Budgeting and Cost Control in Healthcare Term Paper

Excerpt from Term Paper :

Budgeting and Cost Control in Healthcare

One of the most critical issues facing healthcare facilities and organizations is the rapidly increasing cost of providing services. Cost control and budgetary issues are the first consideration for many healthcare facilities. According to statistics, the "single most important thing on the minds of healthcare decision makers is cost management and containment." (Lawson, 2004). In fact, more than 95% of respondents to a survey concluded that cost containment and budgetary issues were among the most pressing issues in the healthcare industry. Yet budgetary issues within the world of healthcare are among the most difficult to address, as most healthcare facilities vary greatly in the level of services they provide to consumers, and the amount of resources readily available to serve those consumers.

Healthcare facilities face increasingly and rapidly rising costs in the face of a poor economy and rising costs associated with providing healthcare services. Healthcare facilities face the daunting task of providing quality care and services while at the same time maintaining very limited budgets. Cost control and management will only be accomplished through innovative cost containment methods and effective data analysis related to facilities expenditures, operating and overhead expenses.

One obstacle that administrators face is having the tools necessary to make cost management decisions. More than 80% of the respondents in the same survey indicated that they felt it was critical to have detailed data regarding operations to make accurate budgetary decisions, yet only 48% felt that there organizations were capable of acquiring the data they needed to effectively control costs (Lawson, 2004).

Healthcare facilities will only be able to manage costs and stay within budgetary guidelines if they are equipped with appropriate data gathering instruments necessary to perform cost containment and analysis surveys.

One challenge that healthcare facilities face is the wide diversity of services provided by various facilities. No two healthcare providers is alike, and expenditures vary greatly from one facility to the next, based on the type of services offered to patients, equipment utilized and cost containment mechanisms in place within a facility. A blanket solution to cost containment is not therefore, possible within the world of healthcare because facilities vary so greatly in the services they provide. Thus each situation must be examined uniquely and separate from other competitors, in order to develop solutions that meet the need of a particular venture.

Some issues related to cost management in the healthcare environment include finding ways to manage costs without compromising the quality healthcare facilities are obligated to provide patients and customers. As technological advances continue to improve the outlook for many patients, patients will continually seek out care with those facilities that offer the best quality and chance for a positive outcome. Thus most facilities are interested in acquiring the latest technologies while still maintaining effective cost containment procedures, a task that is difficult at best.

The environment for services has also become increasingly competitive; thus those facilities who do manage to implement effective cost control while maintaining quality are the most likely to succeed. Consumers are increasingly savvy regarding the type and quality of care that should be offered to them, and many are willing to travel great distances to acquire the care that they feel will most adequately address their concerns and unique situations. Hospitals must take into account this fact when evaluating cost containment measures

Effective budgeting is the centerpiece of cost control. Currently within the United States, the majority of U.S. states are in poor fiscal condition, and soaring healthcare costs have not aided the situation. Healthcare costs rose as much as 11% in 2000, and were projected to continue to increase 13% through 2003-2004 (NGA, 2003). Healthcare spending generally accounts for approximately 30% of state budgets, and Medicaid alone accounts for 20% of those expenditures (NGA, 2003).


Healthcare facilities face "double digit cost increases coupled with decreasing tax revenues" both factors of which contribute to increasing healthcare costs. To analyze healthcare budgetary issues one must first analyze utilization trends, resource use and examine health risks within the population (Medstat, 2003). Healthcare facilities are facing a continually declining economy, and an increasingly demanding consumer. Consumers are demanding more efficient and affordable healthcare but healthcare facilities must take into consideration the rapidly rising costs of providing such services. Balancing quality care and cost containment has become the most critical issue facing administrators within the healthcare industry.

Budgeting is the centerpiece through which a large integrated delivery network such as a healthcare facility must operate given current fiscal conditions. Only by budgeting will healthcare facilities be able to maintain their status and role in society. Budgeting involves many complicated mechanisms when related to healthcare cost containment management.

Healthcare facilities face the unique challenge of having facilities that are much differentiated related to the services they provided. One cost control solution cannot necessarily be developed that will aid all facilities; rather healthcare facilities face the unique challenge of needing many different solutions that meet the needs of very varied practices. Healthcare facilities vary widely in the services that they provide consumers, thus effective cost containment strategies must be tailored to deliver solutions to each unique facilities needs. These solutions will be based on the particular services a company provides, the population it serves and the resources that each facility has available.


Healthcare facilities often are faced with the challenge of controlling costs while operating under extremely small or limited budgets. Managing the budget process involves several key steps, including: (1) setting a goal, (2) formulating a plan of action to achieve the goal, (3) implementing the plan of action, (4) evaluating the plan and (5) communicating results to hospital and other healthcare staff (Berger, 1999). Healthcare facilities must assess what outcomes they would like to realize over the next one, five and ten years. They must meet together with executives, patients and employees to develop appropriate plans of actions to realize these outcomes and then implement activities that will result in the desired outcomes. For any plan to be considered worthwhile, follow up and evaluation should also be considered to assess whether a plan of action is effective not just in the short-term, but in the long-term.

In large and even in small healthcare networks, it is not uncommon for budgets to simply "run away from control" though these phenomena could be contained if administrators were provided with better tools to assess budgetary issues. According to Gaida, a senior vice president at Texas Health Resources, "the key to budgeting is benchmarking" (Werner, 2002). Gaida's has implemented a cost containment system at Texas Health Resources that budgets by supply cost per adjusted discharge, and then breaks down this number by category, total supplies and utilization of all supplies (Werner, 2002).

Understanding supply chain management is also critical to cost control success (Werner, 2002). Many argue that managers need to learn more about the supply chain management process in order to be effective. Materials managers are typically in charge of supply chain management. In supply chain management, "managers must be able to use commercial systems that utilize data supplied by the hospital to return benchmarking information" (Werner, 2002). Commercial systems are able to take a healthcare facility's supply costs and "volume per workload unit" and provide the healthcare facility with percentile rankings that will help them evaluate their systems.

Healthcare facilities would benefit by implementing best practices related to supply chain management. One of the first steps necessary in analyzing any operational or supply chain management model involves performing a gap analysis to uncover gaps or weaknesses within a current systems operating plan. Managing inventory and warehouses is also essential to success in this respect. Hospitals and similar healthcare facilities may in fact benefit from centralizing their sourcing practices, though this would require interdepartmental and facility communication and cooperation, and is likely a long way off. Effective supply chain management has been proven however to reduce the costs associated with operating healthcare facilities, and improve the efficient management of inventories and delivery of services.

According to Steve Berger, "the number one element in budgeting is volume statistics. Volume will drive gross revenue, rates per service, net return to the payer mix, and variable expenses" (Werner, 2002). Berger suggests that cost control can be adequately addressed by paying closer attention to the volume of services provided among other factors. Volume statistics should be factored into the supply chain management process. One cannot efficiently be evaluated without consideration of the other.

Adequate and up-to-date cost accounting processes must also be implemented to manage healthcare facilities expenditures. Many have argued effectively that cost control in healthcare is best managed through efficient and detailed cost accounting processes, which involve determining "the full and incremental costs of providing services and goods to patients and customers." (Medlink, 2003). Costs are currently typically assessed using historical data such as methods for charging services including patient procedures (Medlink, 2003). Cost analysis should also involve real time analysis of the mechanisms through which…

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