planned and actual budgets for Patient Days. Is the variance favorable or unfavorable?
•Determine the service-related variance for Surgical Volume.
•Determine the service-related variance for Patient Days.
•Prepare a flexible budget estimate. Present side-by-side budget, flexible budget estimate, and the actual Surgical Revenues.
•Prepare a flexible budget estimate. Present a side-by-side budget, flexible budget estimate, and the actual Patient Expenses.
•Determine what variances are due to change in volume and what variances are due to change in rates.
steps for creating a health care budget
It may seem odd at first to come up with a budget for something so important, and sometimes unpredictable, as your health.
But health care costs can stress families, impacting their health and wallets. According to the Centers for Disease Control and Prevention, 1 in 10 Americans reported putting off medical care in 2015 due to cost. NURS 6210 – Healthcare Finance and Budgeting Research Paper
So coming up with a plan to manage health care spending makes good sense—no pun intended.
It doesn’t have to be complicated, either. It really just takes five steps to create a plan, and you can use several online tools that can make the task even easier.
Let’s get started.
Step 1: Add up your routine health costs
Do you have regular, monthly prescriptions? Do you expect to take sick kids to the doctor a few times a year?
Chances are you can count on a number of regular medical bills every year. If you’ve been a health plan member for at least a year, you can check your explanation of benefits (EOB) statements for the past 12 months to see what you spent on doctor visits and procedures last year. Just sign in to your Member dashboard and select EOB statements. NURS 6210 – Healthcare Finance and Budgeting Research Paper
Also, call your pharmacy and get the amount you spent on prescriptions last year to get an idea of what next year will look like.
Step 2: Consider any new health costs
What are your health-related plans this year? Budgeting for anticipated health costs—like starting a family or repairing that old knee injury, for example—can help you prepare now and even save money when the time comes.
Sign in to your Member dashboard and select Treatment Cost Estimator to get a sense of how much a procedure like surgery or childbirth will cost. You need to sign in so the cost estimator can take into account your health benefits and provide a more accurate estimate. NURS 6210 – Healthcare Finance and Budgeting Research Paper
You can also use Treatment Cost Estimator to compare charges across hospitals and clinics. Perhaps scheduling a surgery at an ambulatory surgical clinic would cost less than scheduling it at a hospital, for example.
Step 3: Set aside money for unexpected costs
Stuff happens. It’s hard to predict if your child will break an arm or your summer vacation will include a side trip to urgent care.
But you can plan on having something unplanned happen during the course of the year. Take a look at your overall budget and put some money aside for those health care costs you never expected.
Step 4: Take advantage of money-saving tools
At this point, you should have a good estimate of how much you’re likely to spend in the coming year. Now it’s time for a plan to start regularly putting that money aside. NURS 6210 – Healthcare Finance and Budgeting Research Paper
If you’re on a high-deductible health plan (according to the IRS, this is a plan with at least a $1,640 deductible for an individual or at least a $2,600 deductible for a family), you’re able to open a health savings account (HSA).
HSAs have tons of benefits. The first is that you don’t have to pay any taxes on money you put in your HSA. This lowers the income that’s taxed by the government.
You can open an HSA yourself and put money into it. Or if your employer allows the option, you can deposit money into an HSA directly from your paycheck.
Many people like HSAs because all of the money you put in it rolls over from year to year, and you can hold onto it even if you change employers or health plans. HSA funds can be used for anything when you turn 65. NURS 6210 – Healthcare Finance and Budgeting Research Paper
Many HSA accounts, such as those through Health Equity®, come with a debit card that you can easily use to pay for out-of-pocket medical expenses.
Health Equity is our preferred partner for HSA accounts. Through our tie to Health Equity, you can have your claims information automatically sent to Health Equity to let you manage your account 24/7.
You also can set aside money using what’s called a flexible spending account (FSA). FSAs provide similar income tax benefits to HSAs.
Unlike HSAs, FSAs are only available through an employer and can’t go with you if you change jobs. Also, FSAs are a “use it or lose it” type of account because there is a limit to how much money you can roll over from year to year. NURS 6210 – Healthcare Finance and Budgeting Research Paper
If your employer offers an FSA, you can open one regardless of the type of health plan you have.
There’s a lot more to learn about HSAs and FSAs and how they can help you save money. We suggest you start here.
Step 5: Get to know your health plan
Okay, you have a health care budget now. So why the fifth step?
Because we know health care costs are a big concern. And, one of the best ways to control your health care spending is to get to know and understand how your health plan works.
There are three main parts of your health plan to pay attention to: deductible, network and copay/coinsurance.
- Deductible: In short, your deductible is the amount of money you must pay out of pocket before your benefits kick in. Exceptions are preventive care—think well-child visits and your annual physical—that’s covered 100% when you use an in-network provider (more on that below). But most other type of visits will be your responsibility until you meet your deductible. NURS 6210 – Healthcare Finance and Budgeting Research Paper
- Network: Your network consists of the doctors, pharmacies, clinics and hospitals we’ve worked with on your behalf to negotiate discounts on services. When you stay in-network you benefit from those discounts, and once you meet your deductible, your plan pays more of the bill.
