Hospital Budgeting - Where the Real Power Is

This video provides an in-depth exploration of hospital and healthcare organization budgeting, framing it as the ultimate locus of power and the essential prerequisite for any organizational transformation. Dr. Eric Bricker, the speaker, begins by acknowledging the seemingly mundane nature of budgeting but quickly establishes its critical importance, emphasizing that understanding and influencing the budget is synonymous with shaping the organization's future and priorities. The presentation covers the fundamental components of a budget, including income and expenses, and delves into the practicalities of forecasting versus actuals, highlighting the inherent uncertainty and "educated guessing" involved in financial projections.

The discussion progresses by dissecting the income side of hospital budgeting into two broad categories: operating revenue and non-operating revenue. Operating revenue primarily consists of net patient revenue, which is the payment received from insurance companies and government programs for patient services. Other significant operating income sources include grants (e.g., federal grants during COVID) and ancillary sales like cafeteria food or parking fees. Non-operating revenue, often derived from retained earnings of non-profit hospitals, encompasses investment returns (e.g., stock market), real estate income (sales or rentals), and endowment revenue, particularly for institutions affiliated with universities.

Following the income analysis, Dr. Bricker meticulously breaks down the expense categories that hospitals face. These include labor costs (salaries and benefits, noting that benefits can add 15-30% to salary and healthcare for hospital employees is paradoxically expensive), supplies (minor equipment, bed linens, scalpels, and critically, often highly inflated medication costs), capital expenditures (construction, renovation, and major equipment purchases like a gamma knife), technology (electronic health record systems and other software, which are "hugely expensive"), and professional fees (consultants, attorneys, and accountants). The video then identifies the key personnel responsible for budgeting, primarily rolling up under the Chief Financial Officer (CFO), including the VP or Director of Patient Financial Services, internal accountants, and the Controller (often the head accountant). The core message culminates in the powerful assertion that true organizational transformation necessitates budget transformation, and that clinicians, who are patient-facing and advocate for patients, have historically been "on the menu" rather than "at the table" in budgeting decisions, a dynamic that must change for healthcare to improve.

Key Takeaways:

• Budgeting as the Locus of Power: The video strongly asserts that budgeting is where all power within healthcare organizations resides, making it the fundamental driver of priorities and strategic direction. Any aspiration for organizational transformation must begin with a transformation of the budget itself.
• Forecasting is Educated Guesswork: Budgeting involves forward projections of income and expenses, which are inherently "educated guesses" or "modeling and forecasting." Actual outcomes frequently diverge from these projections, underscoring the dynamic and uncertain nature of financial planning.
• Annual vs. Rolling Budgets: Hospitals typically employ either an annual budgeting process, which can quickly become outdated due to its lengthy creation time (e.g., 6 months), or a more adaptive rolling budgeting process, where projections are continuously updated and extended monthly based on actual performance.
• Operating Income Sources: The primary operating income for hospitals is "net patient revenue" from services provided to patients, paid by insurance companies and government programs. Other sources include grants (e.g., federal funding during crises like COVID) and sales from ancillary services like cafeterias or parking.
• Non-Operating Income Sources: Hospitals, especially non-profits, generate non-operating revenue from investments (e.g., stock market returns on retained earnings), real estate (selling or renting properties), and endowments, particularly for academic medical centers.
• Significant Labor Expenses: Labor costs, encompassing salaries and benefits, constitute a major expense. Benefits alone can add 15-30% to salary costs, and ironically, health insurance for hospital employees is often very expensive due to high utilization rates among healthcare professionals.
• High Supply and Medication Costs: Supplies include minor equipment and medications. The cost of medications, especially specialty or infusion drugs, can be subject to significant inflation, heavily impacting the supply budget.
• Substantial Capital and Technology Investments: Capital expenses cover construction, renovation, and major equipment purchases (e.g., a gamma knife). Technology, particularly Electronic Health Record (EHR) systems and other software packages, represents another "hugely expensive" investment area for healthcare organizations.
• Professional Fees as a Key Expense: Hospitals incur significant professional fees for external consultants (e.g., revenue cycle consultants), attorneys, and accountants for audits and other specialized services.
• Key Budgeting Roles: Budgeting responsibilities primarily fall under the Chief Financial Officer (CFO). Other critical roles include the VP or Director of Patient Financial Services (responsible for net patient revenue), internal accountants, and the Controller, who typically serves as the head accountant overseeing a team of financial professionals.
• The "At the Table or On the Menu" Imperative: A central message is that if individuals or departments are not involved in the budgeting process ("at the table"), they risk being marginalized or cut ("on the menu"). This highlights the critical need for patient-facing clinicians (physicians, nurses) to be included in budgeting decisions to truly improve healthcare.

Key Concepts:

• Budget: A document used to track and project an organization's income and expenses, serving as a financial roadmap and a tool for resource allocation.
• Operating Revenue: Income generated from the primary activities of the hospital, such as patient care services, grants, and ancillary sales.
• Non-Operating Revenue: Income derived from secondary activities or investments, such as stock market returns, real estate income, and endowments.
• Net Patient Revenue: The revenue a hospital receives from patient services after accounting for contractual adjustments with insurers and government payers.
• Capital Expenses: Large, long-term investments in physical assets like buildings, renovations, and major medical equipment.
• Rolling Budgeting: A continuous budgeting process where a new budget period is added as the current one expires, allowing for more frequent updates and adaptability compared to annual budgets.
• Controller: The chief accounting officer of an organization, responsible for managing financial reporting, accounting operations, and ensuring compliance with financial regulations.

Examples/Case Studies:

• COVID Grants: Mentioned as an example of significant government grants contributing to hospital operating income.
• Stock Market Returns: Cited as a source of non-operating revenue for hospitals investing their retained earnings.
• Real Estate Rental Income: Hospitals owning buildings and renting them out to practices (e.g., physical therapy) as a source of non-operating revenue.
• Gamma Knife: Used as an example of a major equipment purchase falling under capital expenses.
• Electronic Health Record (EHR) Systems: Highlighted as a "hugely expensive" technology investment for healthcare organizations.