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Introduction to Healthcare Financial Management
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Week 7 Overview
Eldenburg, L.G., Krishnan, H.A., & Krishnan, R. (2017). Management Accounting and
Control in the Hospital Industry: A Review. Journal of Governmental & Nonprofit
Accounting, 6(1), 52-91.
5 Approaches to Effective Budgeting & Forecasting in Healthcare. (see pdf below)
11 Expert Hospital Budgeting Tips You Can’t Afford To Ignore.
New complexities require a new approach to budgeting and forecasting.
DO:
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Discussions
Assignment 3 — Operating Budget due NLT 11:59 by Day 7.
ADDITIONAL RESOURCES:
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Chapter 8 in Gapenski’s Healthcare Finance: An Introduction to Accounting and
Financial Management, Seventh Edition
Chapter 14 in Gapenski’s Understanding Healthcare Financial Management (Pink &
Song)
Discussion With a minimum of 250 words
Read “5 Approaches to Effective Budgeting & Forecasting in Healthcare” (see course content
section). After you read the article, discuss the most effective approaches to budgeting in the
healthcare industry. Which approach is the most effective and why? Answer the question
with research to support your statements in your original few paragraph discussion post.
Support your response with research in a few paragraphs and post your response to the
discussion forum. Once you have completed your post, review the link of at least two of your
peers.
ASSIGNMENT
UMGC Operating Budget
Imagine you are a clinical manager of UMGC Health Care primary care services and in
charge of developing a projected annual operating budget.
Your budgetary figures are as follows:
For fiscal year 2017 and 2018, your clinic received $3 million from the government as feefor-services reimbursements, as well as $1.1 million from private payers. The clinic has an
annual fund-raiser that historically brings in $180,000 and a grants department that brings in
$1.2 million annually.
Your chief financial officer (CFO) has provided you with the following annual expenses:
UMGC Health Care Annual Expenses:
Annual salaries – $1.5 million
Annual benefits – $ 240,000
Annual rent – $ 960,000
Annual insurance – $ 45,000
Annual depreciation – $ 780,000
Annual overhead – $ 180,000
Annual supplies – $60,000
Using the UMGC Health Care Operating Budget template, complete a 12-month operating
budget in which you include the net profit (loss).
Write a 350- to 700-word executive summary that explains to the board of directors how you
developed the budget and its importance.
Include the following in your summary:
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Explain the process for creating an operating budget and its importance.
Explain how revenues and expenses are grouped for planning and control in the
financial statements.
Explain the differences between cash and accrual financial systems.
Cite at least 2 sources
Format your assignment according to APA guidelines.
MATERIALS
READ:
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Week 6 Overview
Carroll, N., & Lord, J.C. (2016). The growing importance of cost accounting for
hospitals. Journal of Health Care Finance, 43(2).
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Hilsenrath, P., Eakin, C., & Fischer, K. (2015). Price-transparency and cost accounting:
challenges for health care organizations in the consumer-driven era. INQUIRY: The
Journal of Health Care Organization, Provision, and Financing, 52,
0046958015574981.
Service Lines and Activity-Based Costing Reveal True Cost of Care for UPMC.
Please respond to the following Post with a minimum of 150 words
POST 1
Healthcare finance directors face heightened pressure to effectively navigate uncertainty,
volatility, and risk in order to provide assistance to their businesses (Spence, 2015). In the
article titled “5 Approaches to Effective Budgeting & Forecasting in Healthcare” by Kaufman
Hall, the publication discusses various strategies for enhancing budgeting in the healthcare
sector. These strategies include aligning rolling forecasts, utilizing statistically-driven
modeling, integrating service-line analytics, implementing cross-departmental modeling, and
establishing a feedback loop between managers and executives. Among these five detailed
approaches, I would contend that leveraging service-line analytics stands out as the most
potent and efficient method for healthcare budgeting. Service-line analytics involve the
consistent integration of service line volume, cost, and profit metrics throughout multiyear
plans, forecasts, and budgeting models. This approach facilitates the alignment of critical
functions such as market planning, physician recruitment, and revenue forecasting (Kaufman
Hall, n.d.).
