Healthcare Budgeting: A Balancing Act (2024)

Healthcare professionals face many unique challenges, not the least of which is ensuring thatthey have everythingthey need to effectively treat their patients. Planning and allocating funds and resourcesis difficult under thebest of circ*mstances, but with the World Health Organization expecting a 10 millionhealthcare worker shortfall by2030, budgeting is more important than ever. But how a healthcare organization budgets canhave a huge impact onmore than just the facility itself, affecting staff, patients and the larger community aswell. Decision-makers andhealthcare financial professionals must understand the ins and outs of the budget processand take great care ateach step, from planning the budget to tracking performance and making adjustments whenneeded.

What Is Healthcare Budgeting?

Healthcare budgeting, like budgeting in other industries, plans and distributes financialresources over a settimeframe, often a month, quarter or year. The budgeting process includes estimating revenueand expenses andsetting financial objectives that align with the organization’s overall strategicgoals. Once completed, thebudget acts as a road map, guiding the organization’s financial undertakings andinforming decisions.Effective budgets in healthcare focus on more than just numbers, as funding decisions mustempower healthcareproviders to deliver top-quality care to patients while preserving financial viability. Thisis especially importantfor hospitals and other large healthcare providers, as resources are often limited anddemand for services is high.To meet this challenge and effectively allocate these resources, budgets must be regularlyanalyzed and adjusted asnew medical standards and public health needs arise, and healthcare professionals mustprioritize investments in newequipment and best practices when they become available. Overly rigid or shortsightedbudgeting can leave hospitalsunprepared to meet patients’ needs, a dangerous risk for any healthcare organization.

Key Takeaways

• Budgeting helps healthcare organizations effectively plan and track revenue and expensesby allocating limitedresources and funds to reduce waste and better serve their patients and communities.
• Healthcare professionals use several budget types, including operational, capital androlling budgets. Eachserves a unique purpose, including planning day-to-day costs, purchasing equipment andregularly updatingfinancial projections.
• The healthcare industry faces unique challenges in budgeting due to the unpredictabilityof demand for servicesand resources. Adopting flexible and agile budgeting methods that can be recalibrated asresults are recordedand circ*mstances change is essential to meeting patient demand.

Healthcare Budgeting Explained

Healthcare budgeting is a dynamic process, demanding both strategic foresight and meticulousattention to detail.Balancing effective, compassionate patient care and financial sustainability pose aformidable challenge forhealthcare financial professionals, and detailed budgeting acts as a compass fordepartments, managers and staff tofollow. The budgeting process should be deliberate and take a big-picture approach, startingwith strategic planningand forecasting, where the organization’s goals are outlined to inform the rest of theprocess. Even after thebudget is finalized and implemented, regular monitoring of revenue and expenses is criticalto ensure adherence andto make necessary adjustments, such as those caused by an unexpected resource scarcity,public health crisis orchange to insurance guidelines and procedures.

Healthcare budgeting is an ongoing process, with thorough reviews and analyses conductedduring and after thefinancial period to assess the budget’s effectiveness and to refine the subsequentbudgeting cycle. Over time,a detailed record of budget accuracy — or an analysis of where and how estimates wentwrong — helpsinform future decisions, strategies and, of course, budgets. This robust process helpshealthcare professionalsmaintain high standards and readiness without incurring losses or cash deficits.

Healthcare Budgeting vs. Budgeting in Other Industries

Healthcare budgeting presents a unique set of challenges that set it apart from otherindustries, includingunpredictable pressure from new or evolving public health issues, changes to insuranceprocesses, the emergence andimplementation of new technologies and escalating costs. According to the American HospitalAssociation (AHA),hospital expenses increased by 17.5% between 2019 and 2022. Unlike other industries, patientdemand is not alwaysdirectly determined by customers’ preferences but, rather, is typically based onexternalities that dictateneeds, such as required medications, surgery after an accident or other services thatpatients urgently require,often unexpectedly. This volatility is less prevalent in other sectors, where demand canoften be forecast withgreater accuracy.

After services are performed and/or goods are sold, a healthcare organization’saccounts receivable are apt toencounter additional challenges not found in other industries, such as specific billingregulations and uniqueworkflows for different insurance providers. For example, healthcare providers in regionswith government-funded,single-payer insurance systems will likely have different protocols from organizations thatwork with many insuranceproviders, all with their own potentially different billing protocols and payment cycles.These differences requiremore flexibility than other industries face when budgeting and estimating future cashbalances and incoming revenuecalculations.

Hospital Cost Structures and Fee-for-Service Payments

Hospital costs are divided into two categories: fixed and variable. Fixed costs are the same,regardless of thenumber of patients treated — think rent, administrative costs and equipmentdepreciation. Variable costsfluctuate from period to period and include supplies, medications and labor costs —the last of which can varysignificantly from overtime and additional staffing costs during busy periods, especiallyduring labor shortages.Fixed costs are easier to budget for, as they do not change from one financial period to thenext. Variable costestimations can be informed by prior budgets andforecasts and are oftenaided by forecastingtools integrated into a larger business platform, such as an enterprise resource planning (ERP) system.

