SEMINAR

Hospital Administration

Topic
Budget Preparation, Specific Elements of Budget including Staff Salary, Supply Costs-
Projected Replacement of Equipment Energy Expenditure Contingency Funds

Praisy AB
04-04-2019
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Table of Content

1.Introduction ......................................................................................................................... 2
2. Budget ................................................................................................................................. 3
2.1 Definition of Budget ..................................................................................................... 3
2.2 History of Budget in India ........................................................................................... 3
2.3 Need for Budget ............................................................................................................ 3
2.4 objectives of Budget ..................................................................................................... 4
2.5 Approaches to Budgeting in Health Care .................................................................. 4
2.6 Advantages of Budgeting ............................................................................................. 5
2.7 Principles involved in Budgeting ................................................................................ 5
2.8 Ten Important Steps Involved in the Hospital Budget Process ............................... 6
2.9 Preparation of Budget.................................................................................................. 8
2.10 Simple Steps in the Process of Making a Hospital Budget ................................... 10
2.11 Types of Budget for Hospitals ................................................................................. 11
2.11 Instructions while Estimating Budget .................................................................... 12
3. Medical Equipment Budgeting ....................................................................................... 12
Budget development.............................................................................................................. 12
Cost estimate ........................................................................................................................ 13
Managing change................................................................................................................. 16
Managing to the budget......................................................................................................... 17
Installation and closeout........................................................................................................ 18
Best possible outcome............................................................................................................ 18
4. Barriers of Hospital Budgeting System .......................................................................... 19
5. Conclusion......................................................................................................................... 22
6. References ......................................................................................................................... 23
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1.Introduction

The word “hospital” is originated from Latin “hospes”. The term has been used to refer
to an institution for the aged, sick, and a place of rest. (Kumar, 2000). Administration
may be defined as a co-operative group effort to accomplish common goals. It plays
an important role in mobilizing and proper utilization of material and human resources
to achieve the desired ends. (SP, 2006).

Developing a financial budget is a process that should use team work to plan and
implement if it is to be effective. By using all department managers in the planning
process of the budget, the administrator is able to develop effective strategies because
all departments are invested in the goal. This eliminates many problems associated
with the budget and identifies areas that need improvement (Buerger, 1991). Financial
budgeting gives the number values to all the activities of a unit. i.e., health care system. Making
a hospital budget is only second to medical delivery systems in for a hospital. In fact, if a
budget is not properly written, the hospital may be unable to deliver medical services at all.
(Goldfield, 2019).
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2. Budget

The term ‘Budget’ is derived from French word “Bougette”, which means leather
pouch or leather bag. It is the anticipated receipts and available resources of an
organization during the given year.

2.1 Definition of Budget

“A statement of future plans described in quantitative and monetary terms, for a

specific period of time, which is usually one year in case of financial budgets”
(Finance, 2017).

2.2 History of Budget in India

‘Budget system was introduced in India on 7th April, 1860. James Wilson, the first
Indian Finance Member delivered the budget speech expounding the Indian financial
policy as an integral whole for the first time. In post India, the first budget was
presented on November 26, 1947 by India’s First Finance Minister Sri R K
Shanmugham Chetty.

2.3 Need for Budget

 The development of a sound hospital. budget is fast becoming a matter of

paramount importance in hospital administration
 Need for proper budgeting arises to allocate scare resources to various
governmental activities.
 Has to be based on the long term strategy and focus on future
 All health professionals should have a sound knowledge of budgeting and
health care financing.
 Hospitals receives grants, donations or budgetary allocations
 Hospital raising funds through equity or debt
 This is to ensure that the unfunded health care needs are met through efficient
planning and utilization of the resources established
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2.4 objectives of Budget

 to provide written terms of the hospital

 to provide a basis for the evaluation of financial performance according to the
plans
 to provide a tool to control costs
 to create cost awareness hospital wide (Buerger, 1991)

2.5 Approaches to Budgeting in Health Care

1. Incremental Approach: - previous year’s expenditure is applied to the next

year with additional components. Only the increment over the previous year’s
budget id actually justified for the present duration.
Advantages- easy to prepare, less preparation time, lower preparation costs,
easy to understand and prevents conflicts.
Disadvantages- wasteful expenditures and priorities are not ascertained and
alternative better options are not considered.

