How Do Hospitals Spend Money? An Introduction

by Erica Mitchell | October 23 2023 | Hospitals, Product Evaluation, Policy, Interventions, Cost-Effectiveness, Costs, Construction, Innovations, Evidence-Based Design | 0 Comments

Hospital expenses-01Hospital finances are a complex process, involving all the parts of a service provider, a retail business, an investment venture, and a non-profit organization. Investment in medical innovations require buy-in from anyone (and everyone) from physicians and nurses all the way to the CFO and CEO. In today's post, we will introduce a series on the topic of how hospitals budget and spend money, and how an individual employee can use that information in order to bring an innovative idea to the right person at the right time. 

First, a quick overview. Depending on the type of hospital, revenue will come into a facility from a variety of sources. Revenue streams include public payers such as the state and federal government, private payers such as insurance companies, donations and grants, and investments on financial assets. Expenditures tend to be more standard across the board, and separate budgets are made for operating and capital costs.

The operational budgeting process is completed annually and is based on past trends and future predictions. The biggest operational expenditure is staffing, including salaries and wages, benefits, and professional fees. The next biggest category is supplies, which includes anything consumable from food and pharmaceuticals to cleaning supplies, one-use products and medical instruments.

The capital budgeting process is completed over a long-term span, guided by the overall strategic plan for the healthcare facility or system. In this long-term budget, annual amounts are allocated for the purchase of durable goods such as beds, equipment, and building improvement/renovation.

Large capital purchases of fixed assets are not expensed all at once. Instead, they are spread out in a process called depreciation and amortization. Amortization takes care of spreading the cost out over the life of the asset, while depreciation takes into consideration how the age of the asset impacts its usefulness (and therefore, it's monetary value) over time. 

So how does an employee wanting to adopt an effective innovation get that product into the budget? Often, hospitals will have set protocols for how new ideas are pitched and evaluated. The Agency for Healthcare Research and Quality suggests following a procedure to evaluate the product and its efficacy, and then to develop a business case for why and how it makes sense. 

The goal is to justify the purchase by demonstrating that the innovation reduces costs (or keeps them neutral), increases revenue (could be by saving money), and addresses the overall strategic plan for the facility regarding quality and growth. (The ideal accomplishes all of the above.)

Larger expenses, including fixed assets such as major equipment, present a greater challenge for the individual excited about a promising innovation. Capital investments last a long time, so decisions made today will still be impacting the facility 5-10 years from now. Capital decision-making can take extra time, with adoption of an innovation (for example, making sure it it is specified in plans and blueprints) sometimes occurring years before its implementation. However, unlike operational costs, capital costs have the added cushion of having all that time across which to spread the costs. If the innovator is aware of these budgeting scenarios, they will be better prepared to bring their idea to the right person at the right time and in the right way.

We will continue this series by diving deeper into the process of product adoption, paying special attention to the individual wishing to bring innovation to their facility. Until then, if you would like assistance in preparing your argument for preventive biocidal surfaces in your facility, click on the link below!

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