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Types of financial decisions made in healthcare

Running a healthcare organization costs a fortune. In fact, the healthcare industry contributes significantly to the economy, at least that is what the latest figures say. In 2019, healthcare spending comprised 17.7% of the economy, increasing $3.8trn and growing faster than consumer prices and the economy. Healthcare spending in the US was double that of other developed countries, with combined healthcare organizations spending an average of $11,582 per person. While several factors figured into healthcare expenses, the costs associated with hiring physicians, prescription drugs, and insurance form the bulk of the costs.

To say that caring for people is expensive is an understatement. Each healthcare organization has a budget that accounts for every expense and all the revenue it pulls into the organization. In a nutshell, the $11,582 figure in the above paragraph includes operating costs and capital equipment. When drafting a budget, financial managers must account for the system, which usually consists of physicians, skilled nurses, home care services, and foundations, among other costs. 

Why budgeting is necessary for healthcare

Budgeting is necessary for healthcare organizations because the price of care changes as researchers and physicians develop new technologies and treatment methods. A budget allows financial managers to plan for the future and establish which departments and programs are a priority. Moreover, it alerts financial managers of waste and where to allocate money best. A healthcare system with a budget can operate more efficiently and often provide patients with better care. 

Planning a budget is crucial because it helps financial managers offset any future challenges. Challenges that healthcare organizations face include unpredictable economic events, for example, COVID-19, changes to reimbursement and payment models (Medicare/Medicaid), the development/adoption of innovation, increasing costs, labor shortages, supply chain problems, and mergers/acquisitions of organizations. Other factors influencing a healthcare budget are changing patient loads, rising interest rates, inflation, and higher capital acquisition costs. Healthcare system finance comprises three budget types — operational, capital, and rolling forecast budgets.

Operational budget

This type of budget focuses on planning costs associated with running the hospital organization and personnel costs, for example, staff and training. Within an operational budget, staffing comprises the largest budget, accounting for salaries, overtime hours, potential overstaffing, and other fixed and variable costs. The operating budget allows financial managers to track expenses and revenues.

Capital budget

This type of budget involves designating funds to purchase durable goods, such as beds, equipment, and building and infrastructural improvements. Equally important, the capital budget pays for items that directly impact patient care. For instance, updated surgical equipment and technology might be items that a financial manager plans for when allocating money during the budget process. This spending is closely tied to the healthcare organization’s vision.

Rolling forecasts

This type of budget differs from the operational and capital budgets in that financial managers review them monthly or quarterly. This review aims to make monthly or quarterly projections using historical data. It allows financial managers to adjust the budget as they receive new information. Furthermore, it helps them make vital data-driven decisions regarding future budgets.

How are budgets created?

Drafting operational and capital budgets involves financial managers relying on software that uses historical data, inputs, and assumptions. After receiving these reports, financial managers evaluate information across the various clinical services and departments. Then, the budget goes through the process of obtaining other inputs, receiving updates, and receiving approval from multiple stakeholders (hospital board members, investors, etc.). Once approved, the budget allocations usually last for one year.

Going through the rolling forecast is more complicated. This process involves using historical data to make future predictions and relies on current data to update existing budgets. This process allows financial managers to modify the budget based on current information, review current expenses and initiatives, and make future decisions. 

The rolling forecast process happens in four steps. The budget team (committee) reconvenes monthly or quarterly to review and modify the budget. The team then chooses a budget horizon, which can be as short as a month or as long as two years forward. The committee then takes the most current information and performs comparative and trend analyses of multiple factors. For instance, if the team needs to assess future risk, they might test against three conditions looking at favorable, unfavorable, and very unfavorable outlooks. After gathering all this information, the committee then looks at specific actions they might take in the short and long term to fortify and protect the healthcare organization. The rolling forecasts allow financial managers to make projections for fund allocations for as little as six quarters to as long as 12 quarters.

