Budgeting in Healthcare. Write a 2000-2500 word essay addressing each of the following points/questions. Support your ideas with at least three (3) scholarly citations
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Budgeting in Healthcare. Write a 2000-2500 word essay addressing each of the following points/questions. Support your ideas with at least three (3) scholarly citations in your essay. Use strict APA guidelines to format the paper. The cover page and reference page do not count towards the minimum word amount and an abstract and table of contents are not necessary and if included are not part of the overall word count.
Provide a budget from a healthcare organization and describe and define each entry in the budget.
Expert Answer and Explanation
Budgeting in Healthcare
Like any other business, healthcare organizations need a budget. A hospital or healthcare budget is an estimation of expenses and revenue over a specific time. Healthcare organizations or hospitals can understand the level of funding needed in certain areas, including capital equipment and operation costs (Kuzmenko et al., 2021). Two main types of budgets can be developed in a healthcare organization or hospital. they include capital and operational budgets. The operational budget is used to plan for operational and personnel costs while the capital budget is used to plan for the purchase of hospital equipment (Waxman, 2012).
The budgeting process is so essential to hospitals and healthcare organizations. Healthcare is changing rapidly and thus healthcare leaders must continuously adapt as new patient needs and technologies emerge (Kuzmenko et al., 2021). A strong budgeting process in healthcare allows hospital leaders to establish priorities around clinical departments and care and plan for the future. A healthcare budget helps in understanding the amount of money spent and how to allocate funds to various projects and departments within a healthcare facility (Waxman, 2012).
Proper budgeting enables healthcare organizations to efficiently and effectively provide patient-centred care (Waxman, 2012). In this paper, budget projections actual through budget 2021 by Metropolitan Nashville General Hospital have been provided and each entry of the budget is defined and described.
A basic budget has four main components. The first component is estimated revenue. Estimated review is the money the business is expected to make in the coming financial year from its sales. Estimated revenue has two main components including the estimated cost of services rendered or goods sold and sales forecast (Shakeri et al., 2021). The second component of a budget is expenses. Expenses show how the organization is expected to use its funds in the next financial year. Expenses can be grouped into fixed, discretionary, and flexible expenses. When making a budget, the nurse leader should pinpoint exactly how the money will be used.
Expenses are used to track the finances and ensure that the management was responsible for the allocated funds. Expenses also dictate the number of funds the management will request for a specific financial period. The third component is sources of funds. This section shows the sources of the hospital’s funds (Waxman, 2012). The fourth component of a budget is income. The income section shows the money the company is projected to make after the budget has been executed. This part is developed by subtracting expenses from projected revenues.
Entries in the Metropolitan Nashville General Hospital Budget
The Metropolitan Nashville General Hospital budget is included in the appendix. The budget was developed based on the three basic components of a budget. The first part of the budget is estimated revenue. This part approximates what the hospital will get from its services (Waxman, 2012). In this part, the budget has described the estimated patient admissions, observational visits, patient days, average length of stay, FTE’s Hospital Only, and FTE’s Per Equiv. ADC.
The budget shows that Metropolitan Nashville General Hospital received a total of $214,798,164 from patient charges (inpatient $66,618,962 and outpatient $ 148,179,202. The budget projected that the hospital will make $236,577,917 in 2020 and $271,801,053 in 2021. The variance between the budgeted patient charges in the 2021 financial year and the actual budget in the 2020 financial year is $35,223,136 meaning that the hospital estimates that patient charges will increase in the 2021 financial year. In the first part, the budget also shows the estimation of money that will be deducted from revenue. This part shows that adjustments are projected to impact the estimated revenue for the budgeted year.
Elements listed in this section include bad debt adjustments, contractual adjustments, uninsured discounts, administration adjustments, charity adjustments, and other adjustments. The funds allocated in this section will cover any unforeseen changes. For instance, bad debt can occur if the patient fails to pay medical bills as agreed. Charity adjustments can be needed if the charity organization fails to fulfil its promises about contributing funds to the organization.
