NURS 6210 Healthcare Finance And Budgeting Research Paper

This course explores healthcare specific financial policies and issues, analytical framework and economic transformation for financial decisions (such as investment and working capital), methods of financial management, insurance coverage and financing. In addition, the course focuses on the ability to apply economic and population health models to address health service issues and problems.

You will use the knowledge gained in this course to financially structure and evaluate the opening of a private primary care medical practice with one physician provider. You will prepare an operating and capital budget as well as a narrative summary of at least 1,000 words to show your financial findings and recommendations. You will provide supporting documentation to support your findings and recommendations.

Prior to writing your narrative summary you will need to prepare an operating and capital budget for the project. The well-prepared operating and capital budgets will demonstrate a keen knowledge of the market, pricing, activity, revenues, expenses, and potential impact on cash-flow and/or profitability. The capital budget will similarly demonstrate an awareness of the capital items and associated costs for project start-up.

Prepare an annual statistical report that includes the following:

Volume of patient visits
Revenues (percentage of reimbursement from Medicare, Medicaid, Commercial Insurance and Self Pay)
Expenses (Labor, Equipment, Supply, Overhead)

Provide your assumptions to justify all volumes, revenues and expenses

Prepare a three-year operating budget that includes the following:

An estimate of revenue each year
An estimate of expenses for each year
The cash flow (negative or positive) generated from revenues and expenses
Prepare a start-up capital budget listing the equipment you may need for this project including the cost and annual depreciation
From your operating budget calculating the following:
Projected cash flow over 3 years
Break-even analysis
Internal rate of return (IRR)
Net present value (NPV)
From your calculations, evaluate the financial risk involved with this project and make a recommendation as to whether this project is financially viable.

Prepare a 1000-word minimum narrative summary of your financial findings and recommendations. You will provide supporting documentation to support your findings and recommendations.

Key points on budgeting in health

No country has made significant progress towards universal health coverage (UHC) without increasing the extent to which its health system relies on public revenue sources. Framing the approach to health financing policy in this way places the health sector within the overall public budgeting system and underscores the crucial role that the budget plays, or should play, for UHC.

Historically, health financing discussions have been largely driven by demands to raise revenues and find new sources of funds, with much less discussion of overall public sector financial management and budgeting issues.

An understanding of the core principles of public budgeting is essential for those who have an active interest in health financing reform because the budget is a primary instrument for strategic resource allocation. Even in contexts where health insurance funds manage a core part of health expenditure, budgeting rules continue to influence flows of funds and transfers to purchasing agencies and/or health facilities.

Firstly, robust public budgeting in health, especially through the development of multi-year plans, is likely to improve predictability in the sector’s resources, which in turn increases the likelihood that defined plans can be translated into policy actions on the ground.

Secondly, proactive engagement of health ministries in the budgeting process can facilitate alignment of budget allocations with sector priorities, as laid out in national health strategies and plans. In doing so, allocative efficiency within the sector’s resource envelope can be improved.

Thirdly, if budgets are better defined, budget execution can improve, which means that under spending – a common issue in low income countries – can decrease in the sector (i.e. budget is implemented according to the plan, which is defined and articulated with national priorities).

Fourthly, if the health budget is formulated according to goals and the execution rules align with this logic, it will allow a certain degree of spending flexibility and make budgets more responsive to sector needs. Engaging in budget preparation, understanding the guiding principles of budgeting as well as the political dynamics that enable the budget elaboration and approval process, is essential for health planning stakeholders.

Although health is financed by public and private funds, to make progress toward universal health coverage (UHC), a predominant reliance on public, compulsory, prepaid funds is necessary. Therefore, the way budgets are formulated, allocated and used in the health sector is at the core of the UHC agenda. This chapter outlines the overall budget process for the public sector, discusses the specific role of health within it, in particular the role of the ministry of health and other health sector stakeholders, to provide timely inputs into the budgeting process.

Several surveys have been administered over the last 40 plus years to learn about capital budgeting practices of healthcare organizations. In this report, we analyze and synthesize these surveys in a four-stage framework of the capital budgeting process: identification, development, selections, and post-audit.

We examine three issues in particular: (1) efficiency of for-profit hospitals relative to not-for-profit hospitals, (2) capital budgeting practices of the healthcare industry vis-à-vis other industries, and (3) effects of healthcare mergers and acquisitions on capital budgeting decisions. We found indirect evidence that for-profit hospitals exhibited greater efficiency than not-for-profit hospitals in recent years.

