Introduction
Effective financial management is crucial for the sustainability and success of healthcare organizations. In the complex landscape of health care, financial managers face unique challenges, including budgetary constraints, rising costs, and the constant need to balance quality patient care with fiscal responsibility. Budgeting, a cornerstone of financial planning, serves as a vital tool for resource allocation and organizational control in this sector (1). Essentially, a budget is a financial roadmap, outlining anticipated revenues and expenditures over a specific period (2). The budgeting process itself is the strategic allocation of resources to maximize output relative to income (3). When implemented effectively, budgeting empowers healthcare managers to enhance organizational management and maintain financial control (4). It provides a structured approach to coordinate activities and ensures financial accountability, orienting organizations towards sound fiscal practices (5).
The healthcare industry is a fundamental pillar of economic (6) and social development in every nation (7). It commands a significant portion of national budgets, with many countries allocating approximately 10% of their GDP to healthcare (8). Furthermore, healthcare costs are on a consistent upward trajectory (9, driven by factors such as aging populations and advancements in medical technology (10). While these advancements improve healthcare quality and extend life expectancy, they also contribute to increased demand for healthcare services, further escalating costs. Consequently, policymakers are increasingly focused on strategies to manage and reduce healthcare expenditures (11).
Over the past three decades, extensive research has focused on healthcare cost containment, leading to the development of various economic models, particularly within hospitals. These models often center on cost structure analysis, cost-effectiveness, cost-utility, and cost-benefit evaluations. Recent cost control measures in healthcare systems include refined accounting methods, updated budgeting approaches, and service cost management in hospitals and similar organizations (12). Healthcare organizations, both public and private, frequently encounter budgetary limitations (13. Therefore, effective cost control and resource management are paramount. Healthcare financial managers must prioritize prudent budget and resource management without compromising the quality of patient care, as their decisions directly impact human health (14).
Several budgeting methods are available to healthcare financial managers. Global budgeting involves allocating a fixed budget for services to a defined population over a set period, typically a year. This method offers both advantages and disadvantages, which we will explore further. Numerous studies have assessed the efficacy and practical outcomes of global budgeting (15–18). Capital budgeting is another crucial tool, used to address long-term investment needs within healthcare organizations (19. The increasing complexity of surgical procedures and reliance on advanced medical equipment necessitates significant capital investments by hospitals and healthcare facilities (20). Hospitals, especially older institutions, often require substantial capital for upgrades to facilities and equipment. Securing adequate funding is essential for healthcare organizations, particularly hospitals, to maintain and improve their services (21). Performance-based budgeting, also known as program budgeting, is gaining traction as another effective approach. This method links budget allocation to specific outcomes and performance metrics. It emphasizes the relationship between expenditures and achieved results and is widely discussed in budgeting literature (22).
Despite ongoing efforts to enhance budgeting practices in healthcare, the sector still faces challenges related to rising costs and resource inefficiencies. This article aims to explore key budgeting methods, their dimensions, strengths, and weaknesses, and to provide insights for improved financial management in healthcare.
Fig. 1:Article selection process for review of healthcare budgeting methods.
Methods of Budgeting in Healthcare: A Systematic Review
This article employs a systematic review methodology to identify and analyze different budgeting methods applicable to healthcare systems and organizations. The research utilized databases including Google Scholar, PubMed, Web of Science, and Scopus, searching for articles published between 1990 and 2022. Keywords used in the search strategy included terms related to hospitals, healthcare systems, and various budgeting approaches such as “budgeting model,” “financial management,” “capital budgeting,” “performance-based budgeting,” and “global budgeting,” among others. The article selection process involved three stages: initial title screening, abstract review, and full-text assessment to ensure relevance to the research objective.
Inclusion and Exclusion Criteria
The study included articles and reports meeting the following criteria:
- Published between 1990 and 2022.
- Available in English or Persian.
- Focused on budgeting within healthcare systems or organizations.
- Addressed budgeting processes, methods, and their associated strengths and weaknesses.
Articles not meeting these criteria were excluded.
Data Extraction and Analysis
A structured data extraction form was developed to systematically collect information on budgeting methods, including their definitions, strengths, weaknesses, and key dimensions. This form facilitated the analysis and synthesis of findings across the selected articles.