The administration might also need to adjust by hiring more people or introducing training after the budget has been prepared and approved. Nashville General Hospital’s budget has considered these changes by including them in the adjustment section. The budget estimated that deduction from revenue in 2021 would be $223,937,407, $192,796,906 in 2020, and $ 173,045,736 in 2019. The variable between the deductions from revenue in the 2020 projected budget and the 2021 budget was $31,140,501 meaning that the deductions were expected to increase.
The budget summarizes the estimated revenue after removing deductions from revenue that will be received by charging patients. The budget estimated that the hospital’s net revenue will be approximately $109,240,290 in the 2021 financial year. It also shows that the net revenue for the financial year 2020 was $102,327,295 and $103,237,927 for the year 2019.
The second section of the entry shows the projected expenses. Shakeri et al. (2021) noted that elements such as salaries, operational costs, cost of buying equipment, mortgage, rent, and any other activity that requires the organization to spend money. The elements that have been included in the first part of this section are salary expenses, contract labor, and benefit expenses. Based on the budget, the hospital was projected to spend more money on salaries in the financial year 2021 compared to the 2020 financial year.
The hospital was expected to spend $40,839,484, $38,290,653, and $35,689,978 on salaries in 2021, 2020, and 2019 financial years respectively. The estimated total labor cost for the financial year 2021 was estimated to be $53,917,534, $51,814,599 53 in 2020, and 49,486,027. This section provides financial information on how much the management of the hospital should spend on paying salaries and wages. Therefore, when recruiting, the management should keep the figures in mind.
Other expenses included in this part are supplies, metro ISF fees, interest, and other unknown expenses. The total expenses after excluding depreciation were estimated to be $106,263,566 in 2021 financial year, $103,122,939 in 2020, and $100,071,744 in 2019. The budget showed that the hospital’s expenses were growing rapidly.
The budget has also included the expected income. The budget has projected the net profit margin. A net profit margin also known as net margin measures how much profit or net income is generated as the revenue’s percentage (Nariswari & Nugraha, 2020). Net margin is a ratio of net profits to revenue of a business or company segment. Net profit margin is used to explain the profit generated from each dollar in revenue collected (Nariswari & Nugraha, 2020). The hospital budget shows that the net margin (deficit) from operations is projected to be $2,976,724 in the 2021 financial year and was -$(795,644) and $3,166,183 in the 2020 and 2019 financial years respectively.
From the budget, it can be seen that the hospital did not make any profits in the 2020 financial year. It made a loss of $795,644. When a business is projected to make a loss in the coming financial year, the loss is often indicated as a negative. As seen in the budget, the percentage of the hospital’s net profit margin in the 2020 financial year is -0.8%, meaning that the facility made a loss. The projected percentage of net patient revenue for the 2021 financial year was 2.7% and 3.1% for the actual budget for 2019.
The budget has also included depreciation and amortization in the net income margin section. Depreciation is defined as the actual decrease in the value of a company or business equipment and other assets, such as vehicles, buildings, and many more. In a hospital setup, assets such as ambulances, smart beds, and radiology equipment can depreciate and become less valuable. Kuter et al. (2018) noted that depreciation is used by accountants to record the wear and tear of company or business assets.
As assets generate revenue for a business every year, their value decreases and this is removed from the company’s operating income. Amortization is writing off the previous cost of an asset. It also refers to a scenario where a company pays off loans using its regular payment structures (Kuter et al., 2018).
The projected depreciation and amortization cost for Metropolitan Nashville General Hospital for the financial year 2021 was approximated to be $4,928,984, and $4,928,984 and $4,800,573 for the financial years 2020 and 2019 respectively. The budget also shows the net surplus of the organization. Net surplus is used to identify the amount of income which exceeds what the company spend in their last financial year. Net surplus is used to show if the business is healthy financially. When a company runs on surplus, it means that it has additional funds it can spend on other projects. However, when spending goes beyond revenues, the company will be forced to borrow to continue its operations or shut down.
As seen in the hospital budget, it is projected that the facility will spend more than its patient revenues. The hospital is projected to spend $1,952,260, $5,724,628, and $1,634,390 more in 2021, 2020, and 2019 financial years respectively. The net patient revenue for the organization is negative, meaning that the management had to look for other sources of funds to finance the hospital operations. The net patient revenue after the deduction of depreciation and amortization costs was projected to be -1.8% for 2021, -5.6% for 2020, and -1.6% for 2019 financial years.
