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Budget Plan

Budgeting at Lincoln Hospital is a continuous process that happens on an annual basis and occurs at nearly every department in the hospital. The budgeting plan process begins with the planning stage that considers the provision of quality medical care, programs and services and then continues with the establishment of individual hospital departments’ operating costs such as the approved salary program for staff, fringe benefits, supplies and other operating expenses. The final hospital’s budgeting plan is a consolidation of several smaller budgets by departmental heads who give projections of operating costs of their respective units. These budgets are created within the goals and objectives set by the hospital and managed by general principles and guidelines to which the budgets must adhere. However, departments and other units are allowed to freely give their contributions in the development and execution of their budgets (Sullivan, 2003).

The overall budgeting goals of Lincoln Hospital are meant to enable the institution to continue providing quality healthcare, programs and services to the community, something it has done for the past 172 years and counting. The budget sets perimeters and standards for the management to follow throughout the year allowing the departmental managers to report variances while providing guidance so that the variances are maintained at minimum acceptable levels and adjusted whenever possible. In the long run, the budgets are supposed to contribute to the vibrant growth of the institution and the community it serves while making Lincoln one of the most qualified, modern and technologically advanced hospitals in the country (Donaldson, 2007).


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Lincoln Hospital’s budgeting objectives include:

  • to provide written terms of the hospital goals
  • to provide a basis for the evaluation of financial performance according to the plans
  • to provide a tool to control costs
  • to create cost awareness hospital wide
  • to ensure that the hospital keeps track of its revenues, expenditure, cash flows and capital as well as make forecasts on financial projections
  • to enable the hospital calculate capital needed for the hospital, human resources, facilities and equipment and management strategy.

Budgeting Strategies

The following strategic initiatives are integral to this year’s budgeting plan and are described in more detail below:

Departmental strategies:

Departmental heads should be given their budget targets by the finance department and not vice-versa. This should be based on the hospitals historical performance, externally set benchmarks and overall budget goals. High-performance budget expectations should be set for all departments, both profitable and unprofitable, to increase contribution margin and decrease losses. Labor, supply, and other budgeted costs per workload unit should be evaluated and reset in order to improve consistently low-performing departments (Israel, 1979).

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Adopt benchmarking. Benchmarking should be used to set goals around the cost per unit of service. Develop percentile goals. When setting benchmarks, particular care should be taken regarding what percentile the organization will use. For example, most benchmarks are reported as the median results of the total number of organizations in the sample. If there are 99 hospitals in the sample, the results of the 50th hospital value (sorted in descending order) would be reported as the median (the 50th percentile). Still, that means that 49 hospitals achieved better results and 49 hospitals achieved worse. Administrators need to decide if they want to set goals at the median or better; best practice hospitals typically set goals between the 75th and 90th percentile. With percentile goals in increasing increments over time, the hospital can strive for, and achieve, continuous improvements in its cost per unit of service (Sullivan, 2003).

Using comparative benchmarks annually should be adopted. External cost and productivity benchmarking should be performed annually to help set appropriate cost per unit of service and productivity standards. Benchmarks should be used once a year to find cost savings opportunities to identify areas to fill the budget "gap." Yearly performance improvement, from current levels of performance, should be at least 25 percent of the benchmark goal until it is achieved. Accurate comparison groups should be used at the cost center and line-item levels to ensure data are normalized (Donaldson, 2007).

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Establish a goal for overhead costs as a percentage of total costs. Doing so will allow individual hospital departments to objectively evaluate the resources being consumed for services that support the revenue-generating operation. Overhead costs generally should not exceed 40 percent of total costs.

Leveraging the finance department. The finance department should function as a support and resource to the other departments by providing financial data, variance reports, operating statements, and other information. Financial or budget analysts should be assigned to specific departments to learn the uniqueness of each department and establish a single point of contact, for increased efficiency. The finance department should be responsible for providing mandatory budget, general finance, and cost accounting training and education to all department managers and directors (Donaldson, 2007)

Collaborating with internal organizations. The hospital budget should be based on the mission, strategy, and financial plan of the entire health system. For instance, in an academic setting, this should include the school of medicine and faculty practice organization. In this ease, the dean or vice president of health sciences should be heavily involved in the hospital budgeting process to understand, influence, and oversee school and hospital budgets that are ultimately intertwined. The hospital should understand and accurately budget for the flow of funds to the school of medicine, so it knows how much is allocated to what missions, and understands the sources of that money (Donaldson, 2007).