Strategic planning, capital planning, annual budgeting, and forecasting should all stem from
service lines since they provide the most all-encompassing method of understanding
operational performance (Spence, 2015). Long-term and short-term planning at the hospital
can benefit greatly from adopting a service-line perspective (Spence, 2015).
In conclusion, hospitals that adopt a service-line perspective in their planning often encounter
challenges in fully implementing it. According to Spence (2015), the most frequently
mentioned hurdle is the insufficiency of data to support accountability. To overcome this
obstacle, a comprehensive system is needed that furnishes the necessary tools for projecting
assumptions and seamlessly integrating various plans. This necessitates the presence of a
robust data repository with substantial capabilities.
References:
Kaufman Hall, LLC. (n.d.). 5 Approaches to Effective Budgeting and Forecasting in
Healthcare |Kaufman Hall. Kaufmanhall.com.https://www.kaufmanhall.com/ideas resources/ebook/5-approaches-effective-budgeting-and-forecasting-healthcare.
Spence, J. (2015). New complexities require a new approach to budgeting and forecasting.
Healthcare Finance News.https://www.healthcarefinancenews.com/blog/new-complexitiesrequire-new-approach-budgeting-and-forecasting
POST 2
The five approaches outlined by Kaufman Hall’s publication all offer effective ways to budget
and conduct forecasting in the healthcare industry. After further research, the most effective
approach was referred to as “align rolling forecasts, multiyear plans, and detailed budgets”
(KaufmanHall, n.d, p.6). These finance-related tasks have to deal with final planning and
budgeting, which are arguably the most important tasks in healthcare finance (Reiter & Song,
2017, pg. 287). Particularly the importance of the newer emerging approach of rolling forecast
within financial planning.
Rolling Forecasts
Rolling forecasts is a financial planning process that allows a healthcare organization to create
monthly financial projections. The calculations are based on historical information and use
other approaches to estimate or forecast the financial reports based on current conditions and
assumptions (Goldstein, 2017, p. 1). Using this approach allows an organization to compare
its current performance against its long-term and short-term targets. With that information
available, it allows organizations the ability to view trends and make strategic decisions based
on that data that can improve long-term projections (KaufmanHall, n.d, p.6). Additionally,
rolling forecasts are able to “provide projections related to future capital spending and days
cash on hand with a longer-term perspective” (Goldstein, 2017, p. 1), which again can help
the organization make strategic decisions. One survey of 132 healthcare finance executives
sponsored by Strata Decision Technologies found that 21% of those executives have
considered or implemented rolling budget forecasting (Eramo, 2021, p.1), showing how it is
picking up in popularity among traditional, straightforward budgeting methods in the
healthcare industry.
Multiyear “Financial” plans
Creating multiyear financial plans typically looks at 2-5 years out and can be used to
understand how internal and external factors affect final results (KaufmanHall, n.d, p.6). This
allows a healthcare organization to look into the future of the organization and use this
information to evaluate how new initiatives may change outcomes. In my opinion, this is a
key tool to help with long-term strategic planning. Information from the rolling forecasts may
be relevant in the plan when looking at short and long-term projections, as well as past
budgets.
Detailed Budgets
The budget is a plan that specifies how much will need to be allocated towards certain
expenses over a given time period, typically a year time frame. This is why the budg et needs
to be as detailed as possible in order to reflect the financial operations of the organization
accurately. These are a necessity in most healthcare since they guide departments and
organizations and are often required by lenders and leadership (Randa, 2020). The budget also
guides the organization and “sets operational expectations” (Reiter & Song, 2017, pg. 292).
Accurate and detailed budgeting plays a big role in how resources are allocated and, therefore,
impacts how an organization operates.
By aligning these practices, an organization will be able to better financially plan and budget.
By using these finance-related tasks, an organization will be able to better strategically plan
and modify operations to fit current market conditions.
