The Basics of Healthcare Budgeting and Capital Budgeting
What is a budget in healthcare?
A healthcare or hospital budget is an estimation of revenue and expenses over a specified timeframe. Through the healthcare budgeting process, health systems come to an understanding of how much funding must be planned in certain areas, including operating costs and capital equipment. A health system may include hospitals, physician groups, skilled nursing facilities, home care services, foundations, and a variety of other business types. During the budgeting process, leaders must account for key components of planning in healthcare, including volume growth assumptions, feedback and input from key stakeholders, and the ability to adjust when inputs and circ*mstances change. Ultimately, a well-planned budget allows health systems to plan appropriately for the future in order to provide quality care.
What are the types of budgeting in healthcare organizations?
There are several types of budgets and planning processes in healthcare:
- Operational budgeting in healthcare is the process of determining the funding planned for facility operating costs and personnel costs, such as staffing and training. Staffing is usually the largest cost in a healthcare operational budget, and it must not only account for fixed costs, like salaries, but overtime hours, potential overstaffing, and other variable costs. A healthcare operational budget allows hospitals and health systems to monitor and balance revenues and expenses.
- Capital budgeting in healthcare is the process of allocating funding to the purchase of durable goods, such as beds, equipment, or improvements to buildings or infrastructure. A hospital capital budget is important because the purchases made from this pool of resources (e.g., more surgical equipment or updated technology) can have a direct impact on a health system’s ability to provide better care to more patients. Capital budgeting in healthcare is generally related to the hospital or health system’s overall strategic vision for the organization.
When comparing an operating budget to a capital budget, it’s important to note that while the two are separate, each influences the other. Capital investments, such as new facilities or updated technology, can impact future staffing and operating costs. Funding for those purchases, however, may need to come from the operating budget. When planning hospital budgets, leaders must balance the effects of the two budgets.
- Rolling forecasting in healthcare is a process for healthcare leaders to update their financial projections on a monthly or quarterly basis. This process uses historical data to continuously update near- and long-term projections. With frequent updates, leaders can adjust their strategy as conditions change. By utilizing rolling forecasting, healthcare organizations can plan more efficiently and make agile, data-driven decisions.
Why is budgeting important in healthcare?
Healthcare is a rapidly changing industry that must continuously adapt as new patient needs emerge, technologies and techniques are updated, and reimbursem*nt models evolve. A strong healthcare budgeting process allows leaders to plan for the future and establish priorities around care and clinical departments. A healthcare budget is an important tool to understand where funds are best spent and how to allocate capital among various departments and projects. This enables healthcare organizations to be more efficient in delivering effective and efficient patient care.
What are the benefits of budgeting in healthcare?
Healthcare budgeting is critical for decision-making across health systems and organizations. An effective budget process allows healthcare leaders to:
- Align operational plans with financial planning targets
- Prioritize capital investments to align with strategic initiatives
- Effectively manage capital spend and cash flow
- Better understand the allotment of funding to individual projects, initiatives, and clinical departments
- Minimize purchasing errors
What budget-related challenges do hospitals face?
Because of the rapidly changing nature of the healthcare industry, health systems and hospitals face many budget-related challenges, including:
- Unpredictable economic events, such as the 2020 COVID-19 pandemic, which can render static budgets outdated and inaccurate
- Changes to reimbursem*nt and payment models, including declines in Medicare and Medicaid reimbursem*nt
- Development and adoption of new technologies, such as telehealth and home-based medicine
- Labor shortages and increasing costs
- Mergers, acquisitions, and increasing market competition from new care delivery models
- Supply chain issues and interruptions, such as personal protective equipment (PPE) or prescription drug shortages
What factors affect a healthcare budget?
Beyond factors within a health system’s control, a variety of external factors can affect a healthcare budget, including:
- Changes in patient volumes across various departments, which can affect service line budgeting
- Rising interest rates
- Inflation
- Higher capital acquisition costs