The acquisition of not-for-profits by for-profits is credited as the primary reason for growth of multi hospital systems; these acquisitions may have contributed to the more efficient capital budgeting practices. One unique attribute of healthcare is the dominant role of physicians in almost all aspects of the capital budgeting process. In agreement with some researchers, we conclude that the disproportionate influence of physicians is likely to impede efficient decision making in capital budgeting, especially for nonprofit organizations.

The healthcare industry faces new challenges daily. Advancements in care keeps the field exciting and rewarding, while an increased population and a large generation of aging patients make healthcare tough.

It isn’t just patient care that makes the field a challenge. The administrative side of healthcare has its own concerns. These concerns aren’t always centered on finances, but financial planning and healthcare budgeting can play a huge role in helping doctors, hospitals, and other healthcare facilities address some of their biggest challenges head-on.

Value-Based Payments

A staggering truth about the healthcare industry is that half of hospital bills are never paid. Some of this is because of issues between insurers or Medicare and the providers. Others are due to confusion about bills or lack of ability to pay on the part of patients.

To simplify the process, the federal government passed the Medical Access and Chip Reauthorization Act, or MACRA, which is meant to move providers to a more value-based payment system. In other words, the better patients are served, the better healthcare providers are paid.

For the first few years, providers will have the option to participate or not. The program will be fully rolled out in 2019 and will impact all hospitals as well as healthcare providers that service a significant number of Medicare patients. The effect on a facility’s bottom line, however, will vary throughout the roll out.

To accommodate the changes, healthcare administrators that can run different scenarios with their budgets and plans will be the ones best prepared to deal with the results of value-based payments. Being able to ask “what if?” and running multiple views of a financial plan will set healthcare providers up for success as the changes related to MACRA go into effect.

Practice Cost Management

Medical professionals understand cash flow issues and how they can affect their operations, but they also understand that cash flow is important to an organization’s financial well-being.

Day to day obligations like salaries, supplies, legal fees, tools and equipment, and so on must be balanced with co-pays, insurance reimbursements and patient payments.

Budgeting expenses against cash flow – and controlling costs – is a critical concern for healthcare administrators.

Understanding where and how money is spent requires slicing and dicing of data and analyzing where savings can be found. Reviewing budget data against actual s and utilizing easy to understand dashboards can point to expenses that can be improved on.

Shifting Requirements and Regulations

As government regulations and laws change surrounding healthcare, it is difficult to know what will be required of providers and how payment models and overages will change. Between the financial demands of becoming compliant with technology regulations and the shifting landscape of the ACA, providers must be flexible in planning and budgeting.

Volatility in financials requires systems that can change quickly and accurately. Unfortunately, spreadsheet budgets can be rigid with small errors resulting in potentially large miscalculations or reporting issues.

Healthcare providers need FP&A systems that provide for rapid changes and projections. Some providers may even consider switching to rolling forecasts, allowing for changes to be incorporated more quickly.

Healthcare providers face change and uncertainty, but must still plan financials like any other business. The key to doing so effectively is having a system that tolerates changes well, is flexible without adding significant operational overhead, provides accurate and easy to understand reporting and offers scenario planning. With these tools available to administrators, providers can be prepared for whatever lies ahead.

Funding for fundamental science and early-stage translational medicine is becoming scarcer, and at the worst possible time—when we now have the scientific and engineering expertise to make major breakthroughs in our understanding of the molecular basis of many deadly diseases and how to treat or prevent them.

The dearth of funding for translational medicine in the so-called “Valley of Death” can be attributed to several factors, but a common thread among them is increasing financial risks in the biopharma industry and greater uncertainty surrounding the economic, regulatory, and political environments within the biomedical ecosystem. Increasing risk and uncertainty inevitably leads to an outflow of capital as investors and other stakeholders seek more attractive opportunities in other industries.

By applying financial techniques such as portfolio theory, secularization, and option pricing to biomedical contexts, more efficient funding structures can be developed to reduce financial risks, lower the cost of capital, and bring more life-saving therapies to patients faster. By taking this course, students will gain the background, resources, and framework to influence the healthcare industry.