The last part of the budget has discussed the sources of funds for the hospital. After projecting the amount of money, a business will spend in a certain period, the management should show how they will fund the company’s operations. One of the ways to fund operations for a healthcare institution is patient revenues (Williams Jr et al., 2020). However, for the hospital to start getting revenues, it must have a starting capital or cash balance to fund its operations.
The projected starting cash balance for the hospital was estimated to be $1,000,000 in the 2021 financial year, $3,603,996 in 2020, and $5,082,778 in 2019. The budget has also specified the sources of funds for its operations. Normally, a hospital facility can be funded by well-wishers and donations, state or federal government programs, and local contributions (Williams Jr et al., 2020). This budget has highlighted the sources of funds for the hospital. the first source of funds is cash from operations also known as net margin.
In other words, the budget projects that the hospital will be funded by the profits it gained from its previous operations. The projected net margins were $2,976,724, -$795,644, and $3,166,183 for 2021, 2020, and 2019 financial years.
Other sources of funds include cash contribution from Metro (Capital), other balance sheet changes, increases in account payable other liabilities, principal payment on the lease, increases in net receivables, and acquisition of capital assets. Metro contributed $2,003,259 in 2019 and $557,982 in 2020. It is indicated that the budget that the cash Metro will contribute in the 2021 financial year is not known. Principal payments on the lease were negative for the 2019 and 2020 financial years.
There is no projection for principal payment on lease in the 2021 financial year. The hospital did not also receive an increase in net receivables in the 2020 financial year and the same might be witnessed in the 2021 period. The budget has been concluded in an ending cash balance. The projected ending cash balance for the 2021 financial period is estimated to be $ 1,000,000. The ending cash balance for 2020 and 2019 financial periods were $ 1,000,000 and $ 3,603,996 respectively.
The Metropolitan Nashville General Hospital budget shows how the hospital plans to spend its funds in the 2021 financial year. In its projections, the hospital estimates that it will make $271,801,053 from patient charges both inpatient and outpatient. The budget estimated that deduction from revenue in 2021 would be $223,937,407, $192,796,906 in 2020, and $ 173,045,736 in 2019. It is estimated that the hospital’s net revenue will be approximately $109,240,290 in the 2021 financial year. The budget has also included hospital expenses.
The estimated total labor cost for the financial year 2021 was estimated to be $53,917,534, $51,814,599 53 in 2020, and 49,486,027. The total expenses after excluding depreciation were estimated to be $106,263,566 in 2021 financial year, $103,122,939 in 2020, and $100,071,744 in 2019. The projected percentage of net patient revenue for the 2021 financial year was 2.7% and 3.1% for the actual budget of 2019. The sources of funds have also been listed in the budget. It is estimated that the hospital will start its 2021 financial year with $1000000 and end it with the same amount.
Kuter, M., Gurskaya, M., Andreenkova, A., & Bagdasaryan, R. (2018). Asset impairment and depreciation before the 15th century. Accounting Historians Journal, 45(1), 29-44.
Kuzmenko, O. V., Kashcha, M. O., Shvindina, H. O., Hakimova, Y., Tagiyeva, N., & Shyian, O. (2021). Healthcare financing and budgeting: The regional policy priorities in response to COVID-19.
Nariswari, T. N., & Nugraha, N. M. (2020). Profit growth: impact of net profit margin, gross profit margin and total assests turnover. International Journal of Finance & Banking Studies (2147-4486), 9(4), 87-96.
Shakeri, A., Aminbidokhti, A. A., & Pourshafei, H. (2021). Identifying the Components of the Budget Policies of Educational Organizations with an Emphasis on Resistance Economy. Health Technology Assessment in Action, 5(3).
Waxman, T. (2012). Financial and business management for the doctor of nursing practice. Springer Publishing Co.
Williams Jr, D., Pink, G. H., Song, P. H., Reiter, K. L., & Holmes, G. M. (2020). Capital expenditures increased at rural hospitals that merged between 2012 and 2015. Journal of Healthcare Management, 65(5), 346-364.