Traditionally, when accounting for revenue, hospitals have followed a fee-for-service model,in which they arecompensated for each service or procedure performed. This incentivizes provision of a highervolume of services toincrease revenue. But recently, many hospitals have begun prioritizing value-based care orbundled services to avoidunnecessary procedures. These hospitals hope to reestablish an emphasis on enhancing patientoutcomes while reducingcosts, even if it reduces overall revenue. However, hospitals must strive to strike abalance between these two coststructures, as the fee-for-service model gives doctors and providers flexibility as to whichservices theyrecommend, rather than relying on bundled procedures, and holistic and bundled services canavoid excessive costsand unnecessary testing, procedures and stress for patients. The balance that a healthcareorganization achievesbetween these cost structures must be explicitly communicated and understood by both themedical staff and thefinancial team. If not, the uncertainty surrounding medical-decision protocols couldcomplicate the budgetingprocess for supplies, expenses and revenue, leading to inaccurate forecasts and potentialdifficulties fordecision-makers.

Importance of Healthcare Budgeting

Healthcare revenue and costs can be highly variable, and budgeting is important to ensurethat each department hasthe funds it needs to provide high-quality care for its patients. On the revenue side, fundscan come from taxes,insurance, patient payments, grants and private donations, and tracking these sources anddetermining how reliablethey will be in the future is critical to informing future revenue estimates. Costs, on theother hand, can varygreatly from patient to patient, even when similar services are provided. For example, twopatients may have thesame knee surgery, but their recovery timeline and associated costs may be very different.Additionally, insurancedifferences between the two patients may lead to a disparity in compensation, both in timeand amount.

Because of these factors and more, healthcare organizations must carefully allocate theirresources and budget theirfunds to avoid a cash crunch when patients need supplies and services, especially duringtimes when delays couldcause real harm. Comprehensive budgeting also allows managers and accounting teams to trackperformance over time toset future budgets more accurately and ensure that shortfalls are addressed and improved forthe next period. Thisgives staff the ability to help people in need more effectively and avoid dangerous delays,a particularly criticalrequirement for organizations providing emergency or intensive care services.

Healthcare Budget Types

Healthcare organizations typically use a combination of three primary budgets: operational,capital and rolling. Allthree budget types are used to distribute resources, anticipate costs and ensurehigh-quality patient care, butunderstanding the differences among them, and knowing when to rely on which, is essentialfor decision-makersnavigating the financial intricacies of healthcare institutions.

Operational Budgets

Operational budgets outline the day-to-day revenue and expenditures necessary to maintainnormal business operations.These budgets form a comprehensive financial structure used to estimate future financialperiods, and they includerecurring revenue sources, such as regular insurance and customer payments, and costs likestaff compensation,medical supplies, utilities and more. Due to the unpredictable nature of healthcare,operational budgets need tofactor in the potential flux of patient needs and strike a balance betweencost-effectiveness and resourceavailability. This balance will vary among organizations, depending on regional healthtrends, population size,medical specializations and other factors. Regular scrutiny and fine-tuning of theoperational budget helphealthcare providers adapt to shifts in patient influx, staffing requisites, medical supplycosts and other variableexpenses. Through detailed analysis of operational budgets, often occurring monthly,healthcare organizations canmaintain financial health while delivering consistent care for their patients.

Capital Budgets

Capital budgets focus on investments in long-term assets, such as state-of-the-art medicalequipment, advancedtechnology upgrades and infrastructure enhancements. These assets yield value over anextended period and helphealthcare organizations keep up with the latest medical standards and technology. Thisproactive approach not onlyempowers healthcare providers to deliver superior patient care but also fortifiescompetitive standing in thehealthcare sector. Capital budgets must also anticipate challenges, such as the substantialcosts and compliancerequirements associated with medical equipment and infrastructural upgrades, while alsoweighing potential risks andbenefits of new equipment and procedures. Potential returns on investment, both financiallyand from improvedpatient care, should be carefully assessed and compared with overall strategic objectives.

While capital budgets are separate from day-to-day finances, they inform the fundingavailable for operations. If ahealthcare organization overexerts its capital expenditures, a cash deficit might ensue thatcan impact patient carebefore the new long-term assets have had a chance to recoup their costs. Therefore, ongoingreview and recalibrationof the capital budget is essential to help healthcare organizations adapt to the evolvinglandscape of technology,patient needs and the healthcare sector at large. By doing so, they can optimize theirresources to serve theirpatients without overextending themselves or investing in untested or unrelated technologiesthat can hurt thestandard of care and strain resources.

Rolling Budgets

Creating and managing budgets can be a time-consuming process, and any lag between datacollection and implementationcan create problems and lead to funding gaps and inaccuracies. Many healthcare organizationsuse rolling budgets tomake budgeting a more regular and fluid process, rather than a set-in-stone annual document.To do this, accountantsand managers establish budgets for a set period in the future, usually 12 to 15 months, andthen recalibrate thebudget at regular intervals, typically monthly or quarterly, and add new financial forecasts onthe back end.

