Different types of budget and its applicability in the health sector, Discussion post help

User Generated

bzrtnzna1911

Business Finance

Description

Instructions in Document labeled U9D1

Unformatted Attachment Preview

Different Types of Budgets Discuss four different types of budgets and explain when it would be appropriate to use each for a medical organization. Remember to use two references. Your post must follow APA sixth edition style and formatting guidelines. 250 words 10 pt Arial. Types of Budgets Although the term the budget is often used as if there were only one budget, most health care organizations develop four interrelated budgets: 1. statistics budget 2. operating budget 3. cash budget 4. capital budget. Reference Zelman, W. N., McCue, M., Glick, N. & Thomas, M. (2015). Financial management of health care organizations: An introduction to fundamental tools, concepts and applications (4th ed.). San Francisco, CA: VitalBook file. Reference Zelman, W. N., McCue, M. J., Glick, N. D., & Thomas, M. S. (2014). Financial management of health care organizations: An introduction to fundamental tools, concepts, and applications (4th ed.). San Francisco, CA: Jossey-Bass. CHAPTER 10 BUDGETING LEARNING OBJECTIVES • State the purposes of budgeting. • Describe the planning-and-control cycle and the five key dimensions of budgeting. • List the major budgets and explain their relationship to each other and to the income statement and balance sheet. • Construct each of the major budgets. The budget is one of the most important documents of a health care organization and is the central document of the planning-and-control cycle. The budget serves not only as a planning document that identifies the revenues and resources needed for an organization to achieve its goals and objectives but also as a control document that allows an organization to monitor the actual revenues generated and its use of resources against what was planned. The Planning-and-Control Cycle As illustrated in Exhibit 10.1, the planning-and-control cycle has four major components: strategic planning, planning, implementing, and controlling. Budgeting is the central element that affects all these areas. Strategic Planning Identifying an organization's mission, goals, and strategy to best position itself for the future. Strategic Planning and Planning Activities Strategic planning and planning activities provide the basis for the organization to develop the budget. The purpose of strategic planning is to identify the organization's vision, mission, goals, and strategy in order to position itself for the future. The purpose of planning is to identify the goals, objectives, tasks, activities, and resources necessary to carry out the strategic plan over a defined time period, commonly one year. The organization's mission is usually set forth in a mission statement, which is a broad, enduring statement of its vision and purpose. The mission statement guides the organization into the future by identifying the unique attributes of the organization, why it exists, and what it hopes to achieve (see Perspective 10.1). EXHIBIT 10.1 THE PLANNING-AND-CONTROL CYCLE Planning The process of identifying goals, objectives, tasks, activities, and resources necessary to carry out the strategic plan of the organization over the next time period, typically one year. Mission Statement A statement that guides the organization by identifying the unique attributes of the organization, why it exists, and what it hopes to achieve. Some organizations divide these attributes between a vision statement and a mission statement. A major activity of the strategic planning process is to assess the organization's external and internal environments. The external environment of most health care organizations is complex, and an environmental analysis must include surveying the local, regional, national, and international environments for changes that may occur in a variety of areas, including the economy, regulation, technology, and health status of populations. Other areas of the external environment that must be examined are listed in the top part of Exhibit 10.2. Failing to thoroughly and correctly assess even one of these domains could lead to major problems for, or even the demise of, the organization. Most recently, the Patient Protection and Affordable Care Act has made significant changes to the strategy and operations of health care entities, particularly hospitals. Some of the issues that are already affecting hospitals are decreasing reimbursement due to value-based payment methodologies, the possibility of increased revenue due to expansion of Medicaid (for those states that enact it), the individual and corporate mandates for insurance coverage, and extensive IT requirements associated with producing and monitoring quality metrics that are already important and will become even more so in the value-based purchasing methodologies (see Perspective 10.2). In addition to its external environment, a health care organization has to examine its internal environment, which includes both tangible factors, such as financing, staff, services, and structure, and intangible factors, such as its history, reputation, and the strength of its board of directors. PERSPECTIVE 10.1 MISSION STATEMENT OF SHRINERS HOSPITALS The mission of any health care entity is important to help guide the entity's strategic management process. But it is probably even more important in a not-for-profit health care entity because it sets forth the entity's tax-exempt purpose. The IRS is scrutinizing not-for-profit health care entities because it believes that many do not provide sufficient community benefit to justify the exemption. Every initiative that a not-for-profit entity undertakes should be able to be tied back to its mission. The mission of Shriners Hospitals for Children is to • Provide the highest quality care to children with neuromusculoskeletal conditions, burn injuries and other special healthcare needs within a compassionate, familycentered and collaborative care environment. • Provide for the education of physicians and