What are the 5 components of a budget?
A budget is a financial plan that outlines an organization’s or individual’s expected income and expenses over a specific period. It typically consists of five key components:
- Income: This component includes all sources of expected revenue or income during the budget period. It encompasses wages, salaries, rental income, investment income, grants, and any other funds that are anticipated to be received. Income serves as the foundation for the budget and provides a clear picture of available resources.
- Expenses: Expenses are the anticipated costs and expenditures that need to be covered during the budget period. These costs can be categorized into various subcomponents, such as fixed expenses (e.g., rent or mortgage payments, insurance premiums), variable expenses (e.g., utilities, groceries, transportation), debt payments (e.g., loan repayments, credit card bills), and discretionary spending (e.g., entertainment, dining out). Tracking expenses helps individuals and organizations understand how their resources will be allocated.
- Savings and Investments: This component focuses on setting aside a portion of income for savings and investments. Saving money allows for future financial security and the ability to cover unexpected expenses, while investments can help grow wealth over time. The budget should specify the amount allocated for savings and investment purposes.
- Goals and Priorities: A budget often includes specific financial goals and priorities that an individual or organization aims to achieve during the budget period. These can be short-term goals (e.g., saving for a vacation) or long-term goals (e.g., funding retirement, purchasing a home). By setting clear objectives, budgeters can allocate resources strategically to meet these goals.
- Budget Variance: The budget variance component involves comparing actual income and expenses to the budgeted amounts. It helps assess whether an individual or organization is staying on track with their financial plan. A positive variance indicates that income exceeded expenses, potentially allowing for additional savings or investment. Conversely, a negative variance suggests that expenses exceeded income, signaling the need for adjustments to the budget or spending habits.
These five components work together to create a comprehensive budget that guides financial decision-making and helps individuals and organizations manage their finances effectively. A well-structured budget provides clarity on income and expenditure patterns, ensures that financial goals are met, and assists in making informed financial choices.
What do you mean by budget explain any four types of budgets which are used in business?
A budget is a financial plan that outlines an organization’s or individual’s expected income and expenses over a specific period. It serves as a tool for managing finances, making informed decisions, and achieving financial goals. There are various types of budgets used in business to address different aspects of financial planning and control. Here are four common types of budgets used in business:
- Operating Budget:
- An operating budget is a comprehensive budget that focuses on an organization’s day-to-day operations. It typically covers a fiscal year and includes detailed projections of revenue and expenses for various operational areas such as sales, production, marketing, and administration. The operating budget helps in planning and monitoring the financial aspects of running the business.
- Capital Budget:
- A capital budget is used to plan for significant long-term investments in assets, such as machinery, equipment, facilities, or technology. It involves estimating the costs of acquiring or upgrading these assets and evaluating their potential return on investment (ROI) over their useful life. Capital budgets assist in making strategic decisions about capital expenditures and allocating resources to projects that will contribute to the organization’s growth and profitability.
- Cash Budget:
- A cash budget focuses on the organization’s cash flow, helping to manage cash inflows and outflows. It forecasts the timing and amount of cash receipts (e.g., sales revenue, loans, investments) and cash disbursements (e.g., operating expenses, loan repayments). The cash budget ensures that an organization has sufficient liquidity to meet its financial obligations and identifies periods of potential cash shortages or excesses.
- Master Budget:
- A master budget is a comprehensive financial plan that integrates all the individual budgets within an organization. It combines the operating budget, capital budget, cash budget, and other specialized budgets to provide an overarching view of the organization’s financial performance and objectives. The master budget serves as a roadmap for the entire organization, aligning its financial goals and strategies.
These four types of budgets are commonly used in business, each serving a specific purpose in financial planning and control. Other specialized budgets may also be employed based on the organization’s industry, goals, and needs. Effective budgeting helps businesses make informed decisions, allocate resources efficiently, and achieve financial stability and growth.