The benefits of budgets for healthcare organizations

Drafting budgets are essential to keep track of how managers spend departmental funding. However, budgets also provide other benefits, such as aligning operational plans with financial planning targets. Ensuring capital investments align with strategic projects and reducing purchasing errors are other advantages of drafting a budget. Finally, preparing a budget assists financial managers with a better understanding of how their purchasing decisions impact the healthcare organization.

Typical financial activities involved with healthcare outside of budgeting

While budgeting is an essential factor in healthcare, financial managers also routinely engage in finance-related activities that impact the organization’s operation. Below are just a few of the activities that financial managers engage in when deciding how to fund healthcare. 

Generating financial statements and analyzing them

Financial statements are the report cards of a healthcare organization’s performance, which is why financial managers must learn how to read, analyze, and interpret the information generated in them. One statement a financial manager might use when making decisions is the balance sheet, which gives managers a picture of the organization’s financial health and future success.

The cash flow statement is another financial statement that provides information as to how the hospital organization is spending and generating income. Finally, the income statement provides insight into a healthcare organization’s actual performance compared to its expected performance. When placed in the context of an annual report, these combined statements offer information related to the organization’s year-over-year performance.

Track financial performance 

Financial managers not only gather information on how their companies operate yearly but also track the healthcare organization’s performance through key performance indicators (KPIs). Examples of KPIs are gross profit margins, return on equity, and working capital. The cash flow and profit KPI allows financial managers to track how the organization manages and grows the hospital’s revenue to make appropriate decisions regarding hiring the appropriate people and resources to provide quality healthcare to patients. 

Make estimations on the impact of programs, initiatives, and projects

Regardless of its mission, every organization deploys initiatives, programs, and projects to carry out its mission. This is also the case with healthcare organizations. For this reason, financial managers often must decide which programs, initiatives, and projects to keep and which to discard. Managers make these estimations based on return-on-investment (ROI) data, which illustrates how much money a program, project, or initiative needs to generate to become profitable. Obtaining ROI information is especially helpful when making decisions regarding the fund allocation of the continuation of programs/projects that departments have completed. 

The cost-benefit analysis is another way healthcare financial managers estimate whether a project, initiative, or program will be worthwhile. These analyses compare the estimated costs of taking on a new venture with its benefits. A data-driven process, the cost-benefit analysis offers a digestible evaluation of the benefits of projects, programs, and initiatives, so financial managers can pursue the projects that will have the best returns for the healthcare organization.

Retain tax-exempt status

Financial managers in the healthcare setting also play a role in helping healthcare organizations keep their tax-exempt status. Most healthcare organizations must ensure that they comply with state and federal regulations to remain tax-exempt. In many cases, financial managers will also devise methods for keeping this designation by implementing strategies such as launching a healthcare training program or providing free services to the community.

Oversee risk management

Healthcare is one industry where risk management plays a vital role in providing quality healthcare. Liabilities in the healthcare environment can have dire consequences if an incident threatens patient safety, quality of life, and life. Financial managers must look at the organization’s current processes and policies to devise ways to reduce or mitigate losses. 

Manage contracts

A patient might find themselves in contact with several companies that contract with the hospital during their care. Financial managers are also involved with reviewing contracts with firms and vendors who provide a range of services to the hospital, from selling food in the cafeteria to lab services. These professionals must ensure that the contractors they work with are legitimate and meet compliance requirements. Moreover, financial managers ensure that the services or products they receive from contractors align with spending priorities.

Devise strategies to raise capital

Another role financial managers play in the healthcare setting relates to devising ways to raise capital for the organization. For example, they must find ways to finance projects or programs, come up with strategies for raising funds, and decide how to use funds from within the organization. When making these decisions, senior managers typically consult an expert to get information on costs, the materials needed, and how they plan to fund the project. 

Make investment decisions

While healthcare organizations focus on providing quality healthcare to patients, they also invest in advancing this goal. These investments are usually long range and can be as small as investing in the latest technology to advance medical care processes or the type of care patients receive. Alternatively, these processes can be as extensive as adding a unit or building that provides care for patients or implementing a preventive program that reduces the incidence of certain patient conditions in the hospital’s surrounding community.