other healthcare professionals. • Conduct research to discover new knowledge that improves the quality of care and quality of life of children and families. This mission is carried out without regard to race, color, creed, sex or sect, disability, national origin or ability of a patient or family to pay. Its vision says: Shriners Hospitals for Children will be the unquestioned leader, nationally and internationally, in caring for children and advancing the field in its specialty areas. Source: Shriners Hospitals for Children, Vision and mission, www.shrinershospitalsforchildren.org/Hospitals/VisionandMission.aspx. An important outcome of the strategic planning process is to identify goals and objectives. In the past, goals and objectives for many health care organizations were fairly narrowly restricted to the nature and scope of services the organization hoped to provide. More recently, however, they have included population impacts (e.g., to reduce low-weight births in the covered population by 15 percent over the next five years), market penetration (e.g., to capture 25 percent of the HMO market within the next five years), and financial position (e.g., to increase return on assets by 10 percent over the next three years). The goals and objectives the organization chooses to pursue affect the revenues and resources the organization will need, and these, in turn, must be reflected in its budget. EXHIBIT 10.2 RELATIONSHIP OF BUDGETS TO STRATEGY, TACTICS, AND OPERATIONS Short-Term Plans Plans that identify an organization's short-term goals and objectives in detail, primarily in regard to organizational marketing, production, control, and financing. Whereas the organization's strategic planning process focuses on the long term, the organization also develops shorter-term plans to help it achieve its short-term objectives. Whereas the strategic plan is fairly general, short-term plans are more specific and identify short-term goals and objectives in more detail, primarily in regard to organizational marketing, production, control, and financing. Implementing Activities Once the organizational plans have been defined and approved for the upcoming fiscal year, budgets need to be created for each and every department (or cost center). Implementing activities is the process of creating these individual budgets, which then get rolled up into service line budgets and, eventually, the overall organizational budget. For example, the individual budgets for general medicine, cardiology, and rheumatology would all get rolled up into a combined budget for the entire Department of Medicine, and this budget would then be rolled up with the combined budget for the Department of Surgery and other budgets into the overall organizational budget. PERSPECTIVE 10.2 EHR IMPLEMENTATION COSTS Hospitals have always had challenges securing the initial down payment for electronic health record (EHR) implementation; a recently released poll from KPMG suggests that financing such projects remains an ongoing concern that promises to last throughout the implementation phase and beyond…. Forty-eight percent of those polled said they are only somewhat comfortable with the level of budgeting their organization planned for EHR deployment. Nine percent said they weren't comfortable at all with their budget plans. With the majority of those polled expressing some level of discomfort about how they will pay for their project moving forward, Gary Anthony, principal with KPMG Healthcare, said the poll findings suggest that healthcare executives miscalculated the costs of their EHR projects…. According to Anthony, recent reports that Duke University will spend $700 million to implement its EPIC EHR indicate the staggering costs of an EHR implementation project. He also said these projects are associated with maintaining and storing additional terabytes of data and providing security capabilities that adhere to Health Insurance Portability and Accountability Act (HIPAA) requirements. Additional costs come with maintaining a robust network that allows doctors and other clinicians to access the data remotely on their iPads or smartphones…. Anthony estimates that salaries for employees with health IT skills have risen substantially during the last two years, which also drives up implementation cost. “There is a lack of skills in most health organizations around high-level project management disciplines. It's difficult to find people who know how to manage these very large-scale projects across the organization and who will implement the project on time and on budget,” Anthony said. Source: Excerpted from R. Lewis, EHR implementation still costs too much, InformationWeek, July 9, 2012, www.informationweek.com/healthcare/electronicmedical-records/ehr-implementation-still-costs-too-much/240003310. For revenue-generating cost centers (those areas that see patients and/or visitors and bill for their services), administrators will use historical trends, marketing projections, and revised fee schedules to estimate the volume of services that they expect to be performed and the corresponding gross revenues that they expect to generate. These revenues will be matched against projected costs for labor and general operations. Non-revenue-generating cost centers (such as Information Technology or Decision Support), will only present projected costs, and their budgets will be rolled up into the overall administration budget. Depending upon the organizational approach to budgeting (discussed in the next section), administrative guidelines will specify how to create standardized budgets in a uniform manner that will be consistent with the organization's mission statement and goals for the upcoming time period. Controlling Activities Activities that provide guidance and feedback to keep the organization within its budget once that budget has been approved and is being implemented. Controlling Activities Planning activities provide input to the development of the budget. Once the budget has been approved and implementation begins, controlling activities provide guidance and feedback to keep the organization