Goldstein, J. (2017). 2 Ways to Achieve the Benefits of Rolling Forecasting: When deciding
whether to use rolling forecasting alone or in addition to annual budgeting, finance leaders
should consider major differences between the two approaches. Strategic Financial
Planning, 12(3), 10–11.
Kristin L. Reiter, & Paula H. Song. (2021). Gapenski’s Healthcare Finance: An Introduction
to Accounting and Financial Management, Seventh Edition: Vol. Seventh edition.
AUPHA/HAP Book.
Eramo, L. (2021, April 1). 40% of hospitals reconsidering traditional budgeting amid
pandemic: HFMA poll: An HFMA-Strata survey found two-fifths of hospitals and health
systems were looking to overhaul their traditional budgeting process, with one in five moving
to rolling forecasting. Healthcare Financial Management, 75(3).
Randa, K. S. (2020, August 25). Annual Budgets or Rolling Forecasting? Healthcare
Organizations Need Both. Health IT Answers. https://www.healthitanswers.net/annualbudgets-or-rolling-forecasting-healthcare-organizations-need-both/
KaufmanHall. (n.d.). PDF.
Copyright © 2021. AUPHA/HAP Book. All rights reserved. May not be reproduced in any form without permission from the publisher, except fair uses permitted under U.S. or
applicable copyright law.
CHAPTER
FINANCIAL PLANNING AND BUDGETING
8
Learning Objectives
After studying this chapter, readers will be able to
• Describe the overall financial planning process and the key
components of the financial plan.
• Discuss the format and use of several types of budgets.
• Explain the difference between a static budget and a flexible
budget.
• Create a simple operating budget.
• Use variance analysis to assess financial performance and identify
operational areas of concern.
Introduction
Financial planning and budgeting play a critical role in the finance function
of all health services organizations. In fact, one could argue that planning and
budgeting are the most important of all finance-related tasks.
Planning encompasses the overall process of preparing for the future.
Because of its importance to organizational success, most health services managers, especially in large organizations, spend a great deal of time on activities
related to planning. Budgeting is an offshoot of the planning process. A set of
budgets is the basic managerial accounting tool used to tie together planning
and control functions (by allowing comparisons of actual results to expected
results). In general, organizational plans focus on the long-term big picture,
whereas budgets address the details of planning for the immediate future
and, through the control mechanism, ensuring that current performance is
consistent with organizational plans and goals.
This chapter introduces the planning process and discusses how
financial plans and budgets are used within health services organizations.
In particular, the chapter focuses on how managers can use flexible budgets
and variance analysis to exercise control over current operations. As this is
an introductory book, we only scratch the surface of these important topics.
287
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G a p en s k i’s H e a l th c a re Fi n a n c e
Strategic and Operational Planning
strategic plan
A document
that defines a
business’s longterm direction
along with the
resources needed
to get there.
Financial plans and budgets are developed within the framework of a business’s strategic plan. Strategic plans focus an organization’s vision and
priorities in response to a changing environment. Their primary purpose is
to ensure that everyone within the organization is working toward the same
goals. Simply put, strategic planning is a continuous process that guides organizational action and behavior. The following are some of the components
of the strategic plan.
Values Statement
The “guiding light” for the strategic plan is the organization’s values statement, because values represent the core priorities that define the organization’s culture. To illustrate, consider the following values of Bayview
Hospital, a not-for-profit acute care hospital:
• To treat everyone with respect and dignity
• To be compassionate in comfort and care
• To achieve excellence and ensure quality
Mission Statement
The mission statement, which must conform to the values statement, defines
the organization’s overall purpose and reason for existence. The mission may
be defined either specifically or in more general terms, but at a minimum, it
must describe what the organization does and for whom. For example, here
is Bayview’s mission statement:
• To provide comprehensive, state-of-the-art patient services
• To emphasize caring and other human values in the treatment
of patients and in relations among employees, medical staff, and
community
• To provide employees and medical staff with maximum opportunities
to achieve their personal and professional goals
Vision Statement
The vision statement describes the desired position of the organization at
a future point in time—say, ten years from now. The intent is to provide
a single goal that motivates managers, employees, and the medical staff to
work together to achieve it. Bayview’s vision statement is “To be the regional
leader in providing state-of-the-art, compassionate care in a humanistic
environment.”