Health Systems Financing

Health financing systems are critical for reaching universal health coverage. Health financing levers to move closer to universal health coverage lie in three interrelated areas:

raising funds for health;
reducing financial barriers to access through prepayment and subsequent pooling of funds in preference to direct out-of-pocket payments; and

allocating or using funds in a way that promotes efficiency and equity. Developments in these key health financing areas will determine whether health services exist and are available for everyone and whether people can afford to use health services when they need them.

Guided by the World Health Assembly resolution WHA64.9 from May 2011 and based on the recommendations from the World Health Report 2010 “Health systems financing: The path to universal coverage”, WHO is supporting countries in developing health financing systems that can bring them closer to universal coverage.

Health Financing System

A good health financing system raises adequate funds for health, in ways that ensure people can use needed services and are protected from financial catastrophe or impoverishment associated with having to pay for them.

[1] Health financing systems that achieve universal coverage in this way also encourage the provision and use of an effective and efficient mix of personal and non-personal services.

Three interrelated functions are involved in order to achieve this:

the collection of revenues from households, companies or external agencies;
the pooling of prepaid revenues in ways that allow risks to be shared – including decisions on benefit coverage and entitlement; and purchasing;
the process by which interventions are selected and services are paid for or providers are paid.

The interaction between all three functions determines the effectiveness, efficiency and equity of health financing systems.

Health system inputs: from financial resources to health interventions

Like all aspects of health system strengthening, changes in health financing must be tailored to the history, institutions and traditions of each country. Most systems involve a mix of public and private financing and public and private provision, and there is no one template for action. However, important principles to guide any country’s approach to financing include:

raising additional funds where health needs are high, revenues insufficient and where accountability mechanisms can ensure transparent and effective use of resources;

reducing reliance on out-of-pocket payments where they are high, by moving towards prepayment systems involving pooling of financial risks across population groups (taxation and the various forms of health insurance are all forms of prepayment);

taking additional steps, where needed, to improve social protection by ensuring the poor and other vulnerable groups have access to needed services, and that paying for care does not result in financial catastrophe;
improving efficiency of resource use by focusing on the appropriate mix of activities and interventions to fund and inputs to purchase;
aligning provider payment methods with organizational arrangements for service providers and other incentives for efficient service provision and use, including contracting;
strengthening financial and other relationships with the private sector and addressing fragmentation of financing arrangements for different types of services;
promoting transparency and accountability in health financing systems;
improving generation of information on the health financing system and its policy use.

Health Care Funding

In the United States, health care providers (such as doctors and hospitals) are paid by the following:

Private insurance
Government insurance programs
People themselves (personal, out-of-pocket funds)

In addition, the government directly provides some health care in government hospitals and clinics staffed by government employees. Examples are the Veterans Health

Administration and the Indian Health Service.

Private insurance

Private insurance can be purchased from for-profit and not-for-profit insurance companies. Although there are many health insurance companies in the United States, a given state tends to have a limited number.

Most private insurance is purchased by corporations as a benefit for employees. Costs are typically shared by employers and employees. The amount of money employers spend on an employee’s health insurance is not considered taxable income for the employee. In effect, the government is subsidizing this insurance to some degree.

People may also purchase private health insurance themselves.

The Patient Protection and Affordable Care Act (PPACA, or Affordable Care Act [ACA]), which became effective in 2014, is U.S. health care reform legislation intended, among other things, to increase the availability, affordability, and use of health insurance (see also the U.S. Department of Health & Human Services ACA official site). Many of the ACA’s provisions involve an expansion of the private insurance market.

It creates incentives for employers to provide health insurance and requires that nearly all people not covered by their employer or a government insurance program (for example, Medicare or Medicaid) purchase private health insurance (individual mandate). The ACA requires creation of health insurance exchanges, which are government-regulated, standardized health plans that are administered and sold by private insurance companies.

