Budgeting and Cost Control in Healthcare

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).

STATEMENT OF THE PROBLEM

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.

RESEARCH

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 facilities charge for services and maintain limitations established by restrictive operating budgets.

For healthcare facilities to stay ahead of the curve, they must take into account not only historical data but real time data related to healthcare expenditures. Many factors must be taken into consideration when accounting for costs associated with running a healthcare facility. Labor and services are among the primary factors to be considered. Products that healthcare facilities carry and sell or provide to patients also are factored into cost analysis (Medlink, 2003). Implementation of new technologies and plans for expansion are also critical factors related to cost control that must be considered if any analysis of expenditures is performed within a healthcare setting.

Healthcare institutions must acquire and account for accurate cost information and budgeting controls; without doing so they put themselves at financial risk whenever decisions are made that will affect operations and long-term plans (Medlink, 2003). One of the primary considerations for healthcare facilities involves the cost of providing adequate healthcare services. This is considered by many to be the most important factor related to cost control. Consumers are increasingly aware of the costs associated with acquiring the best medical care. Hospitals and like minded healthcare facilities must take into consideration consumer concerns related to the quality of services, but also keep in mind that consumers are leery of the rapidly rising cost of healthcare.

In order to truly budget a healthcare facility is obligated to account for the full cost of providing any service to patients and customers. Accounting for all costs includes assessing the number of departments a facility has, including those that do and do not provide direct patient care (Medlink, 2003). Departments not providing direct care account for overhead costs, but the burden of those costs still fall on the healthcare facility.

Cost accounting in a healthcare environment can be broken down into several different levels including: charge items, patient incurred expenses and department level expenses (Medlink, 2003). In the last 10 years, the number of burdens on healthcare administrators, CEO's and directors has increased. Some recent factors that have to be accounted for include new methods of reimbursement such as Medicaid, HMO and PPO contracts (Medlink, 2003). Advances in technology have also altered the manner in which healthcare is delivered, and assessing the costs of such technologies is essential to maintaining the financial stability and integrity in the healthcare industry (Medlink, 2003).

Many decisions require cost analysis and control in a healthcare facility, including the following: HMO and PPO negotiations, pricing determination, marketing decisions for new services and expansion (Medlink, 2003). HMO and PPO pricing must be assessed, and discounts negotiated in order to maintain effective cost control. Pricing determination involves assessing how much a facility will charge for any services rendered by the healthcare facility; this number typically varies greatly from the cost incurred by the facility to actually provide the service (Medlink, 2003).

Cost control can also be maintained within budgetary guidelines by expanding upon or eliminating certain existing services within a given facility. Such expansion or elimination plays into marketing decisions, which typically control whether new methods of delivery or new product lines can be appropriately marketed in a healthcare environment (Medlink, 2003). Healthcare facilities must take into consideration which primary services are most essential to offer their customers. If the budget supports expansion, which may lead to increased revenues, then facilities should proceed accordingly. The key here again is recognizing that no blanket solution is available to all facilities. Each healthcare facility must take into consideration its unique products and services before assessing whether the appropriate course of action will involves eliminating unnecessary services or expanding upon current ones.

RECOMMENDATIONS

Cost control can be effectively established when existing services are replaced with less expensive options where applicable. In some situations in may be necessary to bring in an outside contractor to reduce the costs associated with services provided. When assessing cost and budgetary limitations, a healthcare facility must also account for equipment purchases. The "cost effect" of such purchases includes "not only capital expenditures but also the operating costs in terms of labor, supplies and other expenses" (Medlink, 2003).

Operating budgets should be prepared based on how productive a healthcare facility is. Factors that must be accounted for in healthcare budgeting include the number of patient level cost/margin reports and physician summaries. Healthcare budgeting systems must be flexible in nature to be successful, as the majority of medical facilities operate very differently, and vary widely in the services that they offer to the public. Because of this variation, the cost behavior patterns within any given facility are likely to change.

Overhead items within and healthcare facilities budget are typically considered variable costs, though some might be labeled fixed costs. Better budgeting can often occur with process improvement.

One source of great expense for healthcare facilities is energy expenditures. Typically hospitals within the U.S. spend "an average of $1.67 on electricity and .48 on natural gas per square foot annually" (UPPCO, 2004). Lighting, heating and hot water expenses can run as much as 79% of all energy usage in a healthcare environment, and thus result in great costs (UPPCO, 2004). Most healthcare facilities also operate under a very tight budget; thus, low-cost solutions to reducing such expenditures are critical to the success and longevity of facilities (UPPCO, 2004).

There are many simple and effective conservation measures that facilities can take including turning of lights in rooms that aren't being used, and turning off computers when machines aren't in use. The solution seems almost too simple, yet can save thousands of dollars every year. Installing occupancy sensors or manual switches in operating rooms will reduce the speed of supply and exhaust fans in operating rooms that are unoccupied, which will also save energy expenditures (UPPCO, 2004). Programmable thermostats that measure the occupancy of a room may also assist in lowering energy expenditures, by decreasing the temperature where applicable (UPPCO, 2004).

Longer term solutions include upgrading to efficient lighting systems and commissioning, which is a process whereby engineer's tune-up facility systems to ensure that they are operating efficiently (UPPCO, 2004). Some studies indicate that such measures can reduce energy expenditures by as much as 15% on an annual basis, which is equivalent to approximately $28,000 per year (UPPCO, 2004). Occupancy sensors as mentioned previous can be installed in rooms that are only used periodically, including restrooms and storage rooms, break rooms and offices (UPPCO, 2004).

Another often overlooked avenue for improvement involves utilizing wireless technologies to deliver patient information more rapidly and effectively. Doctors and healthcare providers are consistently required to update patient information and records, which at best is a time consuming and often inefficient process. Storing and retrieving records also often requires many hours dedicated to labor costs.