All health economies at the macro and micro level face challenges caused by constraints on already limited funding. This is usually due to constant improvements in medical care.
National funding is derived from economic and political pressure depending on the prevailing priorities. Meanwhile, the population expects high-quality personal healthcare, regardless of the budgetary constraints.
Hospital budgets are typically reset on an annual basis and amended to account for required savings during the year or to take account of changes in the levels of activity. Annual cost drivers may be factored in to incorporate changes in the cost base caused by demands from suppliers or to meet the needs of annual staff salary rises.
These budgets are often set at a macro level, calculated in an unscientific manner, with the only science applied reflecting historical trends. In relation to the agreed service strategy set by the organisation, there is generally no examination to determine how limited resources should be prioritised.
This lack of science or alignment with current strategic direction diminishes the purpose and power that could be derived from setting a realistic budget. How many hospital boards can say for certain that financial constraints have been incorporated into their strategic plans?
Budgeting responsibility should start and finish in the boardroom. How the budget is adapted to reflect strategic aims should be constantly monitored to ensure that any drifting is spotted early, so that the strategy is not derailed by waste from non-strategic activity.
Demonstrating the support for strategic direction through the spread of appropriate funds will help organisations to communicate serious intent. The manner in which refinement is added to the budget calculations will determine how staff interpret and judge management’s expertise.
It should not be forgotten that budget controls and activity targets are a form of staff engagement. Failure to provide realistic ideas or communicate the supporting logic will lead to a lack of joint endeavours, thus increasing the chances of failure throughout the hospital.
INCOME BEFORE COST
While many hospital managers are held accountable for meeting cost-related budgets, there is little evidence that the topic of income has sufficient visibility throughout many care organisations. It is difficult to engage staff in budget reductions if there is no understanding of the financial context within which the hospital is operating.
Knowledge of the income line and the target set for activity should be as important as the cost budget. Many cost budgets have detailed lines for every item of expenditure, but specific data surrounding income is often scarce. Without this data it is difficult to view productivity and cost effectiveness of services, but this information is vital for investment decisions that are usually the foundation for improving quality of care.
In the way that cost budgets are agreed as a result of many budget meetings, the same kind of effort should be applied to activity and income discussions. Future activity levels should be agreed first and the link to income understood before further debates on cost can be approached. For example, there may be reason to believe an orthopaedic surgeon is planning to perform more operations using uncemented hips than cemented hips; in the UK the impact of this would be to reduce income. The current 18-week referral target for the UK’s NHS will also have an impact on income – doctors missing targets may see a reduction of up to 5%.
By understanding a particular activity and its implications for income, hospitals are better placed to decide a cost budget that matches the activity aims. This alignment of income and cost budget will help to ensure that financial information is directly attributable to known patient care.
A lack of understanding could allow wasted resources to be consumed without detection, which may have a detrimental effect on the number of patients treated or the quality of service provided.
ARE YOU A FLAT-LINE BUDGETER?
Once the board has set the strategic direction and aligned budgets for income as well as cost, and if the value is £12m or more, they should be asking: do we keep it simple and spread this evenly across the year? Do we ignore the fact that less activity will take place around Christmas and New Year?
Should we not consider the implications of school holidays, forcing medical staff to take holidays at the same time of year and thus potentially reducing the level of activity? Do variations in the weather create a different mix of cases and therefore change our cost and income base?
If a ‘flat-line’ budget is used (see graph overleaf) with the budget split into equal proportions across the year, variance to obvious predictions may be overlooked. Often ‘management by exception’ is quoted as the solution for busy managers in all organisations, but this can only be achieved if budgets are aligned with seasonal activity and case mix.
Ignorance of this approach can cause tensions in the clinical and management relationship, as it requires a line-by-line assessment of all budgets by care management and through discussions with the main income and cost generators, who are of course the clinical community. Flat-line budgets can be used as an excuse for overspends and do not allow hospitals to ‘manage by exception’.
PREDICTING POTENTIAL PROBLEMS
Performance against budget could be viewed as a ‘lagging’ KPI of cash spent. The actual spend information for a month will often be provided to management one or two weeks after the end of the month that was under scrutiny. This lag can make it difficult to investigate issues that occurred in the first week of the month in question.
To overcome this delay and to enable immediate action, a number of ‘leading’ KPIs need to be put in place. These will provide early warning signs to management that under/overspends may occur, or that income will be with variance to the target.
A good example of a leading KPI is theatre utilisation. Usage targets for each week should be set in line with seasonal and case mix expectations of activity. Under-utilisation will be the first indicator of reduced income. How cost expectations should be moved downwards will be the next consideration.
If implant costs are on budget when activity is down, it should be questioned why this variable cost is not under budget at a time of reduced activity.
To ensure that all assets and resources are optimised, the budgets set are the foundation for an early warning system or leading KPIs. A care organisation can provide a high-quality service for patients through the use of KPIs:
• Optimising theatre use enables more patients to receive care.
• The number of cancelled operations can be reduced, thus lowering patient stress levels.
• Investigating the causes and implementing lessons learned cuts the cost of wasted time and resources.
• Variance and changes to budgets can be realised in advance, through the appropriate placement of leading KPIs.
In the future, the cost of healthcare will certainly continue to rise and the available pool of money to finance. These costs will always remain under a great deal of political and economic scrutiny.
If budgets are tuned sensitively, these measures will help detect waste throughout the organisation. This will provide the opportunity for all resources to be used, maximising the quality of care.
A budget system that is correctly calibrated can also act as a ‘thermometer’. This means that minor changes in the ‘temperature’ of the organisation can provide management with early indications of the level of progress against the strategic plan.
If changes are detected, what processes are in place to report variance to targets and budgets? Often a degree of latitude is allowed and isolated cases of waste are often hidden from senior management.
Very rarely is there an overview of the budget, with the information coming from all parts of the organisation and consolidated into a diagnostic conclusion.
The healthcare organisation that aligns its budget with the strategy and understands the need to factor in case mix and seasonal activity with leading KPIs recognise that ignoring results is not an option. Sensitivity to changing demands will engage staff and instil confidence in management.
Drawn together, the outcomes can act as a catalyst in determining the need for strategic change. Developing new strategies can help avoid disaster and harness opportunities for improving healthcare.