2. Performance Budgeting: - presents the actual operations undertaken

department wise and evaluation of actual performance of the organization.
Periodic performance is prepared which compares the budgeted actual
performance with the aim to detect any deviations at the earliest possible.

3. Zero Based Budgeting(ZBB): - must review the existing and old programs,
especially which involve a high degree of discretionary costs. Justification that
the activity proposed is essential, cost effective is required. No activity or
action is financed simply because it was done in the past and entire program
must be justified each time a budget is being drawn up.
Advantages- based on cost benefit analysis’ strictly based on priority of
program, and identifies areas of wasteful expenditure.
Limitations- planning requires greatest effort and time and less applicable for
those which do not have a direct cost-benefit relationship.
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2.6 Advantages of Budgeting

o Effective means of communicating future organizational plans to all people, in

monetary and financial terms
o Pre-decided and approved budget serves as an effective benchmark for
monitoring ongoing operations
o Reduces wastage and losses by identifying wasteful expenditures well in
advance and rectifying them
o Budgets though participation, encourage and develop team spirit and collective
responsibility towards excellence
o Basis for assessing performance of senior managers in any organizations

2.7 Principles involved in Budgeting

 A mission statement with specific objective and goals for the health care
system under consideration. The goals must be in measurable units and should
be simple, direct and attainable
 A strategic plan should be the basis of the budget
 A plan to raise resources or modify specific goals if the current financial
resources or allocations are not sufficient
 This plan should relate to achieving the goals. For example, setting up one
more cardiac OT to meet increasing incidents of CABG surgeries
 The budget should measure the current financial performance
 Internalize the budgeting process. Financial budgeting is only an aggregation
of department wise budget prepared by each department within the health care
system
 The financial budget should be based on the operational numbers of each
department
 It should be linked to operational budget which should be derived from the
marketing budget
 Actual financial results must be compared with the budgeted activities
 Variance analysis must be made
 Mid-course correction must be initiated
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 Units must operate within the budget

 Policies for all the activities must be established
 All the units of the health care system should comply with the policies and
procedures
 Each department or unit must evaluate the financial consequences of any new
activity is started

2.8 Ten Important Steps Involved in the Hospital Budget Process

The budget process needs to be very well-understood by the hospital administrator,

even though a lot of it will fall in the domain of the finance officer. However, all
departments must get actively involved in the preparation of the budget.

1. The first step in the budget process is for the hospital administrator to prepare
assumptions, in statistical terms, about the kinds of services (outputs) the hospital
expects to provide (produce), i.e. prepare a quantitative expression of the plans of the
hospital, e.g. patient days of service, by specialties, number of procedures by
departments like pathology, radiology, physiotherapy, etc. number of outpatient visits,
and so on. The purpose of budget assumptions is to share as much information as
possible with all departments. The entire hospital will then be planning on the same
track. Assumptions can include projected patient statistics, additional services,
proposed salary revisions, economic factors, expense policies, etc.

2. The second step is for the hospital administrator to prepare the economic forecasts
in respect of new developments, or other factors, that can affect the hospital’s income
or expenditure during the budget period, such as new services by neighbouring
hospitals, specialists and super specialists likely to join or leave the hospitals, inflation
factors on materials and supplies, and any new government regulations.

3. The third step is for the hospital administration to outline the budget goals and
policies as per the directives of the governing board or board of trustees and in
consultation with the finance officer, which will constitute a tentative outline of the
financial plan. These may include a financial strategy, targeted gain (or loss), and
similar factors that may have a bearing on hospital finances.
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4. The fourth step is for the Finance Officer to prepare a budget package incorporating
written instructions regarding the framework for the budgeting process, procedures to
be followed, accompanied by illustrative forms and calculations, also containing the
goals and policies, assumptions, schedules and past data applicable to the department.

He passes on the budget package to all department heads to enable them to prepare
preliminary draft of their budget. The budget package should be collectively explained
to the department heads in a specially convened meeting. The hospital administrator
and finance officer can take advantage of these meetings in instructing the department
heads in accounting techniques.

5. The fifth step is for each department head to analyse financial and statistical data
generated by his department as well as provided to him by the administration or finance
department, to critically assess the department’s operations and performance, and
develop indices for planning and control. He reviews the budget plan, develops
departmental goals and objectives, and prepares the departmental expense budget.