For example, say a hospital began the year with a 12-month budget from January 2023 toJanuary 2024. Then, at the endof the first month, it analyzed the budget and examined how closely it aligned with reality,granting an opportunityto make adjustments from February 2023 through January 2024, as well as a chance to draft amore accurate February2024 budget. The hospital can follow this process month after month to continually map outthe year ahead andmaintain a reasonable way to make smaller adjustments over time, while folding in newtechnology and healthcaredevelopments, rather than having to build an entirely new budget from the ground up when2024 rolls around.

Benefits of Creating a Hospital Budget

Effective budgeting does more for healthcare providers than just plan and track earnings andspending, though that isa worthwhile benefit on its own. By fully understanding all the benefits that detailedbudgeting can bring,healthcare providers can get the most out of their budgets, seize potential opportunities,mitigate risks and buildsuccess. Here are some of the areas that budgeting can help optimize:

Financial Control and Management

A comprehensive hospital budget allocates how funds will be used. For instance, it candelineate personnelcompensation, medical supplies, equipment upkeep and other operational expenditures andcompare these costs withrevenue projections. This transparency enables healthcare organizations to vigilantlymonitor and regulate spending,while revealing areas to reduce waste. If a budget review uncovers a disproportionateallocation of funds towardoutdated equipment, for example, it could trigger a strategic shift toward investing in moreefficient technology.

Allocation of Resources

Budgets help healthcare organizations allot funds and other resources, such as medicines.This helps ensure thatevery department is fully equipped to meet its patients’ needs, including distributinggeneral supplies(masks, gloves, etc.) throughout the organization and replacing medical equipment as needed.Without thetransparency gained through detailed budgeting, healthcare organizations risk wastingresources on unneededequipment and falling short on supplies, leaving staff unprepared to serve patients orunprotected from contagiousillnesses.

Planning and Forecasting

Hospital budgets establish a comprehensive financial road map by outlining anticipatedrevenue and expenses andproviding a clear framework for managers to follow. Healthcare providers can use budgetaryprojections to improve financialforecasts, determine thefeasibility of potential strategies and allocate the resources needed to implement theseplans. With detailedbudgets, healthcare organizations can more effectively plan contingencies and mitigate therisks associated with theunpredictability of the healthcare industry.

Performance Evaluation

Regular monitoring of actual performance against budgeted figures helps inform financialplans and improve forecasts,often with the aid of accounting software and ERP platforms with real-time datacapabilities. Budgets help tracktrends in key performance indicators (KPIs), such as cost per patient, patient volume,financial returns oninvestment (ROI) and any other relevant financial metrics. Consistently underperformingareas or inaccurateforecasts should be analyzed in greater detail to find where estimates went wrong and whatcan be done to minimizethese errors in future budgets.

Communication and Coordination

Hospital budgeting can foster a culture of open communication and coordination across variousdepartments byinvolving different stakeholders in the budgeting process, including managers, accountantsand top-leveldecision-makers. This encourages honest dialogue among collaborators about resourceallocation, strategic goals andfinancial constraints, and helps promote a shared understanding of the hospital’soverall strategic direction,goals and limitations. As a result, managers feel heard during the budgeting process anddecision-makers gain keyinsights from staff who will be directly affected by budgeting decisions. Clear budgets alsohelp ensure that allparties are on the same page and understand how to track performance and identify whencourse corrections arenecessary.

Accountability

Detailed budgets will likely include a framework for resource allocation that lists specificdepartments or teams incharge of implementation and management of funds, supplies and equipment. By explicitlystating these financialgoals and expectations, staff can clearly see what they’re accountable for, andsupervisors can track progressand quickly identify any problems or areas that are not meeting expectations. Additionally,many hospitals also relyon grants to fund operations, which come with specificcriteriaon how funds can be used. Regular budget reviews, by both staff and supervisors, canhelp identifyshortcomings early, before projects are off-budget or out of line with grant requirementsand unable to becorrected. And if discrepancies do occur, teams will have the opportunity to justify thechanges and collaborate toprevent these variances in future budgets.

Strategic Decision-Making

A well-structured hospital budget provides a clear overview of an organization’sfinancial health, enablingleaders to make informed decisions about resource allocation, investments, cost-cuttingmeasures and more byidentifying areas for growth and potential risks. By continuously monitoring actualfinancial performance againstbudgeted figures, healthcare administrators can make real-time adjustments to theirstrategies and track how thosechanges impact revenue, costs, patient outcomes and other relevant metrics. Decision-makerscan rely on budgets toensure that financial resources are optimally deployed in support of theirorganizations’ long-term vision,while maintaining financial health.

Compliance and Reporting

Healthcare financial statements are typically standardized and formatted to accommodaterelevant accountingstandards, such as Generally Accepted Accounting Principles. Budgeting helps healthcareorganizations adhere tostandards and deadlines for monitoring and reporting on financial data, including revenuefrom government entitiessuch as Medicare and Medicaid. Budgets can also simplify audits, both for internal analysisand from externalregulatory bodies, by showing cost and revenue breakdowns and exactly how funds were spent.Additionally, budgetsalign financial operations with legal and ethical standards by letting healthcareprofessionals set financialpriorities, and they help avoid compliance breaches, legal challenges and financialpenalties. By buildingcompliance into budgeting from the start, healthcare professionals can focus more on helpingpatients and improvingoperations, rather than preparing for audits and double-checking the books.