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Chap ter 8: F inanc ial Planning and Budgeting
289
Bayview’s values, mission, and vision statements provide managers
with a framework for establishing the specific goals and objectives outlined
in the operating plan, which we describe in the next section.
Operational Planning
Whereas strategic planning provides general guidance for the long term,
operational planning provides a road map for executing an organization’s
strategic plan. The key document in operational planning is the operating
plan, which contains near-term operational objectives and the detailed guidance necessary to meet those objectives. In other words, the operating plan
provides the “how to” or perhaps “how we expect to” portion of an organization’s overall plan for the future.
Exhibit 8.1 outlines the key elements of Bayview Hospital’s operating
plan, with an expanded section for the financial plan. A full outline would
require several pages, but exhibit 8.1 provides some insights into the format
and contents of an operating plan. Note that the financial plan must be linked
to the organization’s strategic plan.
1. Briefly describe the nature and use of the following corporate
planning tools:
a. Strategic plan
b. Values statement
c. Mission statement
d. Vision statement
2. Why do financial planners need to be familiar with the business’s
strategic plan?
operating plan
An organizational
road map for
the future, often
spanning five
years, but with
most detail for
the first year.
Operating plans
must be based
on and consistent
with the guidance
provided in the
organization’s
strategic plan.
SELF-TEST
QUESTIONS
Financial Planning
Whereas strategic and operational planning focus on the overall organization,
financial planning focuses on the finance function. Section 1 of the financial
plan (chapter 7.C of the operating plan in exhibit 8.1) focuses on financial
condition, capital investments, and financing at the organizational level. Its
first component is a review of the business’s current financial condition,
which provides the basis, or starting point, for the remainder of the financial
plan. (Insights into how this is accomplished are presented in chapter 17.)
The second component is the capital budget, which outlines future
plans for capital investment (the purchase of land, buildings, and equipment).
financial plan
The portion of the
operating plan that
focuses on the
finance function.
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290
G a p en s k i’s H e a l th c a re Fi n a n c e
EXHIBIT 8.1
Bayview
Hospital:
Operating Plan
Outline
Chapter 1
Chapter 2
Chapter 3
Chapter 4
Chapter 5
Chapter 6
Chapter 7
Organizational values, mission, and vision
Organizational goals and objectives
Projected business environment
Organizational strategies
Summary of projected business results
Service line plans
Functional area plans
A. Marketing
B. Operations
C. Finance
1. Financial condition, capital investments, and financing
a. Financial condition analysis
b. Capital budget
c. Forecast financial statements
d. External financing requirements
2. Current accounts and revenue cycle management
a. Overall policy
b. Cash budget
c. Cash and marketable securities management
d. Inventory management
e. Revenue cycle management
f. Short-term financing
3. Budgeting and control
a. Statistics budget
b. Revenue budget
c. Expense budget
d. Operating budget
e. Control procedures
D. Administration and human resources
E. Facilities
(Capital budgeting procedures are discussed in chapters 14 and 15.) This
information feeds into the forecast financial statements, which are projected
for the next five years. The final component is a list of the organization’s
future financing requirements, along with a plan for obtaining these funds.
(Financing decisions are covered in chapters 11, 12, and 13.) As can be seen
from its content, Section 1 of the financial plan provides an overview of the
financial future of the organization.
Section 2 of the financial plan concerns current accounts management,
which encompasses the management of current assets and current liabilities,
including revenue cycle management. Here the plan provides overall guidance
regarding day-to-day, short-term financial operations. (Current accounts and
revenue cycle management are covered in chapter 16.) In essence, Section 2
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Chap ter 8: F inanc ial Planning and Budgeting
291
of the financial plan provides short-term operating benchmarks for all facets
of current accounts management.
Section 3 is the budgeting and control portion of the financial plan.
