In this course project, you will be asked to design an operating budget for a healthcare organization

Executive Summary

            In the healthcare sector, the operating budget refers to the projected revenues and expenditures for the coming year. As a year progresses, hospital leaders together with the supply chain managers might alter purchasing and other expenses to ensure that the exact budget aligns with the initial projection. The process of developing efficient operating budgets is vital in promoting efficiency as well as the quality of care in healthcare organizations. Additionally, operational budgets develop a plan for expenses and revenues for the coming year and therefore different departments, units, and leadership must collaborate to determine and use the most effective budgeting method. The main issue to consider before planning for the expense and revenue percentages of the operating budget is volume prediction. The next step involves estimation of the expenses and revenues utilizing evidence from historical records derived from an in-depth analysis. The key elements of an operating budget include fixed costs, revenue, and variable costs. This report aims to develop an operating budget for University Hospital, Newark, New Jersey.

            University Hospital is a state-owned teaching healthcare organization situated in Newark, New Jersey. The hospital offers tertiary services to the Northern region of New Jersey. It is certified by the American College of Surgeons. University Hospital is a state-chosen Level 1 Trauma Center making one of the big three trauma centers in New Jersey (UHNJ.OR, n.d). Initially, the University Hospital was known as Newark City Hospital, established in 188 with only 25 beds. Later, the hospital changed its name to University Hospital to acknowledge the awarding of the status of the university by the state legislature. Since then, the hospital has expanded its operations with 519 licensed beds and more than 500 medical experts (UHNJ.OR, n.d). The organizational mission is to offer excellent care to all patients at all times. The organization is also dedicated to collaborating with neighboring communities to promote better health to the future generation. This report aims to analyze the organization's current and historical financial and operational information to help understand its operational budget. An incremental method will be used to compare and contrast the current budget with the previous budget. This is an excellent method since it helps to address the issues that the organization is encountering hence making it easier to determine the root cause of the issue.

Assumptions

            The first assumption relates to expenses. In the financial year 2021, the proposed operating budget is estimated to decline by approximately $ 3.5 million due to a reduction in special state appropriation as well as a rise in wages and salaries. There several reasons that would lead to an increase in employees’ wages and salaries. For instance, the healthcare organization may be desiring to improve service delivery to patients. As it was proposed in the 2019 financial year, the University Hospital is arranging to improve customer satisfaction by approximately 10 percent. Nevertheless, the aspect of customer satisfaction is not included in the operating budget since it does not have a direct influence on the hospital's income and expenses. The improvement initiative was developed to increases the volume of customers while increasing customer patient outcomes and patient satisfaction scores. According to Wu and Lu (2018), an increase in customer satisfaction leads to improved loyalty. Therefore, there would be more customer returns. Further, the depreciation on fixed assets is anticipated to be $ 20 million in the 2020 financial year. The rise in depreciation is associated with the acquisition of IT equipment amounting to $14 million to be used in the data center, $7.5 million for emergency and routine capital expenses, and $14.9 million for the cancer center and radiology capital expenditure. It is also proposed that $ 12 million capital expenditure will be incurred for Higher Education Trust Grant. It is expected that Graduate Medical Education will increase by $1 million. This can be linked to an increase in funding for extra residences enrolling for the Neurology and Medicine Programs. An increase of $2 million is expected in the Clinical Service Agreements with Rutgers in the 2021 financial years compared to 2021. In the 2021 financial year, the Facility and Supplies agreement is anticipated to increase by approximately $ 5 million is represents a 2 percent increase compared to the previous year.

            The other assumption relates to the company's revenues. The revenue for the 2021 financial year is expected to reduce by approximately $4 million due to a reduction in the Special State Appropriation offset. This is attributed to the fall in costs relating to workers’ compensation. The other postulation is that volumes of inpatient from the Liver Transplant Program were anticipated to remain constant. It is also projected that the charges will increase by approximately 3 percent in the 2021 financial year. Consequently, the charges will lead to an increase in revenues for insured payers.

            From the company’s last financial statements, it is evident that salaries and wages have been constantly increasing. This is a great issue for the company since it increases the expenses while cutting if the revenues. The money paid to personnel services also increases. Thus, the rise in the cost attributed to operational services increases the hospital’s expenses. Consequently, the net revenues of the company will decline significantly. Though personal services could be generating revenues indirectly, a further increase can be a bad sign for the sustainability and growth of the University Hospital. The company's current ratio which is obtained by dividing currents assets by current liabilities has also reduced significantly. A decline in the current ratio indicates that the University Hospital is encountering major challenges in settling its short-term obligations. This demonstrates that the company’s ability to settle its current liabilities.