within its budget (see Exhibit 10.1). Control tools vary from organizational structure and information systems to such financial activities as supplying monthly reports to department managers regarding their expenditures against budget and giving midyear bonuses based on financial performance. Organizational Approaches to Budgeting Exhibit 10.3 lists five key dimensions over which organizations vary in regard to budgeting: participation, budget model, budget detail, budget forecast, and budget modifications. EXHIBIT 10.3 Participation KEY BUDGETING DIMENSIONS The budgeting process can vary considerably from one organization to the next in terms of the roles and responsibilities of the various organizational positions. Under an authoritarian approach, the environmental assessment and the planning of future activities are largely concentrated in a few hands at the top of the organization, and the budget is essentially dictated downward. The authoritarian approach is often called top-down budgeting. The opposite of the authoritarian approach is the participatory approach, in which the roles and responsibilities of the budgeting process are diffused throughout the organization. The participatory approach often begins with some general guidelines from the top, based on top management's knowledge of the environment. Within the restrictions of these general guidelines, department heads and service-line managers (e.g., women's services, emergency services, outreach services) have great latitude to develop their own budgets to submit to upper management for approval. This approach is often called a top-down-bottom-up approach. The roles and responsibilities of various organizational positions in the participatory approach are summarized in Exhibit 10.4. Perspective 10.3 offers an example of an institution that has been ranked as one of the best in the country, in part for including physicians in its capital decision-making processes. Authoritarian Approach Budgeting and decision making done by relatively few people concentrated in the highest level of the organizational structure (opposite of the participatory approach). Top-Down Budgeting See authoritarian approach. EXHIBIT 10.4 THE PARTICIPATORY APPROACH TO BUDGETING PERSPECTIVE 10.3 PARTICIPATORY BUDGETING HELPS LEAD TO TOP RANKING Providence Regional Medical Center (Everett, Wash.) … is the third-largest hospital in Washington, with two campuses. It is currently building a $500 million, 368-bed tower, which will double capacity. In 2008, the medical center decided to grow Providence Physician Group to about 100 members over the next three years. To reach this goal, it has increased physicians' involvement in decision-making, such as giving them half the membership in a committee establishing priorities for its capital plan…. [The Medical Center is part of] Providence Health System [which] has an Aa2 bond rating from Moody's Investor Services. Source: Excerpted from L. Page, America's 50 best hospitals, Becker's Hospital Review, February 24, 2011, www.beckersasc.com/news-analysis/50-best-hospitals-inamerica.html. EXHIBIT 10.5 SOME KEY ADVANTAGES AND DISADVANTAGES OF THE PARTICIPATORY APPROACH TO BUDGETING The participatory approach to budgeting has a number of advantages beyond just forcing management to plan (see Exhibit 10.5). These advantages include • Developing a shared understanding of the goals and objectives of the organization by those who have participated in the budgeting process • Developing cooperation and coordination among the various departments • Clarifying roles and responsibilities throughout the organization (thus preventing overlap) • Motivating staff (by allowing them input into their roles, responsibilities, and accountability) • Bringing about cost awareness as a result of being involved in resource allocation decisions Although the participatory approach has many advantages, it has three important disadvantages: • Participation may result in loss of control. • Participation is time consuming and uses resources (mainly staff time) that could be devoted to other purposes. • Participation may result in disappointment. Participatory Approach A method of budgeting in which the roles and responsibilities of putting together a budget are diffused throughout the organization, typically originating at the department level. There are guidelines to follow, and top-management approval must be secured (opposite of the authoritarian approach). Top-Down-Bottom-Up Approach See participatory approach. Incremental-Decremental Approach A method of budgeting that starts with an existing budget to plan future budgets. Zero-Based Budgeting An approach to budgeting that continually questions both the need for existing programs and their level of funding, as well as the need for new programs (often referred to as ZBB). Budget Models There are two basic budget models: incremental-decremental budgeting and zero-based budgeting (see Exhibit 10.3). The incremental-decremental approach begins with what exists and usually gives a slight increase, no change, or slight decrease to various line items, programs, or departments. In some cases, all programs may receive an equal increase or decrease. In other instances, management may differentially give increases or decreases. Whereas incremental-decremental budgeting begins by asking the question, How much of an increase or decrease should each program receive?, zero-based budgeting, commonly called ZBB, continually questions both the need for each program and its level of funding. It asks: Why does this program or department exist in the first place?, and, What will happen as a result of changing (increasing or decreasing) its level of funding? Although not many institutions have truly embraced zero-based budgeting, Bain, a large management consulting firm, and others are touting the concept. With today's push toward cutting costs to deal with reimbursement declines, zero-based budgeting can help to focus on priorities. In preparation for the zero-based budgeting process, each budgeting unit (department, program, or service line) prepares a budget package