This section identifies the organization’s financial goals at the micro level—
for example, by division, contract, or diagnosis—and it is used to control
operations through frequent comparisons with actual results. In essence, this
portion contains the budgets that provide the benchmarks managers should
be striving to attain throughout the year.
Exhibit 8.2 contains the hospital’s annual financial planning schedule.
This schedule illustrates that, as for most organizations, Bayview’s financial
planning process is essentially continuous. For Bayview, much of the financial planning function takes place at the department level, with technical
assistance from the marketing, planning, and financial staffs. Larger organizations, with divisions, focus the planning process at the divisional level.
Each division has its own mission and goals, as well as objectives and budgets
designed to support its goals; these plans, when consolidated, constitute the
overall operating plan.
Months
Action
April–May
Marketing department analyzes national and local
economic factors likely to influence Bayview’s patient
volume and reimbursement rates. At this time, a preliminary volume forecast is prepared for each service line.
June–July
Operating departments prepare new project (long-term
asset) requirements as well as operating cost estimates
based on the preliminary volume forecast.
August–September
Financial analysts evaluate proposed capital expenditures and department operating plans. Preliminary forecast financial statements are prepared with emphasis on
Bayview’s overall sources and uses of funds and forecast
financial condition.
October–November
All previous input is reviewed and the hospital’s operating plan is drafted by the planning, financial, and departmental staffs. At this stage, the operating and cash budgets are finalized. Any changes that have occurred since
the beginning of the planning process are incorporated
into the plan.
December
The operating plan, including all budgets for the coming year, is approved by the hospital’s executive committee and submitted to the board of directors for final
approval.
EXHIBIT 8.2
Bayview
Hospital:
Annual Financial
Planning
Schedule
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292
G a p en s k i’s H e a l th c a re Fi n a n c e
SELF-TEST
QUESTIONS
1. Briefly describe the contents of a typical financial plan.
2. What are the primary differences between sections 1, 2, and 3 of
the financial plan?
Introduction to Budgeting
budgeting
The process of
preparing and
using a budget,
which is a detailed
plan (in dollar
terms) that
specifies how
resources will be
obtained and used
during some future
period.
SELF-TEST
QUESTIONS
Budgeting involves detailed plans, expressed in dollar terms, that specify
how resources will be obtained and used during a specified future period of
time. In general, budgets rely heavily on revenue and cost estimates, so the
budgeting process applies many of the managerial accounting concepts presented in chapters 5, 6, and 7.
To be of most use, budgets must be thought of not as accounting
tools but as managerial tools. In reality, budgets are more important to line
managers than to the financial staff because budgets provide the means to
plan and communicate operational expectations within an organization. In
addition, the budgeting process and the resulting final budget provide the
means for senior executives to allocate financial resources among competing
demands within an organization.
Although planning, communication, and allocation are important
purposes of the budgeting process, perhaps the greatest value of budgeting
is that it establishes financial benchmarks for control. Compared with actual
results, budgets provide managers with feedback about the relative financial
performance of the entity for which they are accountable. Such comparisons
help managers evaluate the performance of individuals and identify areas
where they may need to intervene.
When actual results differ from those specified in the budget, managers use variance analysis to identify the drivers that caused the divergent
performance. In this way, managerial resources can be applied to the areas of
operations that need improvement. In addition, the information developed
by comparing actual results with expected (planned) results (the control process) is useful in improving the overall accuracy of the planning process. By
examining budget variances, managers may identify changes in the operating
environment that should be considered during the next planning cycle.
1. What is budgeting?
2. What are its primary purposes and benefits?
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Chap ter 8: F inanc ial Planning and Budgeting
293
Initial Budgeting Decisions
Managers must make many decisions regarding the budgeting process.
This section covers decisions that focus on budget timing and the general
approach to the budgeting process. The next major section discusses the
types of budgets used within healthcare organizations.
