Table 2:
Budgeting methods/approaches in the healthcare system
| Budgeting type | Characteristics | Practical results |
|---|---|---|
| Global budgeting | ✓ Allocating a certain part of the budget for a certain period (usually one year) to a certain population rather than fixed rates for certain services or items (32) ✓ Determining the volume/total cost of services provided (32) ✓ Administrative mechanism management using a specific type of contract; volume, price, service type, and its quality must be specified in this contract (17) . ✓ Lowering costs for the healthcare organization (33) ✓ More flexible than the line-items method (34) ✓ Applied for cost control and increased health officials’ authority regarding it (17) ✓ Motivating service providers to enhance the efficiency of non-medical activities, causing the payer to avoid their justification of activities (33). ✓ Potentially reduced service quality due to the budget ceiling (35) ✓ This method can be employed as an independent tool to strengthen budget structure sustainability (17). ✓ Compatibility with population-based payment (PBP) methods, e.g., shared savings (32) ✓ Reduced hospital’s motivation to increase service volume (33) ✓ Financial risk on the service provider side in full (34) ✓ Motivating hospitals and other organizations to improve service efficiency and Creating cost predictability for healthcare payers/policymakers (33) ✓ Simple to implement (34) ✓ Reducing competition between hospitals and failing to determine rewards to increase hospital market share (33) ✓ Payers may base allowances for annual budget increases on factors unrelated to health, such as growth in inflation or GDP, or on budgetary constraints outside of the healthcare sector, thereby eroding the global budget’s purchasing power (33) . ✓ Ability to combine administrative simplification with strong motives to enhance performance; here, real progress can be achieved cost-effectively by obtaining less complex information (32). |
✓ Failure to contribute to reducing hospital services or increasing primary care visits among service users after two years have passed since the application of this method in Maryland Hospital (16) ✓ Most physicians developed a negative view of certain cost control measures based on global budgeting in 110 hospitals in China. This can be attributed mainly to concerns about the effects of these measures on physicians’ healthcare performance and patient satisfaction. Cost control measures with a significant impact on physicians’ performance included lowering the average prescription drug costs for outpatients as well as limiting access to examinations, medications, and surgeries. Decreased patient satisfaction was associated with lower admission of patients with deteriorating conditions, reduced usage of commercial drugs, and increased total patient costs due to increased referrals (36). ✓ In Taiwan, hospital wards that used more drugs as part of their regular healthcare increased their prescription drug costs following the government’s implementation of global budgeting in hospitals. Group therapy departments also increased the average monthly cost of medication in each case following the introduction of the global budget system in 2002 (37). ✓ Experimental results indicate that global budgeting has failed to enhance the efficiency of Taiwanese hospitals (38). ✓ While global budgeting is an effective tool for curbing costs, severe financial stress can result in unintended consequences, including impaired quality, due to the altered performance of service providers following financial rewards (35) . ✓ GB can help reduce healthcare costs and increase healthcare quality compared to the FFS method. While service volume, length of hospital stays, and monthly hospital admissions decreased, the number of drugs per antibiotic treatment case remained unaffected (39). ✓ A significant reduction in emergency admissions accompanied the implementation of global budgeting in Maryland compared to hospitals under the payment service structure (40). ✓ In Taiwan, the global budget system was associated with longer hospital stay lengths, increased healthcare costs, and improved healthcare quality for patients treated for acute pancreatitis (41). |
| Capital budgeting | ✓ Capital budgeting is the summarized financial statements of investment in fixed assets (42). ✓ The repayment method is the main criterion for evaluating long-term investment projects in the hospital (43) ✓ A significant number of hospitals whose approaches seem to be dealing incorrectly with the effects of inflation (42). ✓ To implement capital budgeting, the discounted cash flow (DCF) method of valuation has been widely utilized with negligence, such as net present value (NPV) and internal rate of return (IRR) methods. Detailed instructions on their usage are available (43). ✓ As one of the errors that occurred during capital budgeting implementation, the management compares the project revenue with the status quo, while it is unacceptable to apply this approach in the current situation under which we see intense competition and rapid technological changes. There is also a strong desire for measurable aspects of projects compared to intangibles, benefits, and costs (42). ✓ Among the items that need to be considered in capital budgeting are unrealistic assumptions on reinvestment rate and inflation effects accounting (42). ✓ A capital budgeting problem in hospitals is the prominent role played by physicians in accepting or rejecting investment offers because they are not liable for subsequent losses. Thus, the hospital management should make the necessary decisions regardless of the physicians’ desire for venture projects (21). ✓ Decisions are made on choosing a project as a hospital investment because direct cash flows from the project are more than investment costs in domestic investment, and there is sufficient cash flow to cover costs in foreign investment (44). |
✓ A small sample of US hospitals suggests that applying capital budgeting techniques is problematic. The most important concern is probably the prioritized repayment, by which total return on investment (ROI) and time value of money (TVM) are explicitly ignored in the budgeting decision processes (42). ✓ A significant number of hospitals whose approach seems to be dealing incorrectly with the effects of inflation and the use of discount rates that seem excessive (42). ✓ As hospitals are likely to take advantage of the many financial resources available to fund their general capital budget, the projects they evaluated are expected to cover the different average cost of capital (aka the weighted average cost of capital (WACC)). WACC refers to the rate at which obstacles must be overcome before being accepted by the finance team and implemented by the company (44). ✓ In the aftermath of the COVID-19 global crisis, multihospital systems appear to have been more successful in project management and less damaged than smaller hospitals (44). |
| Performance based budgeting | ✓ In performance-based budgeting, the budget allocated to each activity is determined based on its purpose and outcome rather than the previous year’s expense (45) ✓ Performance-based budgeting is a useful tool for aligning planning and budgeting (46). ✓This budgeting method’s technical elements are set ting short-term, medium-term, and strategic goals (46). ✓ One of the most important advantages is the higher flexibility of this budgeting method than other methods. Other benefits include participatory management in the budgeting process increasing commitment to budget execution (47). |
✓ Despite the many benefits of implementing a performance-based budgeting approach, there have been some reports of failure to implement this approach successfully. Unsuccessful implementation of this method can be attributed to several reasons; for example, budgetary and executive institutions operate quite separately in many cases, leading to disharmony and disruption of budget execution. To solve this problem, planning and budgeting institutions must be integrated and act in full coordination (48). ✓ Another reason for disrupted performance-based budgeting in healthcare organizations/systems is the rapidly changing planning and budgeting environment. In many cases, goal-setting is not performed due to a lack of reliable data; instead, it is conducted by key stakeholders involved, including the top-down approach (49). ✓ The last reason for the poor implementation of performance-based budgeting, addressed in relevant studies, is the failure to update the hospital financial management system to implement this method (50) ✓ Four requirements must be met to implement the above system in hospitals and healthcare organizations in Iran:
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