Importance of budgeting in health care
Budgeting plays a crucial role in the healthcare sector for various reasons, given its unique financial challenges and the critical nature of healthcare services. Here are some of the key reasons highlighting the importance of budgeting in healthcare:
- Resource Allocation: Healthcare organizations, whether hospitals, clinics, or healthcare systems, have limited resources. Budgeting helps allocate these resources efficiently by prioritizing spending on critical areas such as patient care, medical equipment, staffing, and facility maintenance. It ensures that resources are distributed where they are needed most.
- Cost Control: Healthcare costs can escalate rapidly, and budgeting is instrumental in controlling and managing these expenses. It allows organizations to set spending limits, monitor variances, and identify cost-saving opportunities. Effective cost control is essential for delivering affordable and sustainable healthcare services.
- Financial Planning: Healthcare organizations need to plan for both short-term and long-term financial sustainability. Budgets serve as financial roadmaps, helping organizations map out their revenue and expenditure projections over time. This planning is vital for securing funding, managing debts, and making informed financial decisions.
- Quality Patient Care: Quality healthcare is a top priority, and budgeting plays a pivotal role in ensuring that resources are available to provide the best possible care. Budgets can allocate funds for training healthcare professionals, upgrading medical equipment, and maintaining high standards of patient care.
- Compliance and Accountability: In the healthcare sector, compliance with regulatory requirements is essential. Budgets help ensure that organizations adhere to financial regulations, reporting standards, and legal requirements. Budgeting also fosters financial accountability among staff and management.
- Emergency Preparedness: Healthcare organizations must be prepared for unexpected events, such as natural disasters or public health emergencies. Budgeting can allocate funds for emergency response and disaster preparedness plans, ensuring that the organization can respond effectively to crises.
- Strategic Investments: Budgets allow healthcare organizations to plan for strategic investments in areas like research and development, new medical technologies, and expansion of services. These investments can enhance the organization’s competitiveness and its ability to meet the evolving healthcare needs of the community.
- Revenue Maximization: For healthcare providers, optimizing revenue is critical. Budgeting helps identify opportunities to increase revenue through better billing and coding practices, improved patient care, and enhanced revenue cycle management.
- Staffing and Workforce Planning: Budgets allocate resources for recruiting, training, and retaining healthcare professionals. Adequate staffing levels and workforce development are essential for providing quality care and maintaining patient satisfaction.
- Data-Driven Decision-Making: Healthcare organizations generate vast amounts of data. Budgeting incorporates data analysis and forecasting, enabling data-driven decision-making. This can lead to improved operational efficiency and patient outcomes.
In conclusion, budgeting in healthcare is indispensable for maintaining financial stability, providing quality patient care, and ensuring compliance with regulatory standards. It enables healthcare organizations to allocate resources wisely, control costs, plan for the future, and respond effectively to changing healthcare needs and challenges. Effective budgeting ultimately contributes to better patient experiences and improved healthcare outcomes.
Operating budget vs capital budget in healthcare
In healthcare management, operating budgets and capital budgets serve distinct purposes and focus on different aspects of financial planning and resource allocation. Here’s a comparison of operating budgets and capital budgets in healthcare:
- The primary purpose of an operating budget in healthcare is to plan and manage day-to-day operational expenses and revenue for a specific period, typically a fiscal year. It addresses routine activities, such as patient care, staffing, utilities, supplies, and administrative costs.
- Time Horizon:
- Operating budgets are typically short-term budgets, covering a one-year period or less. They provide a detailed plan for ongoing operations.
- Expense Types:
- Operating budgets focus on recurring expenses that are necessary to maintain daily healthcare services. These expenses are often categorized as variable (e.g., supplies, utilities) and fixed (e.g., salaries, rent).
- Operating budgets need to be flexible to accommodate fluctuations in patient volumes, changes in staffing needs, and unexpected expenses. They are subject to adjustments throughout the budget period.
- Examples of items included in an operating budget in healthcare may include nursing salaries, medical supplies, utility bills, medication costs, and routine maintenance expenses.
- A capital budget in healthcare is designed for planning and managing significant long-term investments in tangible assets, such as medical equipment, facilities, technology upgrades, and construction projects. It focuses on projects that enhance or expand healthcare services.