Budget Timing
Virtually all health services organizations set annual budgets for the coming
year. However, it would take too long for managers to detect adverse trends
if budget feedback were provided solely on an annual basis, so most organizations also have quarterly budgets, while some have monthly, weekly, or even
daily budgets. Not all budget types or subunits within an organization use
the same timing pattern—some may use monthly budgets, while others use
weekly budgets. Additionally, many organizations prepare budgets for one or
more out years, or years beyond the next budget year; these budgets are more
closely aligned with financial planning than with operational control.
Conventional Versus Zero-Based Budgets
Traditionally, health services organizations used the conventional budgeting approach to develop their budgets. In this approach, the previous budget
is used as the starting point for creating the new budget. Each line on the
old budget is examined, and then adjustments are made to reflect changes
in circumstances. In this approach, it is common for many budget changes
to be applied more or less equally across departments and programs. For
example, labor costs might be assumed to increase at the same inflation rate
for all departments and programs within an organization. The main task
under the conventional approach is determining what changes (typically
minor) must be made to the previous budget to account for changes in the
operating environment. In other words, the assumption is made that, except
for these changes, the current budget accurately reflects the resource needs
of the organization.
As its name implies, zero-based budgeting starts with a clean slate—
that is, departments begin with a budget of zero and department heads fully
justify every line item in their budgets. In effect, departments and programs
must justify their contribution (positive or negative) to the organization’s
financial condition each budget period.
Conceptually, zero-based budgeting is superior to conventional budgeting. Indeed, when zero-based budgeting was introduced in the 1970s,
it was widely embraced. However, the managerial resources required for
zero-based budgeting far exceed those required for conventional budgeting.
conventional
budgeting
An approach to
budgeting that
uses the previous
budget as the
starting point for
creating the new
budget.
zero-based
budgeting
An approach to
budgeting that
starts with a
“clean slate” and
requires complete
justification of all
budget items.
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294
G a p en s k i’s H e a l th c a re Fi n a n c e
Therefore, many organizations that initially adopted zero-based budgeting
soon concluded that its benefits were not as great as its costs. However, many
health services organizations are again using zero-based budgeting, primarily because market forces are requiring providers to implement cost control
efforts on a more or less continuous basis.
As a compromise, some health services organizations use conventional
budgeting annually but then use a zero-based budget on a less frequent
basis—say, every five years. An alternative is to use the conventional approach
for 80 percent of the budget each year and the zero-based approach for 20
percent. Then, over every five-year period, the entire budget will be subjected
to zero-based budgeting. This approach
takes advantage of the benefits of zerobased budgeting without creating a budFor Your Consideration
geting process that is too time-consuming
Middle-Out Budgeting
in any single year for managers.
As you know, there are two primary approaches to
the budgeting process. In the top-down approach,
budgets are established by senior management—
for example, the executive committee or board of
directors (or trustees). In essence, senior management is dictating the financial resources to be
allocated to the department level. In the bottomup approach, department heads are responsible
for creating their own budgets, which are then
submitted up the chain for approval. Although the
bottom-up approach has many virtues, in large
organizations, it is often impractical to have that
many people involved in the budget process.
Some organizations are now experimenting
with a hybrid budgeting approach called middleout budgeting. In this approach, budgets are
prepared at the divisional (services) level—for
example, a hospital’s inpatient, outpatient, clinical support, and administrative support divisions.
Then the budgets are sent to both senior and
junior (department) managers for review and
ultimate approval. In essence, middle managers—
who presumably are in the best position to understand both sides and can create a budget that is
adequate yet not excessive—act as go-betweens.
What do you think? Is there any merit to
middle-out budgeting? Which approach do you
think is best for a small organization, such as a
three-doctor medical practice? What about a 600bed hospital?
Top-Down Versus Bottom-Up
Budgets
The budget affects virtually everyone in
the organization, and individuals’ reactions to the budgeting process can have
considerable influence on an organization’s overall effectiveness. Thus, one of
the most important decisions regarding
budget preparation is whether the budget
should be created from the top down or
from the bottom up.
In the bottom-up, or participatory,
approach, budgets are developed first by
department or program managers. Presumably, such individuals are most knowledgeable regarding their departments’ or
prog
