Cost Variance in Healthcare Organizations - Essay Example

Cost Variance in Healthcare Organizations Introduction Budget management is essential in different industries of an economy. This is because it enables organizations to operate with low costs while maintaining their effectiveness in service delivery. Budget management involves analysis and controlling of budget variance. According to Penner (2003), budget variance could be divided into profit variance, volume variance, price variance, and quantity variance. This paper explains a budget analysis of one of the healthcare organizations in the United States. The healthcare identified for analysis in this paper is the Center for Medicare and Medicaid Services. Like other healthcare organizations, the budget management in this healthcare organization is said to be underdeveloped. This is the reason why we have identified it for the analysis so that we can make possible recommendations. Strategies of Managing Budgets Within Forecast Managing budgets within forecasts is significant in revenue attainment and costs containment. However, ensuring that budgets remain within forecasts is not an easy task. Moreover, budget forecasts are not always accurate in terms of budgetary estimates they give. This makes designing of a strategic budgets management approach to be a necessity in healthcare organizations. In this healthcare organization, specific strategies exist for managing budgets within forecasts. These strategies vary both in their characteristics and in applicability. However, the majority of them are applicable in healthcare organizations like the one identified in this paper. One of the strategies that could be significant in managing budgets within forecasts is the use of both quantitative and qualitative approaches during forecasting. According to Cole (2003), quantitative approach uses numeric data such as statistics and the accounting data to draw projections. Qualitative approach, on the other hand, uses explicit assumptions and individual judgments about the assumptions to draw conclusions (Cole, 2003). Combination of these two approaches, when looking for budget forecast estimates, assists in obtaining the most accurate and unbiased estimates. These estimates guide the actions taken to maintain the budget within the forecasts. As a result, the strategy could help in managing the budgets within forecasts. The interval which the forecast is based on is significant in obtaining accurate estimates from the forecast. Another strategy that could be adapted to manage budgets within forecasts is the use of small intervals when forecasting. The strategy can be implemented by use of a rolling forecast produced on a quarterly basis to provide a full-year outlook (Dressler, 2004). An approach that uses short intervals like this one can promote obtaining of more accurate forecasts. Moreover, it can provide forecast estimates that could be obtained from within the large interval forecasts. This could greatly assist in managing budgets within forecasts, thus promoting operability of the organization. According to Cokins (2006), budgeting and financial planning are confusing to many organizations. As a result, many organizations in different industries find it difficult to integrate the two as organizational management. A strategy of employing budgeting together with financial planning in management of an organization is another strategy that could help in managing budgets within forecasts. Financial planning would assist in the drawing of accurate forecasts while budgeting would be assisting in maintaining the spending within the forecasts. However, for this to be achieved, these two aspects must be used in an integrated manner. Otherwise, they would not be able to supplement each other, thus failing to achieve their objectives. Expense Results With Budget Expectation Healthcare organizations have several expense results. Each of the results has its own budget expectation. Five of the most significant expense results of healthcare organizations such as the one identified in this paper are salary and wages expenses, medical supplies expenses, administration expenses, fringe benefit expenses, and research expenses (MHA, 2010). These expense results have different budget expectation. Salaries and wages have the highest budget expectation. The medical supplies and then the administration expenses follow them closely. Fringe benefit expenses also have a significant budget expectation but not as large as those of salary and wages, medical supplies, and administration. Research expenses have the least budget expectation. Healthcare organizations such as the one identified in this paper have been allocating most of their resources to the budget expectation of the first four expenses. However, in the recent past this healthcare organization has allocated a good amount of resources to research expenses to improve its health services delivery. Several reasons contribute to the variation in the budget expectation of different expense results. One of the reasons is the magnitude of the expense. Salary and wages expense results and medical supplies expense results have the largest magnitude. This is why they have the highest budget expectation. Research expenses, on the other hand, have the least magnitude; hence, they are given the lowest budget expectation. Another reason for the variation is the difference in the level of importance. A healthcare organization can be able to operate without research and fringe benefits. However, it cannot be able to operate without labor, medical supplies, and administration. This is why there is a great variation between the budget expectations of these two categories of expenses. Benchmarking Techniques Benchmarking is a very essential tool of organizational management improvement. According to Lankford (1999, p. 1), “Benchmarking is the process of measuring the performance of an organization relative to that of other organizations in the same or another industry.” Different benchmarking techniques could be used by the organization identified in this paper. Among the currently used benchmarking techniques, the ones that could be employed to improve the management of the identified healthcare organization include process benchmarking, performance benchmarking, and strategic benchmarking (Lankford, 1999). These benchmarking techniques vary in terms of how they improve the management of an organization. Some contribute to financial management while others do not. This indicates their difference in applicability in different industries of an economy. Among the identified benchmarking techniques, the ones that could improve budget accuracy in future forecasts are strategic benchmarking technique and performance benchmarking technique. Performance benchmarking technique eliminates trial and error in a process (Lankford, 1999). If used in the budgeting of an organization, it would eliminate trial and error in the process of budget forecasting. As a result, the accuracy of future budget forecasts would be greatly improved. Strategic benchmarking would tailor processes in the organization to fit the organizational context (Lankford, 1999). As a result, integration of financial planning and budgeting would be greatly enhanced. Moreover, the effectiveness and efficiency of activities involved in budget analysis would be greatly enhanced. These would greatly improve budget accuracy in future forecasts made by the organization. Conclusion Several strategies are available for managing budgets within forecasts. Some of them include use of both qualitative and quantitative approaches when making forecasts, use of rolling forecast, and integrating budgeting activities and financial planning activities. Moreover, several expense results with budget expectations exist in healthcare organizations. They include salaries and wages, medical supplies, administration, fringe benefits, and research. These expense results complicate the process of budget analysis in an organization. As a result, organizations find it difficult to obtain accurate estimates of budget forecasts. However, there are benchmarks that could be adapted to overcome this problem. These include performance benchmarking and strategic benchmarking. This makes us to conclude that healthcare organizations have the capability of improving their budget analysis to be comparable to that of organizations in other industries. To do this, they need to understand the factors that influence financial planning and budgeting in their industry. References Cokins, G. (2006). Activity-based cost management in government. Vienna, VA: Management Concepts Ltd. Cole, G. A. (2003). Strategic management. London: Thomson Learning. Dressler, S. (2004). Strategy, organization & performance management: From basics to best practices. Boca Raton, FL: Universal Publishers Ltd. Lankford, W. M. (1999). Benchmarking: Understanding the basics. Retrieved 15 September 2012 from http://www.coastal.edu/business/cbj/pdfs/benchmark.pdf. MHA. (2010). Hospital costs in context: A transparent view of the cost of care. Retrieved 15 September 2012 from http://www.mhalink.org/AM/Template.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=11241. Penner, S. J. (2003). Introduction to healthcare economics and financial management: Fundamental concepts with practical applications. Philadelphia, VA: Lippincott Williams & Wilkins Ltd. Read More