Financial Stability and Growth

Effective budgeting improves both short-term stability and long-term growth prospects throughsetting goals andlimits for expenses and by optimizing how funds are split between day-to-day obligations,such as wages andsupplies, and investments in long-term assets, such as facility expansions, equipmentrepairs and technology.Without proper budgeting to emphasize this balance, providers are more likely to experiencesupply scarcity oroutdated and broken equipment, ultimately causing reputational harm due to poor orunreliable patient care.

Factors That Affect Hospital Budgets

Navigating the intricate landscape of hospital budgets requires a keen understanding of themyriad factors that shapethem, from fluctuating patient volume and reimbursem*nt rates to inflation and othermacroeconomic forces. Jugglingthese factors, and many more, is fundamental to effective budgeting, and hospitals mustconsider the extent to whichthese factors affect delivery of top-tier care, even as they secure solid financial footing.Below are 11 of themost common factors that affect hospital budgets.

Patient Volume and Mix

Patient volume — the number of patients a hospital caters to — is one of thebiggest factors impacting ahospital’s budget, whether it’s a matter of high volumes stretching resourcesthin or low volumescausing resource underutilization and costly waste. The variety of patient cases pertainingto age, healthconditions and insurance coverage, known as patient mix, also carries its own costimplications and influencesreimbursem*nt rates, as patients will likely need different treatments and have diverse waysto pay for it. Trackingtrends in patient volume and mix over time can help increase forecast accuracy, buthospitals must still followpublic health news and retain some flexibility to be able to meet patient demand.

Reimbursem*nt Rates

Reimbursem*nt rates dictate the compensation a hospital receives for each service renderedand are defined byinsurance providers and government programs, such as Medicare and Medicaid. These rateschange over time and can beaffected by several variables, including the type and location of the prescribed service andthe patient’sinsurance plan. These fluctuations can significantly affect a hospital’s revenue bychanging payment amountsand timing as costs continue to accrue. Hospitals must stay current with the latest ratechanges to recalibratetheir budgets as needed and maintain financial stability to ensure that they have the fundsnecessary to coveroperations and capital investments.

Staffing Costs

Staffing costs include the salaries of doctors, nurses and administrative personnel, but alsoinclude indirect laborcosts, such as benefits, training and recruitment expenses. According to the AHA, laborexpenses typically accountfor roughly half of a hospital’s budget. Some hospitals may have predictable staffingexpenses, but manyhealthcare organizations experience large swings in these costs because of overtime andtemporary staffing duringpeak patient-volume periods. In fact, the AHA says labor costs for hospitals increased by20.8% between 2019 and2022, primarily due to a greater reliance on contract staffing agencies. The balance betweena well-staffed hospitalthat can meet demand and manageable labor costs can be improved by a budget that tracksoutcomes based on keymeasures, such as staff-to-patient ratios and productivity.

Inflation

Inflation — a surge in prices alongside a decrease in a currency’s purchasingpower — can strain ahospital’s budget as the prices of goods and services rise faster than revenue. Highinflationary periodstouch every aspect of hospital operations, from supply costs and utility bills to laborpressures as staff seek wageincreases to compensate for the decrease in their own personal purchasing power. If ahospital doesn’t adjustit* budgets to meet these higher costs, it may be left with shortages —in bothsupplies and labor. To meetthese inflationary challenges, hospitals must monitor macroeconomic trends, carefully chooseinvestments whenexpanding or purchasing assets, and regularly review and adjust their budgets, even whenoperations seem to berunning smoothly.

Supplies and Medical Equipment

The procurement and management of supplies and medical equipment encompass everything ahospital needs in order todeliver high-quality healthcare, from commonplace items like gloves to high-value machinery,such as MRI scanners.Supply and equipment costs are influenced by order size, market demand, supply chain issues,new innovations andpricing changes. Additionally, hospitals must monitor equipment performance, as well as anynew technologicaladvancements, to more accurately budget repair and replacement costs. Each hospital willarrive at a differentbalance between cost and preparedness, but regular monitoring and budget recalibration forboth routine supplies andmajor equipment are essential to prevent unexpected financial strain, yet ensurehigh-quality care.

Technology and Medical Advancements

Technology and medical advancements can affect budgets in complex ways, as they often raiseshort-term expenses butcan also elevate patient care standards and reduce long-term costs by increasing efficiency,improving diagnoses andoptimizing operations. Because medical breakthroughs can happen quickly, new equipment andpersonnel training aretypical features of a hospital budget, but new medical technology often comes with a highprice tag that may not beclear until it hits the market — often long after the budget has been set.Additionally, it may take some timefor patients to become comfortable with new advancements and techniques, making the ROI onthese assets difficult tocalculate in the short term. Therefore, hospitals must maintain some budgetary flexibilitywhen considering newtechnology, even when these advancements will likely bring long-term benefits.