Exchanges may be established within each state, or states may join together to run multi state exchanges. The federal government also may establish exchanges in states that do not do so themselves. There are separate exchanges for individuals and small businesses. The ACA requires that private insurance plans do the following:

Put no annual or lifetime limits on coverage

Have no exclusions for preexisting conditions (guaranteed issue)
Allow children to remain on their parent’s health insurance up to age 26
Provide limited variations in price (premiums can vary based only on age, geographic area, tobacco use, and number of family members)

Allow for limited out-of-pocket expenses (currently $5950 for individuals and $11,900 for families)

Not discontinue coverage (called rescission) except in cases of fraud
Cover certain defined preventive services with no cost-sharing
Spend at least 80% to 85% of premiums on medical costs

Recent and impending changes that will affect the ACA include:

Stopping government funding of premium tax credits and cost-sharing reductions
Expansion of association health plans (AHPs) and health reimbursement arrangements (HRAs), which are less expensive and less comprehensive than ACA marketplace plans
Reduced regulatory burden imposed by the Notice of Benefit and Payment Parameters (NBPP), which will give states more leeway in defining essential health benefits
Repeal of the individual mandate

These changes are intended to reduce government and individual spending on health plans, but some authors warn that overall spending on health care may not be reduced and that there may be increased numbers of uninsured or inadequately insured people.

Alternative Financing Methods

User Fees

User fees – direct charges to users for health services – have been implemented in many countries for a number of years now. Proponents of user fees suggest that fees could make the health system more efficient by guiding demand to cost-effective health care at the appropriate levels. Further, they could improve equity if revenues generated from fees are allocated to addressing the health needs of the poor.

Others, though, argue that this reallocation is not guaranteed, and in the absence of exemption policies or other forms of financial protection, user fees actually price the poor out of the market for health care. The discussion paper below reviews the African experience with user fees.

Innovative Financing Methods

In addition to the traditional methods of financial risk protection, there are a variety of other financing mechanisms with which countries are experimenting. The need for these additional sources of funds is driven by rising demand for health care services, escalating costs of care, rapid increases in technology, and a limit on how much can be raised through a traditional tax base.

Some of these methods are nationally based, such as:

hypothetical taxes, e.g. ‘sin taxes’ for tobacco and alcohol
national and state lotteries dedicated to health
public-private partnerships between governments and the private sector to co-fund health care.

Other mechanisms are internationally focused, such as:

the (recently proposed) International Finance Facility (IFF). This would front-load development assistance by selling government bonds secured by future aids flows
debt for health swaps, in which both public and private financial institutions can be involved in the conversion of the debt
the use of public-private partnerships to develop new products using capital markets.

It is clear that with the rising costs of healthcare, countries will begin to explore more of these ideas to augment traditional sources of health financing.

Budgeting in health care systems

During the last decade there has been a recognition that all health care systems, public and private, are characterized by perverse incentives (especially moral hazard and third party pays) which generate inefficiency in the use of scarce economic resources.

Inefficiency is unethical: doctors who use resources inefficiently deprive potential patients of care from which they could benefit. To eradicate unethical and inefficient practices two economic rules have to be followed:

(i) no service should be provided if its total costs exceed its total benefits;

(ii) if total benefits exceed total costs, the level of provision should be at that level at which the additional input cost (marginal cost) is equal to the additional benefits (marginal benefit). This efficiency test can be applied to health care systems, their component parts and the individuals (especially doctors) who control resource allocation within them.

Unfortunately, all health care systems neither generate this relevant decision making data nor are they flexible enough to use it to affect health care decisions. There are two basic varieties of budgeting system: resource based and production targeted.

The former generates obsession with cash limits and too little regard of the benefits, particularly at the margins, of alternative patterns of resource allocation. The latter generates undue attention to the production of processes of care and scant regard for costs, especially at the margins. Consequently, one set of budget rules may lead to cost containment regardless of benefits and the other set of budget rules may lead to output maximization regardless of costs.

To close this circle of inefficiency it is necessary to evolve market-like structures. To do this a system of client groups (defined broadly across all existing activities public and private) budgets is advocated with an identification of the budget holder who has the capacity to shift resources and seek out cost effective policies. Negotiated output targets with defined budgets and incentives for decision makers to economize in their use of resources are being incorporated into experiments in the health care systems of Western Europe and the United States.

Undue optimism about the success of these experiments must be avoided because these problems have existed in the West and in the Soviet bloc for decades and efficient solutions are noticeable by their absence.

Budgeting is important in any organization. In healthcare, department level budgeting is often managed by healthcare professionals and managers with little or no financial background. Managers may be promoted from the front lines as they have demonstrated a strong understanding of department function, or are hired with significant work-related experience and/ or possess advanced education.

NURS 6210 Healthcare Finance and Budgeting Research Paper