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Materials Management
Materials management is an essential function in any health care
organization to control the flow of supplies. Discuss the benefits and
limitations of using a bar code scanner in the operating room for materials
management.
Consider routine items and supplies that only have to be ordered on rare
occasions. Who should be responsible when an item that was supposed to
be ordered is not available, or when a surgery has to be cancelled?
Offer recommendations based on your research.
Remember to use two references. Your post must follow APA sixth edition
style and formatting guidelines. 250 words 10pt Arial
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 insura …
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