Capital Expenditures

Capital expenditures are an important part of a hospital’s long-term sustainabilitybecause they representinvestments into long-term assets that enhance or sustain the quality of healthcare servicesthrough the acquisitionof new infrastructure, comprehensive renovations and new medical equipment. Given theconsiderable, and oftenongoing, financial commitment these purchases require, they can have a significant impact onbudgets. When budgetingfor capital expenditures, healthcare financial professionals should assess potential ROI,the hospital’scurrent financial health, the anticipated influence on patient care and the timing of whenthe investment will takeplace. While hospitals may be inclined to focus on surviving the current financial period,these future-focusedinvestments are crucial for long-term success as they maintain the hospital’scompetitive standing and improvepatient care.

Regulatory Compliance Costs

Regulatory compliance costs stem from the necessity to meet regulations and standards setforth by multipleregulatory bodies, including standards governing care and proper billing procedures. Theseregulations aim toprotect patients and uphold a requisite quality of care. Compliance costs include expensesfor staff training,system enhancements, IT security and audits. With the evolving landscape of healthcareregulations, these costs canvary from one financial period to the next, so healthcare providers must carefully track anyupcoming changes andincorporate them into recalibrated and future budgets. Noncompliance can lead to more thanfinancial or legalpenalties; it can also do reputational harm and erode public trust in a healthcare provider.

Community Health Needs

Hospitals don’t operate in a bubble and neither do their budgets. Hospitals mustconsider the demographic andsocioeconomic attributes of their surrounding community to effectively budget and allocateresources to meet theirneeds. For example, a hospital located in an area with a sizable elderly population willlikely need more fundsallocated to geriatric care than a hospital frequented by younger patients. Similarly,hospitals in areas withlow-insured populations will likely have different revenue streams and reimbursem*ntschedules than hospitalsprimarily dealing with insurance companies to collect payments. Hospitals can better plantheir services andresources by analyzing community data, conducting community outreach and collecting feedbackto see how they canmeet their community’s unique needs. This can both improve the hospital’sreputation and create a morereliable budget for future periods.

Economic Conditions

The overall economic landscape can hit a hospital’s budget in major ways, from risingprices to surges inunemployment rates. Downturns in the economy can increase the number of patients who areuninsured or unable to paybut are still in need of medical care, which can exert significant pressure on hospitalresources that may not berecouped in revenue. On the other hand, a thriving economy can increase the demand forelective or more advancedprocedures, which can boost revenue. Such macroeconomic trends can be complex, as heightenedrevenue may also leadto inflated costs for supplies and labor. Hospital financial specialists must adapt theirbudgets regularly,deliberately and with great care, and not defer to a one-size-fits-all approach that isbased on a small number ofeconomic indicators.

Public Health

Unforeseen public health events, such as pandemics or natural disasters, can trigger a spikein the need for medicalservices and resources, which may or may not have been budgeted for. For example, during theCOVID-19 pandemic, asharp increase in demand for personal protective equipment (masks, gloves, gowns, etc.) leftmany hospitalsundersupplied for critical supplies, and it took months for the supply chain to catch up andmeet demand. Shifts inpublic health policies, such as government-regulated pricing for some medicines, can alsoinfluence healthcarebudgets. To keep up with these shifts, many healthcare organizations bring policy expertsinto the budgeting processto help align the hospital’s priorities with those of the larger health sector.Through this collaboration,hospitals can more effectively allocate their resources to address both current and emerginghealthcare challenges,helping to mitigate risks and minimize the impact of public health shifts on financialhealth.

Impacts of Hospital Budgeting

As much as healthcare financial professionals must monitor external market forces toeffectively create andrecalibrate their budgets, they must also consider how their budgeting decisions caninfluence trends in the largerhealthcare industry. As stated in Sir Isaac Newton’s third law of motion: “Forevery action, there is anequal and opposite reaction.” Failure to consider the implications of this law whenbudgeting could bedetrimental to patients, healthcare facilities, the larger community and even the country.Let’s take a lookat the potential impact of hospital budgeting on various entities.

On Patients

Budgeting decisions have a direct impact on the patient experience, informing patients’encounters with thehealthcare system, as well as the tangible outcomes of their treatment. Effective budgetingcan elevate patientcare, increase patient satisfaction and enhance health outcomes. But even when resources arescarce or funds aretight, hospitals must provide the best care possible and ensure that patients know thattheir needs will be met.Hospitals must be transparent from the get-go, offering a realistic timeline on when and howthey will be able toprovide the necessary services. If a hospital is unable to meet patients’ needs,outcomes are likely to sufferand patients may seek care elsewhere (or not at all), hurting the hospital’s long-termsuccess and potentiallyharming patients’ overall health. Because of this, budgets must always prioritizepatient safety and carequality, even in the face of financial constraints.