Decide which insurers to accept

Insurance plays a great role in hospital care because it allows people who might not receive expensive healthcare to receive quality care. Typically, a patient’s insurance covers a portion, if not the whole, price of a physician’s visit, any treatments, and medications that a patient might need. Financial managers must ensure that insurance reimbursements can cover the costs of services and treatments a patient receives. For this reason, financial managers play a vital role in deciding which insurers to accept. 

Watch for misuse/misappropriation of funding

Finally, financial managers are watchdogs for how administrators use funds in the healthcare setting. Through the various reports they receive, financial managers can determine if staff have used funds or materials in appropriate ways. With this information, they then decide which actions to take if there is a discrepancy between hospital records or inventory and what resources (financial or material) are available for use. 

Why financial decisions are the foundation of quality healthcare

Funding and its uses determine the type of care patients receive, the central mission of all healthcare organizations. The minute a patient walks through the doors of a healthcare center, they are impacted by the financial stewardship of the organization. This impact includes how long a patient must wait to see a physician and the types of treatments available to them. Many of these decisions are based on the financial statements, documents, and budgets that allow them to see whether the organization’s current operational procedures are effective but still allow offering quality care. An effective healthcare organization relies on the work of a team of professionals that oversee the financial health of the organization. 

Available careers in financial management within healthcare

Because of the many different roles that finance and funding play in the hospital setting, healthcare organizations must employ people who can work with numbers. These professionals play a central role in the type and quality of healthcare individuals receive and are part of the backbone of the hospital organization. Furthermore, the healthcare industry is home to many positions that need administrators who work with figures. 

Students and mid-career professionals looking to advance their careers to contribute to financial decision-making in the healthcare setting have a few options by which to do so. Jobs that one might see in financial management in healthcare are auditors, accountants, billing managers, sponsorship managers (who oversee fundraising efforts in the hospital), grants managers, patient account managers, and fraud investigators. These are just a few roles that those seeking a career in financial management in this industry might fill. 

The professional working with numbers is a part of healthcare administration, a growing field. This 

broad field comprises numerous positions whose requirements can vary. Below are some of the requirements to enter financial management.

How to obtain degrees necessary to function in these roles

The best place to start is with a trip to the local career office. Here, those interested in pursuing a career in financial management can get guidance on which avenues to take. Because finance within healthcare is in every part of the organization, the degree, certificate, training, and work experience requirements will vary depending on the department or specialty. However, the landscape allows prospective healthcare administrators room for career growth.

Many roles within the financial part of healthcare administration only require the professional to obtain a bachelor’s degree in a related field, for example, finance, accounting, or business. However, for those who seek to advance in areas within healthcare management, many organizations ask for master’s or doctorate degrees, in addition to relevant work experience. In either case, students can obtain either degree through various college and university programs. 

For mid-career professionals who want to obtain a degree without sacrificing their income, higher education is within reach through the online platform. For instance, through the Executive Master of Health Administration Online students can earn a degree in two years that will allow them to work in a managerial role in the hospital setting. This particular program prepares students for an evolving healthcare landscape by teaching them about the policies and trends that govern this field. 

Final words

As healthcare becomes more complex, the demand for professionals to fill the various roles within it will also grow. The hospital setting will always need professionals who can oversee the aspects of drafting, reviewing, and allocating a budget. Outside of working with budgets, healthcare organizations also perform a variety of roles within the clinical setting, including overseeing operational costs and whether departments are operating efficiently. Regardless of the position, these professionals provide the foundation for quality patient care.

Students looking for a career in a non-clinical healthcare role and mid-career professionals who want to advance their careers in a field with career stability and growth will find healthcare administration filled with infinite possibilities. Fortunately, there is a way to achieve these goals through college and university programs that offer the flexibility and support needed to finish the degree program. Looking forward to a rewarding career in healthcare begins with taking that first course. 

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