6. A budget hearing is organised by the Finance Officer at the departmental level where
the department head presents his or her draft budget. After a joint analysis and review
by the hospital administrator and the finance officer, a summary of the departmental
budget is prepared. In the sixth step, the summary of each department’s budget hearing
records the commitments and statements made between the administration and the
department head, and also includes observation of the Finance Officer.

7. The seventh step is for the Finance Officer to develop the department’s revenue
budget, summarise departmental expense budget, and forward the department’s budget
hearing summary to the concerned department head.

8. The eighth step is for the Finance Officer to prepare a preliminary operating revenue
budget for the whole hospital, by summarising and collating the individual
department’s budgets. Finance officer also prepares a cash budget at this stage. If the
expected revenue does not cover the budget expense, price increases may become
necessary. If price increases are not acceptable, the finance officer may propose areas,
functions or categories of budgeted expenses that can be cut. In addition to the
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departmental budgets, the finance officer will budget for other items that affect the
entire hospital such as depreciation, contributions to employee’s provident fund and
benefits, interest expense and other administrative expenses.

9. The ninth step is for the Finance Officer to summarise the total budget (including
capital budget and cash budget) into a proper budget format including statistical
summaries.

10. In the final step, the budget is presented by the Finance Officer to the governing
board or board of trustees or to the finance committee for their approval. The budget
is then adopted by the board or the committee with revisions if necessary. It is later
communicated to all department heads and other concerned persons. The time taken
to prepare a hospital budget can vary from some weeks to some months.

Therefore, it is prudent to set up a budget timetable listing the time schedule of each
part of the budget process, persons responsible for each part, and providing guidelines
and explanation for the purpose of each part. The budget timetable then becomes a
plan for the completion of the budget in time and to set deadlines (Choudhary)

2.9 Preparation of Budget

1. Statistical Budget- the first step in preparing an operating budget is to provide the
statistical budget. The objective is to provide a measure of activity in each
department for the upcoming budget period. Diagnostic departments measure how
many procedures will be provided for the upcoming years, while nursing estimates
the number of patient days anticipated. Knowledge of the past performance of a
facility is useful in the forecasting. The last five years is an appropriate amount to
plan for history to keep on file. This enables management to plan for future
operations. Comparisons of past performance with current operations may indicate
favourable and unfavourable trends. For example, it is very helpful to review the
past history of full time equivalents(FTEs) for each department in a hospital. This
enables management to set goals to lower overtime, sick time, etc. This enables
management to maintain FTEs to within the budget.
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Departments should be requested to estimate the volume of their activity, but the
financial managers should have the final control. This is important because
department managers may tend to overstate volume and this could be devastating
when the budget is not met. However, the departments should be involved because
top management tends to be too conservative. Each department have their own set
of variables to examine prior to forecasting. Key variables to examine are patient
days and outpatient visits. Managers should look at the census per month over the
past few years to project the numbers of patient’s days expected in the future. Equal
visits over twelve months cannot be assumed. Seasonal, weekly, and daily patterns
should be reviewed. For example, Christians is usually slow time of the year, so
you would probably budget fewer patient days in December than in June. Other
areas of concern may involve a physician planning to retire, which would affect
admissions and patient volume.
2. Expense Budget- this is the second step in preparing an operating budget. After
the statistical budget is prepared, each department can then prepare their expense
budget. The expense budget is the amount of money each department expects to
pay out. These expenses include salaries, supplies, and other various expenses.
These are the dollars the departments must stay within.
 Salaries- it is a good idea to give each department manager a worksheet
with each of their employees listed with their anniversary date, present
hourly pay, and number of hours scheduled to work. The department
manager can then make corrections as necessary. They can also look at a
pay scale and decide what increases the employee will get at their
anniversary date. This is also a good time to budget for vacancies and
make all corrections
 Supplies- input from the department heads are necessary if there will be
price increases from the vendors and what percentage the prices will
increase. If expenses go up, the revenue budget should increase
proportionately.
3. Revenue Budget- the revenue budget is a forecast of the income a hospital expects
to receive for the budget period. The not for profit nature of the health care industry
demands that revenue be related to budgeted expenses.
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The preparation of the revenue budget entails the projection of patient service
revenues, other operating revenues and non-operating revenues. Total patient
service revenue is calculated by multiplying the expected service volume in each
revenue centre by the charge per unit of service.
4. Operating Budget- the operating budget is composed of the expense budget and
revenue budget. It lists, for the upcoming fiscal years, anticipated income by
source, and anticipated expenses by natural classification, such as salaries,
supplies, and utilities. Administration should always pursue a larger revenue
budget than expense budget, therefore projecting a profit on the bottom line. The
profit is used to finance the capital budget.
5. Capital Budget- the capital budget summarizes future plans for acquisitions of
plant facilities and equipment. A hospital must determine how much of its capital
plan to devote to renovations and expansion projects. Management also has to
examine the hospital’s operating performance and current financial status to see
whether future financing is needed (Buerger, 1991).