On the Healthcare Facility

Hospitals must distribute resources across many departments, and budgets set priorities bydetermining whatpercentage of a hospital’s limited resources each department will receive. Theseallocation decisions canimpact the organization’s performance and staff morale, and are especially importantduring volatile economictimes, such as during supply chain disruptions and inflationary periods, which can increasecosts and reduce stocklevels. Hospitals must consider their unique circ*mstances, when setting budget targets, byassessing what they dowell and how best to allocate resources. This strategy is often applied to both operationaland capital budgets, ashospitals can improve their standing by investing in state-of-the-art equipment that canenhance their competitiveedge. For example, a hospital with the best neonatal care in the region may choose toemphasize thatdepartment’s needs over other fields of medicine by investing in advanced NICUinstruments to maintain its“best in the region” status.

On the Community

Budgeting decisions affect more than just the hospital itself, extending into the widercommunity. By budgeting forcommunity outreach and marketing strategies focused on awareness and preventative care,hospitals can raise theoverall health of a community without accruing the costs of surgeries and procedures.Hospitals can also budget forreduced-rate or uncompensated services by increasing funding for procedures or equipmentthat make care moreaccessible and affordable for underserved — and often underinsured — segments ofthe local community.Strategies emphasizing preemptive care can help reduce the impact of community healthproblems on a hospital’sbudget when outbreaks and other widespread health issues occur. For example, getting aheadof the flu early, bypromoting an annual vaccine campaign, can reduce the number of patients needing hospitalbeds. But these campaignsmust be properly planned and implemented, which typically requires budgeted funds andassigned staff, before theycan make a real difference in the community.

On the Country

The relationship between hospital budgets and our larger economy goes both ways, with localbudget decisionsimpacting the national landscape and broader market forces in major ways. Local budgetscontribute to overallnational healthcare costs and outcomes, and they inform national policies since localdoctors are often the firststop for patients with questions regarding national policies and healthcare standards.Additionally, during periodsof resource scarcity or skyrocketing costs, government-controlled regulations may set pricelimits or exert controlover the supply chain, as they did during the COVID-19 pandemic to coordinate thedistribution of tests and vaccinesand overcome supply chain bottlenecks. Front-line healthcare providers worked in tandem withoversight organizationsto make budgeting decisions, which, in turn, both influenced how these resources weredistributed and informednational policy regarding the virus’s spread and community guidelines.

Healthcare Budgeting Process

The healthcare budgeting process is more than just taking funds from one column andallocating them to another.Effective budgeting requires deliberate planning, adjustments and monitoring, based on harddata and detailedforecasts, often achieved with the help of accounting or integrated ERP software.Understanding each step of thisprocess helps accountants and healthcare financial leaders make the most of their budgetsand create a morerealistic and accurate road map for healthcare professionals to follow. Here are the 10 keysteps involved in thehealthcare budgeting process:

1. Strategic Planning

Before the budget is drafted, a healthcare organization must establish its broad goals andobjectives to informfuture budgetary decisions. The planning phase should include an analysis of theorganization’s financialwell-being and operational efficacy, as well as the trends, challenges and opportunities inthe larger healthcareenvironment. This helps keep the budget realistically focused on achieving real goals thatalign with theorganization’s overall mission.

2. Revenue Forecasting

Revenue forecasting is a pivotal step because it estimates the income that will fund the restof the budget. Theseforecasts, often compiled by sophisticated data analysis software and/or financial experts,are based on ameticulous analysis of historical data and current or expected trends. Many hospitals havediverse revenue streamsand must account for patient fees, insurance reimbursem*nts, government funding, donations,grants and anyadditional sources of income. Accuracy at this stage is critical, as revenue overestimationcan lead to cashshortfalls, and underestimation can lead to wasteful surpluses.

3. Expense Forecasting

On the other side of revenue are expenses, generally compartmentalized into fixed costs— salaries, rent, etc.— and variable costs that fluctuate as services are performed, such as medicalsupplies. While expenses, likerevenue, are based on historical data, trend analysis and market shifts, they will ofteninclude a safety net tohelp meet demand spikes and account for potential, unforeseen expenditures, such as publichealth crises orsignificant alterations in regulations. During budget performance reviews, any unspentsafety funds can then bereallocated to appropriate places at the end of the year, such as to bonuses or capitalexpenditures. Expensesshould be monitored and adjusted throughout the budgetary period, as underestimatingexpenses can result in budgetshortfalls and resource scarcity, while overestimation can leave funds idle that could havebeen productivelydeployed elsewhere.

4. Drafting the Budget

Once the planning and forecasting stages are completed, the budget can be drafted. This steplinks expected revenuewith expected costs to show where funds will come from and where they will go. Collaboratorsfrom differentdepartments can present detailed proposals at this stage to help balance the budget andensure that everyone getsthe funds they need to effectively meet patient demand and cover all necessary expenses inline with theorganization’s overall strategic goals.

5. Review and Adjustments

After the overarching budget draft is prepared, it’s sent to decision-makers for reviewand fine-tuning toensure that it’s achievable and that it supports the overall financial well-being andperformance standards ofthe organization. Through a detailed review and adjustment process, diverse stakeholdershone the budget toprecision for accuracy and effectiveness before finalization and implementation. This stagealso takes into accountany big-picture shifts in the industry or internal organization that might inform budgetstrategies and alterations.