- Copay or coinsurance: Your copay or coinsurance (some plans have both, others just have coinsurance) is the amount you must pay for doctor visits and medical procedures—whether you’ve met the deductible or not. There’s no copay or coinsurance for office visits that are covered by your preventive health benefits—again, those are covered 100% when you stay in-network.
Today healthcare industry faces tough financial challenges in integrating planning across the organization. With fluctuations in patient volumes, complex reimbursement processes, and increasing government regulation and costs, it can be difficult to retain high quality patient-care. The ability for finance to plan accurately and quickly is essential. The usage of spreadsheet based solutions in an industry where key elements of your business can change rapidly is ineffective. This is how Kepion solutions can provide answers. NURS 6210 – Healthcare Finance and Budgeting Research Paper
- Use driver-based, integrated planning and reporting for revenue, expenses, and cash flow.
- Track KPIs in order to make the effective top-down & bottom-up decisions.
- Monitor all levels of performance, consolidate data automatically and accurately.
- Continual re-forecast throughout the year and what-if scenario analysis.
- Improve your management of staff level, payer percentages and inventory.
- Track all revenue and expense sources to see your bottom line in real-time.
Pete Pyhrr’s concept of zero-based budgeting was adopted by his company, Texas Instruments, at the time of its inception in the early 1970s, and soon after by Jimmy Carter while he was governor of Georgia and then president. The budgeting technique has recently been revived by private equity firm 3G Capital Partners as part of the firm’s strategy to slash costs, according to the Wall Street Journal.
Mr. Pyhrr developed zero-based budgeting between 1969 and 1971 when he was working as a controller for Dallas-based Texas Instruments. In a 1977 interview with People magazine, Mr. Pyhrr said, “We discovered to our horror that many programs [at Texas Instruments] were not analyzed every year, and that many were just funded as a matter of course — without a conscious decisions being made by anybody.” NURS 6210 – Healthcare Finance and Budgeting Research Paper
In zero-based budgeting, managers plan a department or company’s annual budget as if starting from zero, as opposed to adjusting the budget according to the previous year’s spending. Under this technique, every expense must be newly justified every year, not just new ones, and the goal is to bring it lower than the year before.
Zero-based budgeting requires managers to reduce programs or activities into discrete “decision packages” with all associated costs added in to determine how funds are used. Essentially, the system forces managers to justify the costs and assess the benefits of the budget every year to ensure funds are being allocated to the most profitable projects, according to WSJ.
Mr. Pyhrr, the zero-based pioneer, called it a “tremendous” tool, “especially in times of economic problems, when you need to make reductions, or when you have significant and rapid technological change,” according to the report. Those two characteristics will ring a bell for any healthcare professional today.
Could healthcare organizations employ zero-based budgeting to ensure spending is going in the right direction and effectively control costs?
Hospitals and health systems must respond to numerous external challenges that affect their finances, such as public and private payers’ efforts to reduce costs, fluctuating inpatient volumes, the increased adoption of bundled payments and other alternative payment systems, as well as increased co-pays and deductibles that incentivize a more conservative outlook among patients on healthcare utilization. NURS 6210 – Healthcare Finance and Budgeting Research Paper
According to the Bain industry brief “Radical redesign through zero-based budgeting,” healthcare organizations can benefit greatly from taking a comprehensive approach to lowering cost structures through zero-based budgeting.
“In our experience, zero-based budgeting provides a practical way for companies to radically redesign their cost structures, cutting as much as 25 percent of spending on overhead and support functions, while boosting efficiency and competitiveness,” according to the report.
In contrast with targeted cost cutting, zero-based budgeting asks what activities and resources need to be kept under current and future market conditions, whereas the former seeks out what needs to be trimmed. In this sense, zero-based budgeting strengthens capabilities that lead to competitive differentiation, while simultaneously downgrading other areas that over-deliver nonessential functions, according to the report.
Additionally, zero-based budgeting is executed in one comprehensive effort, as opposed to successive periods of targeted cost-cutting, which can have profoundly negative impacts on employee morale. The comprehensive nature of this approach also ensures executives they are not cutting costs in one area of the organization only to later discover the cause of the issue was rooted somewhere else. NURS 6210 – Healthcare Finance and Budgeting Research Paper
While zero-based budgeting may help morale in the long-run, it has also been characterized as cut-throat and can leave employees blindsided when their jobs are called into question or eliminated. For instance, 3G — which implements zero-based budgeting — operates in such a unique business sense that analysts now refer to it simply as “the 3G way.” The company is fond of strict, old-school budgeting that falls under the advice of “treat the company’s money as you would your own.” NURS 6210 – Healthcare Finance and Budgeting Research Pape
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