2.10 Simple Steps in the Process of Making a Hospital Budget

Step 1-Determine hospital revenue. Revenue can come from patient payments, tax
dollars, donations, insurance credits. Be sure to deduct a percentage of the patient
bills that will remain uncollected, the charity work expected by the hospital and the
pro bono work it does.

Step 2-Figure out expenses. Start with the physical facility. How much does it cost
to keep up the building or buildings. What is the maintenance cost of each
department, engineering, air-conditioning, heat, water, other utilities? Know what
equipment costs, how much must be replaced per patient day, and if any can be
recycled. Include the non-medical cost of each bed in the hospital. Include
advertising.

Step 3-Know the cost of personnel, all employees and ancillary staff, including
consultants, outsourced contracts, perhaps laundry or nurse staffing services. For all
employees of the hospital, from janitorial to hospitalists, figure the fringe benefits
the hospital must pay for each.
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Step 4-Add all medical equipment costs, ongoing and expected expansion or
replacement of new diagnostic equipment.

Step 5-Know the medical costs of each bed. How many staff hours are spent on each
bed, occupied or not? Use this figure as an average to get a cost per patient year.
Add to that the non-medical costs per bed. Include every possible cost that keeps
that bed in the hospital. Don't forget replacement costs per annum for any and all
patient needs.

Step 6-What about expansion? Are you planning a new wing, or the renovation of
an old one? Are you expanding into a new specialty that could bring in extra
revenue? Estimate that revenue when planning your budget.

Step 7-Don't forget parking garages, lots, landscaping, grounds keeping or window
washing.

Step 8-Include all insurance for the facility and personnel.

Step 9-Write in an emergency expense fund. Disasters occur and the hospital must
be prepared for them when they arrive.

Step 10-To do the budget, use a spreadsheet. Enter all categories and the cost of
each. Add all taxable items and the percentage of each. You probably get reduced
rates on utilities, or least a break on the taxes on them. Enter all formulas for those.
It is possible your state or your hospital system has one already available. If the
spreadsheet exists, use it or modify it for your own needs. If it does not, make one,
so making next year's budget is simply a matter of entering numbers and letting the
computer do the work (Goldfield, 2019)

2.11 Types of Budget for Hospitals

1. Capital Budget-
 Fund needed for the capital items for the growth
 New supplies and facilities and, the replacement
 The decision on capital budgeting is primarily based on needs of patients
and existing alternatives, effects of additional equipment on income and
expenditure, and availability of funds
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2. Cash Budget- cash budgets are planned to make adequate funds available as
needed and to use any extra funds profitably. The ensure that the agency has
enough, but not too much, cash on hand during the budgetary period.
3. Operating Budget Expenditure- includes salary and wages, materials and
supplies, utilities, and maintenance

2.11 Instructions while Estimating Budget

 Clear understanding of the hospitals financial and service goals

 A hospital organization with clearly defined responsibility for each
department
 A system of accounting designed to provide a measure of performance.

3. Medical Equipment Budgeting

Key to the success of a health care construction project is a vetted and approved
medical equipment budget. This lays the foundation for the application of practices
that may not only save the facility money on medical equipment, but on the entire
project cost.

This requires careful consideration of a number of important variables such as the

sophistication of the equipment being specified, the accuracy of cost estimates, the
needs and desires of the various stakeholders and the frequency of change orders, to
name a few. Successful professionals will take a formal approach to ensuring that these
and other concerns are properly addressed.