Financial and Operational Analysis

             Recently, University Hospital has been facing serious operational and financial issues such as increased expenses as a result of the declining revenues, increases in salaries, and declines in Medicare and Medicaid reimbursements. The reduction in reimbursements has been caused by the reduction in the state and the federal budget, the introduction of managed care in the market, and massive cuts in Federal Disproportionate Share Hospital. Therefore, a decline n Medicare and Medicaid reimbursements will significantly affect the hospital’s revenues. This will also cause destabilization in the hospitals' operations. Besides, a reduction in the Federal Disproportionate Share Hospital will reduce incomes hence making some services redundant.

Benchmarks and Comparative Analysis

             Normally, comparative analysis and benchmarks are done in healthcare organizations to increase the quality of healthcare services offered to patients. Healthcare benchmarking is the process of taking a specific organization's performance metrics and comparing them to standard development utilizing data from other organizations in the same industry. This practice has been in existence since the 1980s (Healthcare Catalyst,n.d). University Hospital leadership can use benchmarking to understand their organization is ahead of their peers and areas that require improvement. Comparative analysis on the other hand provides a superior option to conventional benchmarking by bridging the gap and provide a more accurate performance overview using real-time information across a wide range of parameters including volume, revenue, expense, and financial health.

            Healthcare organizations including the University Hospital should ensure that they have improved their safety measures. Additionally, desired healthcare results can be maintained by enhancing healthcare services. Fundamentally, all healthcare organizations should guarantee patient safety. It is worth noting that faculty systems are a major cause of medical errors. Therefore, process improvement should be done to prevent any medical errors. A healthcare organization can improve its operations by comparing its operations to those of its competitors in the industry. In this case, the University Hospital will be compared to Mayo clinic. Mayo Clinic is considered one the best-performing healthcare organizations in the region. When comparing the University Hospital to Mayo Clinic, it is behind in terms of revenue resources, capital investment, technology investment, and staff compensation (Nath, 2020). While hospitals such as Mayo Clinic are investing heavily in electronic health record (EHR) systems, the University Hospital is yet to invest in such technology. Mayo Clinic announced the launch of EPIC EHR that has helped the organization to track, retrieve, and store patient information. The organization has gone a step further to invest in online services whereby clients can book appointments, order medications online, and pay for services. The investment in modern technology has increased Mayo’s revenue greatly. Comparing Mayo Clinic’s services which are efficient and lean, University Hospital uses manual systems. However, the plans to adopt EHR systems at the University Hospital are underway.

            Additionally, the Revenues for University Hospital are lower compared to those of Mayo Clinic. Specifically, the University Hospital depends on reimbursements from Medicare and Medicaid, grant revenues, and State appropriations. The overdependence on these revenue streams causes instability especially when the federal and state governments cut these funds ((Ilin, Iliyaschenko & Konradi, 2019). For example, the current pandemic (Covid-19) could compel the federal and state government to make the cuts. Consequently, the activities of the hospital will be greatly affected. However, hospitals with diversified revenue streams such as Mayo Clinic will not be affected much by the cuts.

            Over the past years, the University Hospital has made huge investments to support the growth and development of its staff. However, compared to Mayo Clinic, the company is lagging. For instance, the healthcare organization recently injected $18 million to facilitate employee development initiatives while Mayo Clinic invested over $400 million in its employee development program. University Hospital is investing in employee development programs to enhance effectiveness and efficiency in the delivery of quality services to patients (Hilorme et al.,2019). Moreover, staff development aims at enhancing employees’ levels of satisfaction. This a great way to motivate employees allowing them to render quality services since they feel valued and respected.

            In University Hospital, capital investments are relatively low compared to that of the industry leaders. While Mayo clinic for instance made a capital investment of over $700 million, the University hospital invested $147 million in capital projects. Nevertheless, the University Hospital has made great progress in capital investment over the past two years. According to Rincon et al (2018), investing in capital projects is important for healthcare organizations since it helps enhance the current productive capacity. Besides, capital projects help to develop new services for clients. This is done by purchasing new fixed assets such as plants and property, which leads to high returns both in the long -run and the short term.

Operating Budget

            Based on the company’s operating budget the company’s revenues increased significantly between 2019 and 2020. This is enough evidence that there was increased customer satisfaction. It is evident that the University Hospital could have invested in quality enhancement hence attracting more customers to subscribe to their services. Though there is a possibility that grant revenues and subsidies might have led to the growth in net revenues, other aspects such as advancement in technology and quality improvement might have played a significant role in fueling the growth. Besides, it is anticipated that the patient services revenues will increase substantially in 2021.