- Time Horizon:
- Capital budgets have a longer time horizon than operating budgets and typically cover several years. They address large-scale projects that require substantial funding and time for implementation.
- Expense Types:
- Capital budgets deal with one-time or infrequent expenses related to the acquisition or improvement of assets. These expenses are considered investments rather than day-to-day operational costs.
- Capital budgets are less flexible than operating budgets. Once approved, capital projects are typically executed according to the original plan, with limited room for adjustments or reallocations of funds.
- Examples of items included in a capital budget in healthcare may include the construction of a new wing of a hospital, the purchase of advanced medical imaging equipment, the renovation of existing facilities, or the implementation of an electronic health records (EHR) system.
In summary, operating budgets in healthcare focus on short-term operational expenses and revenue to support ongoing daily operations. They are flexible and subject to frequent adjustments. On the other hand, capital budgets address long-term investments in assets and infrastructure that enhance healthcare services. They have a longer planning horizon and involve larger, less flexible expenditures. Both types of budgets are essential for effective financial management in healthcare organizations, ensuring the balance between sustaining daily operations and making strategic, long-term improvements.
Provide a budget from a healthcare organization and describe and define each entry in the budget
Creating a full budget for a healthcare organization would require extensive financial data and specific details about the organization’s operations, which can vary widely depending on the type of healthcare facility (hospital, clinic, etc.) and its size. However, I can provide a simplified example of a healthcare organization’s budget with some common budget entries and descriptions:
Healthcare Organization Budget for Fiscal Year 20XX
- Patient Services Revenue: This entry represents the income generated from providing healthcare services to patients. It includes revenue from medical procedures, consultations, diagnostic tests, and other medical services.
- Grants and Donations: This line item accounts for funds received from government grants, private foundations, and individual donors to support specific healthcare programs or initiatives.
- Insurance Reimbursements: Revenue from health insurance companies for services rendered to insured patients. It includes payments for in-network and out-of-network care.
Expenses: 4. Salaries and Wages: This category includes salaries and wages for healthcare professionals, administrative staff, and support staff, such as nurses, physicians, technicians, and administrative personnel.
- Medical Supplies and Pharmaceuticals: Costs associated with purchasing medical supplies, medications, surgical instruments, and other consumables required for patient care.
- Facility Costs: This entry covers expenses related to the facility’s operation, including rent or mortgage payments, utilities (electricity, water, gas), maintenance, and repairs.
- Equipment and Technology: Expenses for acquiring and maintaining medical equipment, technology upgrades (e.g., electronic health record systems), and IT infrastructure.
- Patient Care:
- Laboratory Services: Costs associated with running in-house laboratories and outsourcing lab tests.
- Radiology and Imaging: Expenses related to diagnostic imaging services, such as X-rays, MRI scans, and CT scans.
- Pharmacy: Costs related to dispensing medications to patients.
- Patient Transportation: Expenses for patient transportation services, including ambulance services.
- Administrative and Overhead Costs: This category includes administrative salaries, office supplies, insurance, legal fees, and other general operating expenses.
Capital Expenditures: 10. Facility Expansion/Renovation: Funds allocated for expanding or renovating healthcare facilities to accommodate a growing patient population or improve services.
- Medical Equipment Acquisition: Budget for acquiring new medical equipment, such as surgical instruments, diagnostic machines, or patient monitors.
- Information Technology Upgrades: Funds designated for upgrading electronic health record systems, cybersecurity measures, and other technology infrastructure.
Reserve Funds: 13. Emergency and Contingency Funds: Funds set aside for unexpected emergencies or contingencies, such as natural disasters or unforeseen financial challenges.
Total Revenue: The sum of all revenue sources, reflecting the organization’s total income.
Total Expenses: The sum of all expenses, indicating the organization’s total operational costs.
Net Income (or Loss): The difference between total revenue and total expenses, showing whether the organization is operating with a surplus (positive net income) or deficit (negative net income).
This simplified budget provides a general overview of a healthcare organization’s financial planning, with common revenue sources, operational expenses, capital expenditures, and reserve funds. In a real healthcare organization’s budget, each category and line item would be more detailed and tailored to the organization’s specific needs and operations.