Budget development
Historically, medical equipment budgets for health care construction projects were
determined as a percentage of projected construction cost. The industry now
recognizes that two hospitals with the same square footage can offer completely
different services, resulting in significant differences in the cost for owner-furnished
medical equipment. A more accurate method than basing a budget on square footage
is basing it on a space program. But, even then, the budget may vary significantly,
depending on a variety of factors.
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A fundamental concept in developing the medical equipment budget is the budget-

setter’s definition of medical equipment — not just categories of devices but whether
factors such as relocation costs, equipment upgrades, leases, transition rentals,
information technology (IT) integrations and ancillary expenses (i.e., electronic health
record interoperability) will be part of the medical equipment budget.

Additionally, the project delivery method (i.e., design-build, integrated project

delivery or design-bid-build) may impact the procurement process and the final cost
of medical equipment. On a design-build project, for instance, medical equipment that
typically is considered owner-furnished may be furnished by the contractor.

The construction schedule also can impact the cost of medical equipment. For
example, in renovation or expansion projects, phasing can impact the warehousing
requirements, equipment discounting and the practicality of relocating existing
equipment versus purchasing new equipment.

After all these issues are considered, the health care organization will determine
whether the budget should include additional costs such as tax, freight, inflation, group
purchasing organization (GPO) discounting, insurance for stored equipment,
warehousing costs, installation, transition planning and various contingencies.

Cost estimate
The cost estimate encompasses many of the same or similar parameters as the budget
as well as clinical input, design-driven decisions, supply chain considerations and
other factors. The best process to assemble this information is to gain input through a
series of meetings.

Pre-design visioning sessions. Before design meetings begin, the organization should
document the technology vision for the facility. It is important that all participants in
the design process (e.g., administrative personnel, clinical directors and physicians)
understand and support the organization’s vision. A large, urban teaching or research
facility might include cutting-edge medical equipment or specialized technology such
as positron emission tomography (PET), teaching surgical suites, inter-operative
surgical suites or research
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laboratories. In other circumstances, a critical access hospital’s market may not require
PET, but the organization may want to consider technologies such as telemedicine.

If an organization is considering implementing a Lean program, medical equipment

planning for the new facility can support that effort. Likewise, if an organization has
not already established medical equipment standards, a new project is an ideal
opportunity to start. These programs may allow the health care organization to realize
better pricing. Additionally, maintenance and staff training may be reduced.

The project team should begin by identifying the budget and cost-estimate decision-
makers and ask them to establish who is carrying what costs in their budgets. For
instance, picture archiving and communication system display monitors may be
carried in the IT cost estimate or in the medical equipment estimate. The team also
should meet with supply chain and purchasing early in the design process to
understand GPO contracts, standards, leased and no-charge items and discounting
expectations.

The team also should discuss who will be responsible for installing no-charge items
like glove boxes and sharps containers. Vendors can assume this role, but contractors
might be the better choice because they are involved in mock-ups and understand the
planning of the room and placement. Vendors inadvertently may place items in the
wrong position and cause reworking of walls.

Capital purchases already approved and capital budgets in the years leading up to
project completion should be considered during project design to help alleviate budget
shortfalls. Similarly, it is important to determine whether the project is relocating
equipment from another facility. The decision-makers should establish which
categories of equipment should be considered for relocation.

Clinical user meetings. Medical technology user involvement is essential to

developing a reliable cost estimate. The right clinicians and staff members should be
brought to the design and planning meetings. For example, a nurse might know which
features of an automated medication dispenser are needed but not know which
particular model is appropriate
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or how it is acquired. Thus, input from finance, IT and pharmacy are critical to
selection, procurement and implementation.

Clinical staff can help to identify project-specific factors such as marketing, clinical
applications, government regulations, test or procedure volumes, patient demographics
and staff preferences. Most importantly, the project team will be sure all equipment
and systems meet clinical needs and program criteria.

The planning and cost-estimating process is a precursor to the procurement process

and should result in clinical specifics. The more clinical specifics identified in the
meetings, the more accurate and manageable the cost estimate. For example, a cost
estimate for a 3-D ultrasound for fatal studies requiring five transducers that is based
on discussions with the clinical staff is more exact than simply estimating a diagnostic
ultrasound. Specifics also can help to identify items that are being added to the project
that were not part of the original scope. For instance, the reference to fatal studies
might be a red flag that the equipment is beyond the project parameters.

