This paper will discuss the most effective and ineffective financial management practices in the healthcare setting. Healthcare is the most difficult industry to prepare financial operating budgets. There are many factors and variables that must be taken into consideration. These factors and variables can change yearly making the preparation of the budget even more difficult.

1. Running head: HEALTH CARE BUDGET 1
Health Care Budget
Debbie Fernando
HCS/577
April 8, 2013
Sharon Sanders

2. HEALTH CARE BUDGET 2
Health Care Budget
This paper will discuss the most effective and ineffective financial management practices
in the healthcare setting. Healthcare is the most difficult industry to prepare financial operating
budgets. There are many factors and variables that must be taken into consideration. These
factors and variables can change yearly making the preparation of the budget even more difficult.
The operating budget is “a combination of the revenue and expense budgets” (Gapenski,
2008). One of the most effective financial management practices in creating and monitoring an
operating budget is to consider the previous year’s patient net revenue. This is a good starting
point for estimating the net patient revenue that can be expected this year. Typically, there will
not be any major changes in the volume of patients seen. The type and number of patients
admitted as in-patients or seen as out-patients should be fairly constant from one year to the next.
Thus, the expense of supplies including dressings, IV fluids, supplemental oxygen supplies, etc.
should also remain a constant. Management must keep in the back of their minds the improbable
yet possible chance of natural disasters, biological warfare, or other major catastrophes that
could throw the entire budget into a blender. It would be impossible to prepare a budget with this
added into the equation. In comparison, the expense of staff salaries should be fairly close to the
previous year. It should certainly rise by a small percentage, but it should be easy to estimate.
Variances
Another effective financial management practice when monitoring an operating budget is
the variance analysis. One variance that has to be considered is managed care contracts.
Managed care contracts can vary from one year to the next and can have a large effect on the
revenue and the provision for doubtful accounts. If the managed care contract pays in advance,
there can be a large unearned revenue liability. The managed care contract can also change in

3. HEALTH CARE BUDGET 3
what procedures, tests, or surgeries it covers, what the copay is, and the amount allowed. The
health care facility and the managed care contract providers have to re-negotiate yearly. The
negotiations can be more profitable for the health care organization or it can cause them to lose
revenue.
It is very important for management to determine whether the variances were contributed
to a probable or expected variance or something that was not predicted. They can then be more
prepared the following year to consider that this may show up as a variance in the next year as
well. It may then go from a variance to something that must be added to the expense report.
Financial management practices that are least effective in creating and monitoring an
operating budget are items that belong in the capital budget. The purchase of long-term items
such as MRI machines, operating room tables, and such may take a large amount of cash on hand
out of the operating costs but adjustments will have to be made in the amount of revenue the
piece of equipment would bring in over its life span. If used in the operating budget,
management would have to estimate the number of patients who would be using the equipment
yearly which would be difficult since it is new and has not yet shown its value.
Another non effective financial management practice would be to expect a certain
amount in charitable donations. The donations may be close to the same coming from
community events or individual donations. But large donations made due to someone passing
away and leaving a million dollars to the facility in their will cannot be expected.
Conclusion
Preparing and monitoring a budget in healthcare is difficult. There are so many variables
in healthcare. Third party payments will cause the main variable. Managed care contracts will
continue to play a large part in the difficulties of preparing an accurate operating budget. Health

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care reform will have to be considered for the next few years as it will change the face of health
care if it proceeds as intended.

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References
Gapenski, L. C. (2008). Healthcare finance: an introduction to accounting and financial
management (4th ed.). Chicago, IL: Health Administration Press.
Content
60 Percent
Points
Available
12
Points
Earned
X/12
Additional Comments:
 2010 Operating Budget Projection was
accurate based on 2009 Operating Budget
and 2010 Budget Assumptions
 Properly identified effective financial
management practices in the health care
setting
 Discussed ineffective financial management
practices in the health care setting
12
Great job identifying
financial management
practices that are both
effective and ineffective.
Your calculations were
correct, however since
there is no change in
investments, that amount
would be $0 and the net
and operating income
would be the same.
Organization/Development
20 Percent
Points
Available
4
Points
Earned
X/4
Additional Comments:
 The paper is 700 to 1,050 words in length.
 The introduction provides sufficient
background on the topic and previews major
points.
 The conclusion is logical, flows, and reviews
the major points.
4
Great job.
Mechanics
20 Percent
Points
Available
4
Points
Earned
X/4
Additional Comments:
 The paper—including the title page,
reference page, tables, and any appendixes—
is consistent with APA guidelines as directed
by the facilitator. The paper is laid out with
4
You had no major
grammar or spelling
errors.

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effective use of headings, font styles, and
white space.
 Rules of grammar, usage, and punctuation are
followed; spelling is correct.
Total
Available
Total
Earned
20 20