6. Final Approval

Following rigorous review, the budget is finalized and approved by all relevant parties andprepared forimplementation. It’s important to keep in mind that even after the final approval, thebudget remains a livingdocument and should be regularly monitored, analyzed and adjusted to ensure that it retainsits efficacy andadaptability in the face of evolving financial conditions.

7. Implementation

In this phase, the budget is disseminated to all pertinent departments and personnel thatwill be responsible forimplementing the budget and ensuring that it’s properly followed. All accountableparties must fullycomprehend their role within the budget framework and how it shapes their daily operations,as smallmisunderstandings can have ripple effects throughout the budgeted period and beyond.

8. Monitoring

Budgets are rarely perfect and require regular monitoring to assess what’s on track,what needs recalibrationand what lessons the healthcare organization can learn from both scenarios to improve futurebudgets. Monitoringrequires detailed examination of financial reports to compare actual revenue and expensesagainst the budgetedfigures to pinpoint any deviations. Small variations can inform proactive adjustments, whilesignificantdiscrepancies signal that an issue should be further examined and addressed. Monitoringtypically requires trackingand analysis of KPIs, such as inventory levels, outstanding insurance reimbursem*nttimelines and uncompensated carecosts.

9. Evaluation and Adjustment

After any budget deviations are identified, analysts should delve into the underlying reasonsbehind thesediscrepancies to pinpoint root causes, not symptoms. These problems may require only asimple fix, such asreallocating a handful of resources from a fully stocked department to a struggling hospitalwing. However, majorerrors may require a deeper reassessment of strategic goals, such as a major investment intonew equipment to createa more efficient way to deliver complex patient care. Accurately planned and implementedbudgeting triumphs are alsoworth evaluating, as the steps that led to their success may be replicated across theorganization.

10. Post-Year Review and Analysis

Even after the budgeting period is over, healthcare financial professionals can still learnvaluable lessons fromtheir budgets. They can study any incremental analysis conducted throughout the period todetermine what impactmid-period changes had and if they were successful in course-correcting discrepancies, whichcan inform the planningof and adjustments to future budgets. Additionally, a big-picture look at the entirebudgeting period can spotlightareas where revenue or costs spiked or dipped unexpectedly to help prepare for futureoutliers. Over time, thiscyclical process of planning, implementing, monitoring, adjusting and reviewing budgetsrefines the precision ofhealthcare budgeting and helps providers build long-term success.

10 Healthcare Budgeting Best Practices

Every healthcare budget is unique and should address the specific strengths, weaknesses andgoals of the organizationit is made for. Still, some near-universal best practices can help healthcare professionalsget the most out oftheir budgeting process and more effectively balance financial viability with exceptionalpatient care. Here are 10best practices for healthcare professionals to follow:

1. Align with strategic goals. Every aspect of the budget should supportthe overall goals of thehealthcare provider to avoid wasted or misallocated funds. Every row of the budgetshould be justified, deliberateand fit with the larger strategy, such as a five-year expansion plan for a new wing of ahospital.
2. Incorporate data analytics. Resource allocation should be based on harddata, not hunches, and adata-focused approach should be embedded at every stage of the budgeting process. Thisincludes collecting robustdata to pinpoint costs and revenue sources and identify trends.
3. Engage stakeholders. Budgeting requires collaboration among departmentsand stakeholders tounderstand how decisions will affect the staff directly involved with patients and toinform the overall budgetproceedings through budget proposals and presentations. This also helps front-lineworkers identify problems theyencounter almost daily and to voice actionable suggestions to decision-makers.
4. Monitor performance regularly. Regular performance checks vis-à-visprior budget estimates andforecasts enable early identification of issues and, thus, timely interventions. Aproactive approach can safeguarda healthcare provider’s finances, preventing budget overruns and reinforcingfinancial sustainability.
5. Use a rolling forecast. Rolling forecasts allow for perpetual planningand fine-tuning based onreal-time financial performance and evolving circ*mstances. This dynamicapproach offers more flexibility and responsiveness than traditional andrigorous annual budgeting and isespecially important during challenging economic periods, such as inflation.
6. Budget for contingencies. The unpredictable nature of healthcarerequires contingency plans —and funding — to absorb costs from unexpected events, such as public health crisesor natural disasters. Thisforward-looking approach helps providers maintain care continuity during periods whenpatients need it most.
7. Promote a culture of accountability. A budget is only as effective asthe team implementing it, anda clear delineation of responsibility and accountability helps prevent misspent fundsand poorly implementedbudgeting strategies. Make sure every team member knows exactly what they need to do andhow and when they need todo it.
8. Plan for capital expenditures. Technology is constantly beingintroduced to meet new and evolvinghealthcare needs, and healthcare providers must budget for new equipment. Additionally,they should analyze the lifecycle and performance of existing assets to plan and budget for repairs. While thesecapital expenditures take awayfrom the funds available for day-to-day expenses, effective planning and timing can helpstrike the right balancebetween optimizing today’s care with building long-term success fortomorrow’s patients.
9. Review and learn. The budgeting process is ongoing and should continueas long as the healthcareorganization is collecting revenue and accruing expenses. By analyzing successes andmissteps in current and priorbudgets, hospitals can continuously improve and enhance future budgeting processes.
10. Leverage technology. Technology, particularly budgeting software andintegrated business platforms,can expedite the budgeting process through automation, enhance precision throughscenario modeling and yieldinvaluable insights and actionable strategies. Technology can give healthcare financialprofessionals the tools theyneed to quickly and regularly generate and adjust budgets, replacing the antiquatedmanual budgeting process thatcould take weeks or even months to fine-tune and implement.