Providing specifics also can help to identify wish list items. However, restraint should
be exercised because a construction project sometimes may be viewed by staff as an
opportunity to get items they requested in previous capital budgets but were denied.
Wish-list items should be considered only after all the medical equipment needed to
meet clinical and program goals has been purchased.

Leadership meetings. In addition to clinical input, the team should meet with key
leadership to address possibilities of future change in procedures, volume, staff and
other variables. Then, medical equipment appropriate to those possibilities can be
planned.

Leadership also must understand the impact of timely design decision-making on the
overall project budget. Design and construction are based on exact details, and
placeholders for fixed equipment don’t provide the necessary level of detail. It is better
to design around a specific computed tomography (CT) system and, if necessary,
modify the design for an alternative system later.
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Managing change
Change orders and specification adjustments are among the key moving parts that
health facilities professionals must manage before, during and after a major design and
construction project. Medical equipment is easily among the most expensive variables
subject to these types of changes.

Reconcilable differences. At some point, a variance may exist between the initial
medical equipment budget and the medical equipment cost estimate developed during
planning. If the medical equipment cost estimate is less than the initial budget, the
project team should not look for ways to spend what may be perceived as extra money.
If the medical equipment cost estimate is more than the initial budget, the team should
look for ways to reduce the cost estimate. The approach will depend on the magnitude
of the variance. Adjustments could require a simple change in manufacturer or model
for a specific item or a significant change in the project scope.

Significant discrepancies between the estimate — based on what the users identify as
requirements for meeting clinical goals — and the budget may signal a problem.
Operational requirements may have changed and the original estimate may have been
based on incorrect or incomplete information. Or advanced technology may have
resulted in increased equipment costs, which could be offset by operational
efficiencies.

Whatever the case, the initial budget and the medical equipment cost estimate must be
reconciled before procurement begins. There only should be one set of numbers to
track during procurement.

Planning for reuse. The team shouldn’t automatically discard replaced medical
equipment. They should look into relocating existing medical equipment, with the
caveat that current equipment in good condition at present may be obsolete by the
move-in date. For example, a patient exam table that is no longer manufactured but is
in good condition is appropriate for relocation. However, an eight-year-old, 16-slice
CT scanner that is in good condition may no longer be appropriate for a hospital with
a growing emergency department.
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Managing to the budget

At the end of the design phase, a procurement schedule should be established based on
the construction schedule. Construction delays due to not having the equipment on-
site can cost more than the equipment itself. The medical equipment planner and the
contractor should coordinate to identify items that are considered critical-path
equipment. By definition, this is equipment that can derail a construction schedule if
it is not delivered to the job site when the contractor needs it.

Procurement policies and procedures. A successful procurement process that stays

within budget involves a collaborative effort, continuous review and reporting of
measurable results throughout the life of the project. The end result could mean having
money left over to address the wish list in part or in total.

A team and process should be established for clinical review and approval of all items
that are scheduled for purchase. This team might include one or two principals, such
as the chief operations officer and a department head, who were involved during the
design process and are aware of the organization’s ongoing objectives. They must be
informed, decisive and responsive to support the construction process.

Clinical input. Clinical review, acceptance and approval are critical before proceeding
with any purchase. Circumstances may have changed since clinical equipment first
was specified, and a new solution may be necessary. The project team should establish
a procedure for approving changes to the final equipment plan. The team must know
the variance between the cost estimate and the purchase price before the purchase order
is issued.

Settling accounts. If the team has spent less than expected, they must be careful not
to spend the savings before all accounts are settled. For every purchase order that is
under budget there probably will be one that is over budget. A budget status report,
comparing the impact of purchases to the cost estimate and its relationship to the
budget should be issued at least monthly by both department and overall project. This
document should be required reading for key project stakeholders.
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Installation and closeout

Careful planning and management pay off when the project enters the installation and
closeout stage, because the project team has created the framework for handling
unforeseen situations.

For instance, it is still possible for a piece of medical equipment to arrive on-site and
not fit in the area for which it was planned or lack the utilities it requires. If casework
must be adjusted, or an outlet must be added for an under counter refrigerator, a change
order or delay may occur. Both may impact the project budget, if not the equipment
budget. Fortunately, many of the causes of change orders in the past now can be
identified and avoided by using building information modelling.

