The advantage of zero-based budgeting is that every expense is justified.
The disadvantage is that the process is time-consuming and may not be necessary. For that reason, organizations may not use this process every year. An adaptation of the zero-based budget is to start the budget with a lower base, for example, 80 percent of the current expenses. Managers then have to jus- tify any budgetary expenses requested above the 80 percent base.
Fixed or Variable Budgets Budgets can also be categorized as fixed or variable. In a fixed budget, the budgeted amounts are set without regard to changes that may occur during the year, such as patient volume or program activities, that have an impact on the cost assumptions originally used for the coming year. In contrast, variable budgets are developed with the understanding that adjustments to the budget may be made during the year based on changes in revenues, patient census, utilization of supplies, and other expenses.
The Operating Budget The operating budget, also known as the annual budget, is the organization’s statement of expected revenues and expenses for the coming year. It coincides with the fiscal year of the organization, a specified 12-month period during which the operational and financial perfor- mance of the organization is measured. The fiscal year may correspond with the calendar year— January to December—or another time frame. Many organizations use July 1 to June 30; the federal government begins its fiscal year on October 1. The operating budget may be further broken down into smaller periods of six months or four quarters; each quarter may be further sepa- rated into three one-month periods. The revenues and expenses are organized separately, with a bottom-line net profit or loss calculated.
The Revenue Budget The revenue budget represents the patient care income expected for the budget period. Most commonly, health care payers pay a predetermined rate based on discounts or allowances. In many cases, actual payment generated by a given service or procedure will not equal the charges
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that appear on the patient bill. Instead, the health care provider will be reimbursed based on a variety of methods. These include:
● Reimbursement of a predetermined amount, such as fixed costs per case (Medicare recipients);
● Negotiated rates, such as per diems (a specified reimbursement amount per patient, per day);
● Negotiated discounts; and ● Capitation (one rate per member, per month, regardless of the service provided).
Revenue projections for the next year are based on the volume and mix of patients, rates, and discounts that will prevail during the budget period. Projections are developed from histori- cal volume data, impact of new or modified clinical programs, shifts from inpatient to outpatient procedures, and other influences. Today, however, these projections may not be viable, especially in the light of health care reform.
With implementation of accountable care organizations and medical homes, Medicare reim- bursement is expected to change (Buerhaus, 2010). Instead of paying for inpatient services at a predetermined specific rate for each Medicare recipient based on the patient’s diagnosis (DRGs), providers will be reimbursed for care of patient groups.