George Mason UniversitySchool of Business

Changing How Hospitals Think about Budgeting can Save Money

Written by Katherine Johnson on .

Nirup Menonhospital, associate professor of information systems and operations management, has always been interested in researching health IT and the value it brings to hospitals. In his most recent research though, Menon stepped out of his specialty to apply a concept from accounting information systems to hospital budgeting.

“When I was looking at hospital data, I noticed that there’s extensive budgeting information that nobody has touched. It’s just sitting there,” he said.

“I wanted to approach it more from an information systems budgeting point of view because I wanted to see how much people are allocating to IT. However, it developed into budgeting for a whole organization.”

Menon and co-authors Akhilesh Chandra, University of Akron, and Birendra Mishra, University of California, Riverside, wanted to make budgeting processes more effective in hospitals.

Like many organizations, hospitals often experience asymmetric ratcheting, or spending less money but not decreasing budgets.

“Being human, we know that managers want to have enough money on their hands,” Menon said.

Managers want financial flexibility in case of unexpected costs or a sudden budget decrease. As such, they budget for more than they spend to ensure they have extra money on hand.

Instead of looking at budget data for each department, Menon and his colleagues applied a concept called transaction cycles to group budget expenditures by business process. The concept consists of five cycles: production, expenditure, financial, revenue, and human resources.

Each cycle was mapped to an aspect of healthcare, production to patient care; expenditure to IT, purchasing, and transportation; financial to fiscal services; revenue to patient accounts, admitting, and medical records; and human resources to hospital administration, personnel, and employee benefits.

The researchers collected data from 99 hospitals in Washington state, which had 12 years of consecutive budget data.

“We went to hospitals and looked at their budgeting accounts, and we classified them into these five cycles. Then we analyzed the data of actual spending versus budgeted data, as to how much the hospitals were adjusting along the cycles,” Menon said.

They found that patient care, which correlates to the production cycle, has more asymmetric ratcheting than other cycles. Menon said spending less money than was budgeted for patient care was expected because it brings the most revenue to the hospital.

The researchers concluded that using transaction cycle budgeting is more efficient than doing department-based budgeting. By creating budgets for the five business cycles instead of budgets for dozens or hundreds of departments, there is less over budgeting.

“The transaction cycle level budgeting does not follow departmental lines, rather it follows process logic, meaning some of the problems with department-level budgets can be avoided,” Menon said, citing issues like budget slacks, budget padding, and asymmetric ratcheting.

The overall budget would be lower as it would more accurately reflect a hospital’s costs or expenditures for the budget cycle. With rising healthcare costs, controlling budget allocations is likely to keep hospitals financial sound and reduce the need to increase costs for patients in the future.

The research has been accepted for publication in the Journal of Information Systems.