Another issue during closeout and installation may be building codes requiring certain
equipment to be anchored to withstand an earthquake. The responsibility for
installation of the equipment may have been established as the vendor or contractor,
but the cost of the seismic tie-down kits themselves often come out of the equipment
budget.

Ideally, the clinical review, acceptance and approval team, working with the medical
equipment planning and procurement consultant and supply chain, will have
coordinated to review and approve purchase decisions throughout the procurement
process. This coordination will result in no procurement-related design changes and
associated change orders.

In addition, a team that has exercised restraint when quotes have come in under budget
may enable the organization to purchase equipment that had been deferred earlier in
the process or to replace equipment that had been planned for relocation, but is no
longer viable.

Best possible outcome

The medical equipment specification, procurement and installation process is fraught
with hazards for the project team that does not carefully consider all variables.

Managing change while considering the entire life of a medical equipment project will
yield the best possible outcome (Spivey, 2015).
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4. Barriers of Hospital Budgeting System

We have identified how hospitals’ budgeting systems have erected three distinct
barriers to the adoption of technology. These barriers, however, can be overcome by
changing how hospitals acquire new technology and by providing incentives to units
to use digital innovations to provide more effective and efficient care.
Barrier 1: Unaligned budgeting units. Hospitals are typically organized by clinical
departments (e.g., surgery, medicine, oncology), care areas (e.g., operating rooms,
recovery floors, emergency department), and ancillary departments (e.g., pharmacy,
radiology, pathology). Each of these departments has its own cost budget for which it
is held accountable. A hospital organized into these different unconnected units finds
it difficult to adopt innovations that reduce costs across a patient’s complete cycle of
care.
Consider, for example, a surgical patient who starts in the pre-operative area, then
moves to the operating room, the post-anesthesia care unit, and the inpatient floor, with
occasional side trips for imaging, testing, and physical therapy. Each of these units
acquires its own resources within constraints authorized by its departmental budget.
Any unit that contemplates acquiring a new technology that would lower the total cost
of the patient’s care in the hospital must pay the full price for that technology from its
departmental budget or persuade others to co-invest with it, which is not an easy task.
Decentralized departmental budgets, therefore, lead to considerable under-investment
in innovative technologies that create benefits across the entire cycle of care.
A central innovation budget would help to alleviate this severe sub-optimization
problem. The innovation budget would be used to acquire technology solutions whose
benefits get realized in multiple organizational units. Once acquired, the cost of the
solution could be attributed, in approximate proportion to its benefits, to the budgets
of each organizational unit. The AHA study we mentioned above found that 29% of
hospitals had either built or intended to establish such a centralized innovation center.
A second, more radical solution is to create budgets and authority for a service line or
integrated practice unit (IPU) that manages a patient’s entire treatment for a high-
volume medical condition. The IPU is an essential component of the value-based care
model advocated by Harvard Business School’s Michael Porter.
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The IPU/service line should become accountable for the outcomes and total costs when
treating patients for that condition. While this might seem like a radical step for
hospitals, it is exactly the transition that occurred 100 years ago in the business world
in general when companies shifted from a departmental or functional structure to a
decentralized, business-unit structure that was more aligned with and accountable for
its products, services, and customers.
Not all hospital services would need to be incorporated into this more decentralized
structure. Heads of the various service lines/IPUs (e.g., for osteoarthritis of joints,
prostate cancer, and type 2 diabetes) could purchase services from other hospital
units — such as nursing care and imaging. Ideally, the hospital, through its internal
budgetary process or external payers, would compensate the IPU with bundled
payments that incent the IPU to deliver better outcomes at lower total costs by charging
one price for everything involved in, say, a knee replacement. A service line/IPU
structure, combined with bundled payment, has the incentive to spend more on a new
technology for one stage of the patient’s care cycle if the technology reduces total costs
across the entire care cycle.
Problem 2: Rigid annual operating budgets. Hospitals typically budget on an annual
basis. A department running over its budget during a fiscal year must reduce its
expenditures to meet the annual spending target regardless of the consequences in
future years. This annual process makes it problematic for the department to invest in
an innovative technology.
Consider the opportunity to raise spending in Year 1 by $100,000 to acquire
technology that would decrease spending each year thereafter by $100,000. Despite a
one-year payback period and a highly positive net present value (NPV) from this
investment, the department will often reject the attractive opportunity. First, the front-
end investment causes it to be over budget during the current year. Second, it will not
receive credit for the large benefits from savings in future years; so unless the payback
period from the new investment is realized in the current year, hospitals will reject the
proposal to buy the technology.
A centralized innovation budget would again somewhat offset this dysfunction by
shifting the spending from a department’s annual operating budget to a centralized
budget. This is an imperfect option though since it still does not give a department the
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incentive to achieve savings in future years. A more complete solution would involve
moving away from setting budgets based primarily on the actual spend in the prior
year. Instead, the finance office can allow the department to keep some of the savings
it created, in excess of the original acquisition cost, in future year budgets.
Problem 3: Separating operating- and capital-budget timelines and processes.
Typically, technology hardware and perpetual software licenses are purchased via
capital budgets. Acquiring software through an annual subscription payment (called
“software as a service,” or SaaS) must be funded from the operating budget.
For example, users formerly purchased Microsoft Office with an upfront license
payment for unlimited future use. Microsoft has recently shifted so users now make an
annual payment to use Office 365. Software licenses typically have high upfront costs
and low annual maintenance costs, while SaaS subscriptions have more level payments
over time. Whether a hospital with separate capital and operating budgets can fit the
licensed software solution into its capital budget or the subscription software into its
operating budget often determines which software solutions it decides to purchase. In
effect, the source of funding (capital or operating budget) rather than the functionality
and performance of alternative solutions determines the choice.
Hospitals should consider retaining a capital budget for physical infrastructure (though
a similar tension can exist with a buy-versus-lease decision for buildings and
equipment). But they should also allow the acquisition of software technology to be
determined by performance considerations and discounted-cash-flow calculations, not
whether the acquisition fits within predetermined capital and operating budgets.
Hospital budgeting systems have arguably performed well for decades. But they were
not designed for contemporary, digital technology solutions whose benefits cross
budgetary units and accrue over time. Traditional budgetary systems prevent clinical
and ancillary departments from being agile and responsive to innovative technologies
that deliver performance improvements for patient care.
Hospital leaders should consider establishing a central innovation budget and
decentralized service line/IPU structures. Such changes will make it easier for them to
acquire innovative technologies that will enhance patient outcomes and lower their
service lines’ costs (Derek A. Haas, 2018).
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5. Conclusion