that provides an overall justification for the unit's work and a series of requests to show what the unit's work would look like at various levels of funding. After receiving all budget packages from all budgeting units, management chooses from among them to find the best combination of departments, programs, and service lines, and the best levels of these to meet the goals of the organization within existing resource constraints. The following scenario illustrates what a zero-based budgeting package might look like at the general level for a small rural hospital that feels it must establish better relationships with physician practices. In this example, the zero state is no change. The alternatives are to provide practice privileges to primary care physicians at one, two, or three physician practices. In addition to the information used in this example, many organizations would also require further detail about various line items. Such information can be found in the next section, “Budget Detail.” The Situation San Valens Hospital wants to attract more referring primary care physicians (PCPs) into always sending their patients to San Valens, using the lure of its hospitalist service as a way for these physicians to bypass twenty-four-hour, seven-days-a-week primary care physician inpatient coverage obligations. Currently, there are three PCP groups in the local market area that have been referring their patients to a competing facility, but all these practices have expressed interest in joining the medical staff at San Valens and referring their patients there instead. Crown Colony and Westover Family Practice, on the one hand, with six and eight PCPs, respectively, have a similar mix of adult patients across all insurances and age levels; Parkland Affiliates, on the other hand, is the largest practice with eleven PCPs but, being located adjacent to a growing retirement community, tends to have a much higher proportion of elderly patients. Parkland patients also predominantly have Medicare and steady retiree incomes, and so their reimbursement is more favorable, but because of their age, they tend to utilize services at a disproportionately higher rate than is seen at the other two practices. San Valens wants to establish itself as a regional referral center for patients and cannot discriminate based on ability to pay. However, at the same time, it wants to make financially prudent decisions and budget adequately for any changes in service capacity. Given these objectives, the hospital needs to explore the economic ramifications of gaining patients from any or all of these PCP groups as it strives to strategically position itself as the dominant area hospital. San Valens is not operating close to its full capacity. Three alternatives are being proposed, each with considerably different costs and potential revenues, as well as different impacts on the hospital's growth, image, and political concerns (Exhibits 10.6 and 10.7a). Although the costs are fairly predictable (mainly for new staff), if volume projections are off, the revenues are not as predictable. Thus, San Valens must decide how much it wants to invest, if at all, in the three alternatives. See Exhibits 10.7a, 10.7b, 10.7c, 10.7d, and 10.7e. EXHIBIT 10.6 SUMMARY ZERO-BASED BUDGET Note: The budgets for each practice separately are considered line-item budgets. The three budgets presented altogether or in other combinations constitute a program budget. Finally, when performance targets are added to a line-item budget, it becomes a performance budget. Concluding Remarks About Zero-Based Budgeting Zero-based budgeting was introduced and broadly used in the mid-1960s, but it soon dropped out of favor, primarily because it was such a laborious process. Many organizations felt that too much time was being spent preparing and reviewing budget packages when in fact major changes rarely occurred. There are some signs, though, that zero-based budgeting is reemerging as health care organizations face an increasingly competitive environment, seek to implement new revenue enhancement and cost avoidance activities, and try to capture new market niches. Line-Item Budget The least detailed budget, showing only revenues and expenses by category, such as labor or supplies. Program Budget An extension of the line-item budget that shows revenues and expenses by program or service lines. Budget Detail Budgets can be classified into three categories based on the amount of detail they contain: line-item, program, and performance. A line-item budget has the least detail, merely listing revenues and expenses by category, such as labor, travel, and supplies. A line-item budget for the comprehensive level of care for the San Valens Hospital is shown in Exhibit 10.6. A program budget not only contains the line items but also lists them by program. Exhibit 10.6 shows how the line-item budget for the three physician practices would look as a program budget by providing detail about the three practices, which if chosen singly or in combinations would provide incremental revenues. (Zelman 465-476) Zelman, William N., Michael McCue, Noah Glick, Marci Thomas. Financial Management of Health Care Organizations: An Introduction to Fundamental Tools, Concepts and Applications, 4th Edition. Jossey-Bass, 2013-12-30. VitalBook file.
Purchase answer to see full attachment
User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.

Explanation & Answer

Hello, please review the attached and notify me if there is any part that require clarification or any further assistanceLooking forward to here from you

Surname

Student’s Name
Instructor’s Name
Course
Date
Different types of budget and its applicability in the health sector.
According to the Charted Institute of Management Accountant (CIMA), a budget is a
quantitative statement for a period of time, which may include planned revenues, assets, liabilities and
cash flows. It provides a focus for the Organization, aids coordination of activities and facilitat...


Anonymous
Just what I needed. Studypool is a lifesaver!

Studypool
4.7
Trustpilot
4.5
Sitejabber
4.4

Related Tags