            The overall growth in the total revenues shows that the healthcare organization is performing well when it comes to enhancing its revenue streams. Although the special state appropriation, fridge benefits, and miscellaneous incomes can be linked to the growth in the hospital's revenue other factors such as income from goodwill, income diversification, and investment in short-term programs could have played a major role. In the 2021 financial year, the total revenues are anticipated to increase by approximately 6 percent compared to the 2020 financial year. The projected increase is likely to be caused by service diversification and an increase in special state appropriation.

            In the operating budget, there is a growth in the total expenses which can be associated with an increase in the cost of supplies, fringe benefits, depreciation, and lease agreements. An increase in salaries and wages as a result of the recruitment of more employees to facilitate quality service delivery. In the 2021 financial year, it is anticipated that expenses will rise since the hospital is making arrangements to increase its labor force. Fringe benefits are projected to increase as a result of a rise in educational assistance, medical insurance, employee discounts, housing allowance, and sick pay. Besides, fringe benefits are expected to increase due to the extra manpower in the healthcare facility.

Recommendation

            The proper functioning of a healthcare system depends on a realistic budget prepared by a hospital. Whether big or small, the survival of a healthcare organization will rely on effective budget plans by the organization. Several recommendations need to be implemented to help the hospital address some issues in its operating budget. First, the University Hospital needs never-ending wages and salaries to increase by managing its workforce more efficiently. Rather than providing individual incentives to its staff, the organization should consider group incentives. Essentially, group incentives give tax incentives, foster cooperation, and teamwork, and reduce cost since they encourage the pooling of risks. It is worth noting that when employees are offered group incentives, they feel equally appreciated and valued (Azadi, Zare, & Zare, 2018). Consequently, they are all motivated to provide excellent customer service. In addition, group incentives promote collaboration and teamwork in a healthcare setting as it brings workers together since they enjoy the same benefits.

            The hospital should also consider investing in modern technology. Specifically, it should invest in electronic health systems to help it cut costs and boost its revenue sources. Although the cost of the investment may be high, in the long run, the system is viable as it reduces duplication, ensures efficient operations while retrieving, storing, and sharing patient information, and also eliminates wastage (Foster, 2019). Leaders in the industry such as Cleverly Hospital and Mayo Clinic have already implemented EHR systems. The implementation of EHR systems in these hospitals has played a significant role in improving their revenues and operations. Manual systems are prone to deletion, loss of critical information, and obsoleteness. Therefore, EHR systems such as EPIC can help deal with these issues. Duplication of tasks can also be reduced since retrieval and storage of patient information can be done by one person.

            It is plausible for the hospital to invest in online customer service. In the contemporary healthcare setting, people have started shifting to online ordering services. Nowadays, patients order medications online and prefer services being delivered to their doorstep. While industry leaders are implementing online customer services, the University Hospital should consider doing the same (Nath, 2020). This is a great way in which the hospital should increase its revenue stream. Mayo Clinic reported that its revenues have significantly increased after implementing EPIC EHR systems. This is enough evidence that online services are lucrative and the University Hospital should not lag.

            Further, the hospital should consider using monitoring reporting tools to allow them to utilize the benchmarked data as a way of controlling costs and improving productivity. By so doing, the management will minimize the unanticipated costs and expenses arising because of poor monitoring of monthly costs (Rahman, 2018). The hospital’s administration needs to determine performance initiatives require to bring new revenues as well as new services that will increase the volume of customers (Tu, Wang & Wu, 2018). For instance, the hospital's registry services are redundant hence a complete renovation is needed in the registry to enhance its efficiency.

Conclusion

            The University Hospital is currently encountering serious issues such as increasing wages and salaries, cuts in state appropriation, declining revenues, and reduction in Medicare and Medicaid reimbursements. The financial constraints arise due to inefficiencies caused by failure to invest in appropriate technology such as EPIC EHR systems. Other problems include failure to use monitoring tools, lack of online customer service, and provision of individual incentives. It is therefore important for the organization to consider the recommendations mentioned above. Besides the recommendations aforementioned, University Hospital should consider investing in continuous training of staff members. Fundamentally training improves the technical knowledge while improving their effectiveness and efficiency in the client's service delivery. Thus, training improved customer loyalty reduces operation costs, and boosts brand reputation and image.