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Cost Accounting Issues Affecting Cost Management. The hospital should seriously consider cost management by adopting a cost accounting system that is reliable, verifiable, understandable, and useful. Cost accounting involves determining whether costs are variable (costs that vary in direct proportion to changes in volume of operations) or fixed (costs that do not vary with volume changes). These types of costs have significant impact on the organization's cost base. Cost accounting also involves determining whether costs are direct (directly related to the user department) or indirect (also known as overhead costs). Knowing which costs are direct and indirect allows an organization to set standards relating to how much overhead (or support) costs it wants to carry, in relation to the costs allowed for revenue-producing departments. In this way, the organization knows it is spending the right amount for overhead costs, and is able to manage those costs (Sullivan, 2003).

Employee strategies:

The hospital should work with physicians, the faculty practice organization, or the school of medicine to make accurate budget projections, particularly with volumes and revenue. Volume projections should be kept conservative and should not be used to balance the budget. Medical directors should be held accountable to volume projections each quarter.

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The healthcare system should adopt management accountability techniques which include specific positive and negative consequences for achieving (or not achieving) goals. Managers or staff needs to be demoted or dismissed from the organization if they fail to meet the hospital's cost-management goals (Israel, 1979).

Effective monitoring techniques that incorporate the goals and actual outcomes should be adopted. These results need to be reported to the affected parties on a periodic basis that allows managers and executives to rationally discuss results. The various hospital units should be produce reports on a daily, weekly, monthly, quarterly, or annual basis as appropriately required. Labor productivity should be reported as often as daily (even shift by shift), while payroll analysis is reported according to the payroll schedule.

On a monthly basis, develop and report financial and other results (clinical, operational, volumes, patient satisfaction) in a balanced scorecard format--that is, with aggregate information reported on a cover page with drill downs to specific indicators. These reports should be developed at both the organization and department manager levels. To achieve its cost management goals, the organization needs 1o set those goals, monitor the results, and report the results to the appropriate managers in a simple yet powerful way (Sullivan, 2003).

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Promotional Strategies

Presenting and owning the budget. Once the budget and operating margin target are finalized, the CEO and senior management, as a unified team, own the budget and are accountable for meeting it. They also urge the rest of the employees to adopt the budget fully. The CEO presents the annual budget and operating target to the entire management team to endorse the budget and establish the expectation of obtaining it. The CEO should also communicate the methodology and need basis for setting the targets to gain buy-in and support from hospital management (Israel, 1979).

Adopt flexible budgeting. Flexible budgeting ensures management accountability at the cost-per-unit of service level. The hospital's departments need to consider adopting flexible budgeting and reporting techniques that allow administration and management to understand whether differences between budgeted and actual costs are related to a variance in the reported volumes or other elements, such as rate or efficiency variances. Flexible budgeting techniques remove volume as a variance factor by using cost per unit of service as a value, allowing the organization to focus its attention on the other areas (Donaldson, 2007).

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Improving hospital budgeting and accountability: a best practice approach: if your organization is struggling to achieve its budget targets, your budget process itself may be the culprit. It may also hold the solution.

Action Plan

Calculating the Costs of Supplies

The health information manager should determine the cost of supplies for the hospital unit by working with other departments to gather all the cost information needed to create accurate data. Hospital supplies, such as bandages and bedpans, should be measured in a cost per item. He/she should also factor in your staff charges, determine transport, stocking and restocking staff costs, then add this overhead to the cost of the supplies used.

In conclusion, the hospital's operations department needs to factor in the cost per square foot to store the hospital’s unit's items. This cost is then added to supplies the unit actually uses. This will provide a more realistic price, which results in a more accurate picture of the cost of stocking a unit. The cost of the actual supplies used in your unit can be tracked by looking at charge item data on your hospital's computer systems. This will give you an idea of the amount of supplies consumed on an average day in your unit. Once you begin to track this, you will be able to determine which supplies are used most frequently and in the greatest volume. Add the actual supply charge to the staff and storage figures to get an accurate idea of how much unit supplies actually cost (Sullivan, 2003).



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