Term Paper: Budgeting and Cost Control

Pages: 13 (3341 words)  ·  Bibliography Sources: 1+  ·  Level: College Senior  ·  Topic: Healthcare  ·  Buy This Paper


[. . .] For healthcare facilities to stay ahead of the curve, they must take into account not only historical data but real time data related to healthcare expenditures. Many factors must be taken into consideration when accounting for costs associated with running a healthcare facility. Labor and services are among the primary factors to be considered. Products that healthcare facilities carry and sell or provide to patients also are factored into cost analysis (Medlink, 2003). Implementation of new technologies and plans for expansion are also critical factors related to cost control that must be considered if any analysis of expenditures is performed within a healthcare setting.

Healthcare institutions must acquire and account for accurate cost information and budgeting controls; without doing so they put themselves at financial risk whenever decisions are made that will affect operations and long-term plans (Medlink, 2003). One of the primary considerations for healthcare facilities involves the cost of providing adequate healthcare services. This is considered by many to be the most important factor related to cost control. Consumers are increasingly aware of the costs associated with acquiring the best medical care. Hospitals and like minded healthcare facilities must take into consideration consumer concerns related to the quality of services, but also keep in mind that consumers are leery of the rapidly rising cost of healthcare.

In order to truly budget a healthcare facility is obligated to account for the full cost of providing any service to patients and customers. Accounting for all costs includes assessing the number of departments a facility has, including those that do and do not provide direct patient care (Medlink, 2003). Departments not providing direct care account for overhead costs, but the burden of those costs still fall on the healthcare facility.

Cost accounting in a healthcare environment can be broken down into several different levels including: charge items, patient incurred expenses and department level expenses (Medlink, 2003). In the last 10 years, the number of burdens on healthcare administrators, CEO's and directors has increased. Some recent factors that have to be accounted for include new methods of reimbursement such as Medicaid, HMO and PPO contracts (Medlink, 2003). Advances in technology have also altered the manner in which healthcare is delivered, and assessing the costs of such technologies is essential to maintaining the financial stability and integrity in the healthcare industry (Medlink, 2003).

Many decisions require cost analysis and control in a healthcare facility, including the following: HMO and PPO negotiations, pricing determination, marketing decisions for new services and expansion (Medlink, 2003). HMO and PPO pricing must be assessed, and discounts negotiated in order to maintain effective cost control. Pricing determination involves assessing how much a facility will charge for any services rendered by the healthcare facility; this number typically varies greatly from the cost incurred by the facility to actually provide the service (Medlink, 2003).

Cost control can also be maintained within budgetary guidelines by expanding upon or eliminating certain existing services within a given facility. Such expansion or elimination plays into marketing decisions, which typically control whether new methods of delivery or new product lines can be appropriately marketed in a healthcare environment (Medlink, 2003). Healthcare facilities must take into consideration which primary services are most essential to offer their customers. If the budget supports expansion, which may lead to increased revenues, then facilities should proceed accordingly. The key here again is recognizing that no blanket solution is available to all facilities. Each healthcare facility must take into consideration its unique products and services before assessing whether the appropriate course of action will involves eliminating unnecessary services or expanding upon current ones.


Cost control can be effectively established when existing services are replaced with less expensive options where applicable. In some situations in may be necessary to bring in an outside contractor to reduce the costs associated with services provided. When assessing cost and budgetary limitations, a healthcare facility must also account for equipment purchases. The "cost effect" of such purchases includes "not only capital expenditures but also the operating costs in terms of labor, supplies and other expenses" (Medlink, 2003).

Operating budgets should be prepared based on how productive a healthcare facility is. Factors that must be accounted for in healthcare budgeting include the number of patient level cost/margin reports and physician summaries. Healthcare budgeting systems must be flexible in nature to be successful, as the majority of medical facilities operate very differently, and vary widely in the services that they offer to the public. Because of this variation, the cost behavior patterns within any given facility are likely to change.

Overhead items within and healthcare facilities budget are typically considered variable costs, though some might be labeled fixed costs. Better budgeting can often occur with process improvement.

One source of great expense for healthcare facilities is energy expenditures. Typically hospitals within the U.S. spend "an average of $1.67 on electricity and .48 on natural gas per square foot annually" (UPPCO, 2004). Lighting, heating and hot water expenses can run as much as 79% of all energy usage in a healthcare environment, and thus result in great costs (UPPCO, 2004). Most healthcare facilities also operate under a very tight budget; thus, low-cost solutions to reducing such expenditures are critical to the success and longevity of facilities (UPPCO, 2004).

There are many simple and effective conservation measures that facilities can take including turning of lights in rooms that aren't being used, and turning off computers when machines aren't in use. The solution seems almost too simple, yet can save thousands of dollars every year. Installing occupancy sensors or manual switches in operating rooms will reduce the speed of supply and exhaust fans in operating rooms that are unoccupied, which will also save energy expenditures (UPPCO, 2004). Programmable thermostats that measure the occupancy of a room may also assist in lowering energy expenditures, by decreasing the temperature where applicable (UPPCO, 2004).

Longer term solutions include upgrading to efficient lighting systems and commissioning, which is a process whereby engineer's tune-up facility systems to ensure that they are operating efficiently (UPPCO, 2004). Some studies indicate that such measures can reduce energy expenditures by as much as 15% on an annual basis, which is equivalent to approximately $28,000 per year (UPPCO, 2004). Occupancy sensors as mentioned previous can be installed in rooms that are only used periodically, including restrooms and storage rooms, break rooms and offices (UPPCO, 2004).

Another often overlooked avenue for improvement involves utilizing wireless technologies to deliver patient information more rapidly and effectively. Doctors and healthcare providers are consistently required to update patient information and records, which at best is a time consuming and often inefficient process. Storing and retrieving records also often requires many hours dedicated to labor costs.

Technology has made transcription and transference of the above mentioned records easily accomplished through wireless networks. Greater use of computer and web-based technologies might also enable healthcare providers at different facilities to communicate more efficiently and share information about patients more effectively. The extent to which such technologies might be utilized has not been studied in great enough detail to offer comprehensive suggestions for improvement.


For healthcare facilities to continue to operate under the current economic climate, they must develop more comprehensive cost containment strategies that enable them to operate with limited budgets. Healthcare facilities face two challenges; they must operate within extraordinarily tight budgets yet continue to provide high quality care to attract and maintain their client and consumer base. Healthcare facilities must develop unique solutions to meet consumer demands. No two healthcare facilities offer the same services, thus any cost containment strategy must take into consideration the individual make up and profile of a particular facility.

In order to effectively manage costs, healthcare corporations must first analyze their current expenditures and costs. One of the challenges faced by healthcare providers and facility administrators as mentioned above is the fact that one blanket solution cannot be developed to solve all cost containment issues. Healthcare facilities are so diverse in nature, each operating under different constraints and each providing unique services that no one answers can solve all financial problems. The first step then, for each facility would be to perform a gap analysis or any other helpful analysis of current operating procedures, practices and needs in order to assess where improvements to efficiency and quality can be made.

Cost analysis involves assessing the services and products any given healthcare facility provides and evaluating better mechanisms with which to manage costs. The majority of healthcare facilities operating today are headed by managers and administrators who have little faith in the ability of their current systems to provide the data necessary to analyze costs. Perhaps the first step to improvement then is deciding upon what technologies are necessary to aid in gathering adequate financial information. There are a variety of proprietary software and financial programs currently available to healthcare facilities that can aid in the cost containment analysis process.… [END OF PREVIEW]

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