Machine Learning and AI in the Hospital Budgeting Process

Machine learning and artificial intelligence (AI) have been implemented in many sectors,healthcare included. Thesetechnologies can improve decision-making across healthcare organizations throughsophisticated and automated datacollection and extrapolation techniques, creating more accurate and far-reaching forecaststhan even the savviestaccounting team might achieve. These insights, often organized into easy-to-read dashboardsor comprehensivereports, allow users to quickly find the information they need, and they are often moreaccurate than manuallyentered data. These platforms can also generate ad hoc reports and increase flexibility bycarrying adjustmentsthroughout the entirety of the budget, minimizing missteps or double-counted expenses andrevenue.

But it is important to remember that these technologies present some challenges. There is asubstantial cost inimplementing machine learning and AI, from capital expenses to onboarding and training staffin their proper use.Additionally, privacy concerns exist for comprehensive data analysis, especially for a fieldas regulated as medicalrecords. And automation isn’t perfect; it still requires a human touch to ensure thatthe informationpresented is accurate and being applied appropriately. A field as human-driven and complexas healthcare needs to bebudgeted and managed with compassion and with an emphasis on patient care, not justspreadsheets and numbers.Collaborations between technology and humans often yield the best results, and automatedbudgeting processes are noexception.

Collaborative Budgeting, Planning and “What-If” Modeling forHospitals With NetSuite

In the rapidly evolving healthcare industry, the demand for robust, adaptable andcollaborative budgeting solutionsis greater than ever. With NetSuite’s Healthcare andLife Sciences software, financialprofessionals can more effectively track revenue and costs and improve visibility acrosstheir organizations,letting healthcare providers focus more on helping patients and less on crunching numbers.

NetSuite is a comprehensive and customizable solution that uses sophisticated technology toimprove forecasts, run“what-if” models and plan resources, streamlining the budgeting process andpreparing healthcare workersfor whatever challenges the future brings. NetSuite’s budgeting and planning toolshelp healthcareorganizations effectively balance financial sustainability with delivering top-tier patientcare to create long-termsuccess for hospitals, patients and the communities they share.

Healthcare professionals face myriad challenges in their mission to provide effective care,difficulties that areexacerbated by limited resources and rising costs. To meet these challenges, healthcareorganizations can usebudgets to carefully plan and implement their priorities, from the initial planning phasesto recalibratingstrategies after they are implemented. By emphasizing the importance of effective budgeting,healthcare facilitiesof all sizes can build long-term success and remain well equipped to meet the needs of theirpatients and thecommunities they serve.

Healthcare Budgeting FAQs

What are the different types of budgets in healthcare?

There are three primary types of budgets in healthcare: operational, capital and rolling.Operational budgets coverday-to-day expenses and revenue. Capital budgets focus on long-term assets and largerinvestments. Rolling budgetsfocus on a set amount of time in the future, typically 12 to 15 months, and are regularlyadjusted as time goes on.

Why is a budget important in healthcare?

Due to the high variability in expenses and revenue sources for the healthcare industry,budgets are necessary toensure that medical professionals can provide high-quality care to patients in need.Inaccurate budgets can lead tosupply scarcity and suboptimal care resulting from poorly allocated funds and resources.Over time, this can causefinancial issues for hospitals, from lost revenue to reputational harm.

Why is a flexible budget important in healthcare?

A flexible budget allows healthcare organizations to adapt to fluctuations in patientvolumes, respond to regulatorychanges, manage medical emergencies and support strategic initiatives to better alignresources with patient care.Because public health crises, such as outbreaks or natural disasters, can occur at any time,healthcareorganizations must be able to recalibrate their budgets as conditions evolve andpatients’ needs change.

How does a shift from fee-for-service to value-based care impacthealthcare budgeting?

Fee-for-service healthcare is commonly criticized for emphasizing revenue over patientoutcomes because each serviceearns revenue. With value-based care, healthcare professionals aim to take a more holisticapproach to providingcare. However, budgeting for bundled services and tracking patient outcomes requireextensive data collection, whichcan present challenges for small healthcare providers and may require investments inresource utilization andaccounting software.

How often is a healthcare budget updated?

Healthcare organizations can choose to update their budgets as often or as infrequently asthey deem appropriate. Butgiven the high variability in revenue and expenses in the healthcare industry and the rapidexpansion andimplementation of new technology, equipment and best practices, many healthcareorganizations choose to update theirbudgets monthly or quarterly.