The formulation of a realistic budget is a key to the efficient operation of any hospital.
Staff efficiency results in a level of high quality care, which in return results in
financial success for the hospital. Budget help accomplish this because the budget
process and financial statements identifies problems, define areas for improvement,
and concurrently allow administrators and supervisors to maintain and reinforce
excellence. Recognition and reinforcement should be given to department employees
for outstanding performance in providing quality service and in staying within their
forecasting budget. As department heads gain budgetary experience, they should be
motivated to make budgetary planning on ongoing function. This will reinforce the
importance of their role in providing timely information to the administration and their
subordinates.
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6. References

Buerger, J. L. (1991, march 21). Preparing a Budget for the Small Hospital. southern
illinois university carbondale, 22. Retrieved from opensiuc:
https://www.google.com/url?sa=t&sourse=web&rct=https://opensiuc.lib.sic.e
du/cqi/viewconetnt.cqi%3Farticle%3D1204

Choudhary, R. (n.d.). share your essays. Retrieved from share your essays web site:
http://www.shareyouressays.com/essays/10-important-steps-involved-in-the-
hospital-budget-process/116158

Derek A. Haas, M. S. (2018, march 29). Hospital Budget Systems are Holding Back
Innovation. Harvard Bussiness Review .

Finance, M. o. (2017). union budget. Retrieved from union budget web site:
http://unionbudget.nic.in/

Goldfield, J. (2019). PoketSense. Retrieved from PoketSense Web Site:

https://poketsense.com/make-hospital-budget-4471831.html

Kumar, A. (2000). Encyclopedia of Hospital Administration. Bombay: Shailesh

publishers.

SP, N. (2006). Public Administration: Concepts and Theories. New Delhi: New Age
International Publishers.

Spivey, T. E. (2015, January 7). Medical Equipment Budgeting: Controlling Medical

Equipment Spending for the Life of a Project. Health facilities management.
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