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Operational Budget Proposal-External Factors Affecting Healthcare Budgeting

Operational Budget Proposal-External Factors Affecting Healthcare Budgeting

External Factors Affecting Healthcare Budgeting

Hospitals today face the pressure to increase their financial performance due to the ever-increasing importance of financials in a hospital’s survival. In the US, for instance, two factors are responsible for a hospital’s desire to manage its finances effectively. These include the Affordable Care Act (ACA), the shift to value-based care, and the baby boomer generation’s retirement (Nurettin Oner, 2016). Also, the increase in new spending on drugs for new treatments has partly contributed to the rising need to manage finances well to avoid falling into a financial crisis.

One of the Affordable Care Act effects was the requirement for protection for all care plans. Regardless of a patient’s insurance coverage, they can access healthcare. As a result of the legislation, patients can access care from any primary provider. Also, the requirement abolishes the initial requirement that forced women to inform an insurance company before seeking services from a gynecologist. Hospitals are required to ensure those seeking emergency care services are able to access them. ACA also extends coverage to dependants, particularly offspring, till they attain 26 years (Nurettin Oner, 2016). The result is increased financial stress on hospitals, forcing them to adopt more prudent financial management plans. Such financial pressure also means that hospitals must budget adequately to avoid falling short of their financial obligations.

Besides, the shift to value-based care has impacted how providers conduct their budgeting. The model requires insurance providers to reimburse physicians and hospitals based on evidence-based healthcare outcomes. Unlike the capitation payment model, which is based on the number of services offered by physicians, the value-based model entirely depends on quality and delivery (Nurettin Oner, 2016). The model has changed how hospitals and physicians provide care. For instance, the model requires a networked approach to addressing patient issues, including team-oriented and coordinated patient data sharing. That means providers should adopt healthcare technology or electronic health record systems to ensure effective healthcare delivery as per the model. Also, value-based care requires all providers to incorporate all healthcare needs, including specialized care, with primary care. That puts more financial pressure on healthcare providers since they must acquire expensive equipment for specialized care. Essentially, the value-based care model requires providers to invest in total quality management, and that means a comprehensive budget is needed to take care of any eventualities.

Budget Alignment with Profitability Targets

The increasing healthcare costs contributed by external factors mean that hospitals must undertake strategies to align the costs with proposed budgets. One strategy used by hospitals to ensure that they attain their profit margin targets is setting base year estimates and then adjusting them to align with rising value-based care financial needs (Mammano & Tyson, 2008).  For instance, the projected costs resulting from MRI purchases and other related expenses have been factored into the initial budget to derive a new budget. Also, hospitals must adjust their budgets to factor in external changes in the prices of drugs.

Also, creating estimates is a good way to cut costs and use resources efficiently. For instance, some states in the US that act as insurance providers require hospitals to provide revenue-based budgets before state funding. With financial incentives, hospitals are always willing to serve the healthcare needs of the local population effectively and attain the required budget limitations.

Besides, a pre-determined budget is useful in helping hospitals adopt non-wasteful payment methods. The requirement that encourages team-based caregiving means that hospitals will compensate accordingly to avoid falling out of the budgetary constraints (Mammano & Tyson, 2008). If, for instance, a patient is attended by a physician and nurses, their compensation comes as a package. Spreading such payment across the individual caregivers will increase overall healthcare costs.

Hospital Financial Performance Key Performance Indicators (KPIs)

Many healthcare metrics can measure hospitals’ performance, but there are fewer KPIs when it comes to determining financial performance. The best way to track and evaluate expenses is by considering the operating margins (Silber et al., 2014). That means a comparison between the budgeted costs and actual costs. The operating margin shows profitability after the hospital has accounted for all costs.

Another way to evaluate financial performance is by tracking output and its utilization in all healthcare areas. Focusing on individual departments instead of an entire organization will help the hospital eliminate the obstacles that stand between it and its profit targets (Silber et al., 2014). It is easier to make adjustments to non-performing departments this way.

The hospital should also monitor all labor expenses and their contributions towards the total hospital expenses. That should also include a closer look at the composition of the labor expenses to filter out unnecessary expenses (Cleverley, Cleverley & Song, n.p). Weeding out non-essential staff is critical towards reducing the costs at the hospital.

Furthermore, considering the impact different insurance companies have on a hospital’s bottom line, the latter should evaluate them one by one. That will help the hospital discover the insurance providers likely to hurt its bottom line. Consequently, the hospital can renegotiate billing terms to adopt provider-friendly care payment terms.


Cleverley, W. O., Cleverley, J. O., & Song, P. H. Essentials of health care financeMA:   Jones & Bartlett Learning.

Mammano, K. A., & Tyson, T. N. (2008). Developing an operating budget for Extended Family, inc.: A not-for-profit human service organization. Issues in Accounting             Education23(1), 129–144.

Nurettin Oner, M. S. (2016). Organizational and environmental factors associated with hospital financial performance: A systematic review. Journal of Health Care Finance43(2).

Silber, J. H., Rosenbaum, P. R., Ross, R. N., Ludwig, J. M., Wang, W., Niknam, B. A., . Fleisher, L. A. (2014). A hospital-specific template for benchmarking its cost and quality. Health Services Research, 49(5), 1475–1497.


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In 4-5 pages, describe the environmental forces that affect healthcare organization budgets.

Operational Budget Proposal-External Factors Affecting Healthcare Budgeting

Operational Budget Proposal-External Factors Affecting Healthcare Budgeting

Propose a budget that includes organizational improvements. Explain how the budget aligns with the target profit margin and how financial performance will be measured.

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