Results: Key Budgeting Methods in Healthcare
The systematic review identified 33 relevant articles, which were analyzed to categorize and describe various budgeting methods in healthcare. These methods were grouped into four main themes: healthcare system budgeting, capital budgeting, global budgeting, and performance-based budgeting.
Overview of Budgeting Methods
| No. | Budgeting Type | No. | % |
|---|---|---|---|
| 1 | Global Budgeting | 12 | 36.4 |
| 2 | Healthcare System Budgeting | 10 | 30.3 |
| 3 | Performance-Based Budgeting | 7 | 21.2 |
| 4 | Capital Budgeting | 4 | 12.1 |
| Total | 33 | 100 |
Distribution of budgeting method types identified in the literature review.
Healthcare System Budgeting: Foundational Principles
Effective healthcare system budgeting aligns financial allocations with health priorities, necessitating strategic involvement from health planning stakeholders (23). Department and operational unit managers are crucial “budgeteers” within healthcare organizations, actively participating in the budgeting process (24). A typical budget cycle includes four key phases:
- Preparation and Submission: Initial budget proposals are developed and submitted.
- Approval (Authorization): Budgets are reviewed and approved by relevant authorities.
- Execution: Approved budgets are implemented and managed throughout the fiscal period.
- Audit and Evaluation: Post-fiscal year audit and performance evaluation of budget execution (25).
Several core principles are essential for successful budget planning and implementation in healthcare:
- Employee and Manager Participation: Involving staff and managers in the budgeting process enhances their commitment to budget execution (26, 27).
- Bias Awareness and Mitigation: Recognizing and addressing potential biases—both unintentional cognitive biases and intentional biases—is critical for accurate budgeting (28).
- Service Quality Consideration: Budgeting should not solely focus on cost control but must also prioritize maintaining service quality and patient satisfaction (29, 30).
- Performance Feedback: Regular feedback on budget performance enables managers to identify variances and adjust their strategies promptly (26).
- Stakeholder Satisfaction: Budgeting decisions should consider the needs and satisfaction of stakeholders, as their dissatisfaction can negatively impact the organization (30).
- Criteria for Budget Allocation: Allocation criteria should include national health priorities, essential services, historical budget data, health needs assessments, feasibility analysis of international guidelines, and income generation potential (31).
Global Budgeting: Managing Costs at a Macro Level
Global budgeting involves allocating a predetermined sum to cover healthcare services for a defined population over a specific period, replacing fee-for-service models (32). This method sets limits on the total cost of services provided (32). It typically operates through administrative contracts that specify service volume, pricing, service types, and quality standards (17).
Characteristics of Global Budgeting:
- Cost reduction for healthcare organizations (33).
- Increased flexibility compared to line-item budgeting (34).
- Enhanced cost control and greater authority for health officials (17.
- Incentivizes service providers to improve non-medical efficiency (33).
- Potential for reduced service quality due to budget ceilings (35).
- Can strengthen budget structure sustainability (17).
- Compatible with population-based payment models (32).
- Reduces hospital motivation to increase service volume (33.
- Financial risk primarily borne by service providers (34.
- Motivates service efficiency and cost predictability for payers (33).
- Relatively simple to implement (34.
- May reduce competition among hospitals (33.
- Budget increases may be tied to non-health factors, eroding purchasing power (33).
- Combines administrative simplicity with performance incentives (32).
Practical Results of Global Budgeting:
- Mixed evidence on reducing hospital services or increasing primary care visits (16).
- Potential negative perceptions from physicians due to cost control measures affecting performance and patient satisfaction (36.
- Possible increase in prescription drug costs in some settings (37.
- Evidence suggests limited success in enhancing hospital efficiency in some contexts (38.
- Risk of unintended consequences, such as impaired quality, under severe financial pressure (35.
- Potential for cost reduction and quality improvement compared to fee-for-service models (39.
- Associated with reduced emergency admissions in some studies (40.
- In some cases, linked to longer hospital stays and increased healthcare costs, but potentially improved quality for specific conditions (41).
Capital Budgeting: Investing in Healthcare Infrastructure
Capital budgeting focuses on long-term investments in fixed assets (42. In healthcare, this includes investments in buildings, major medical equipment, and technology upgrades. Repayment period is a key metric for evaluating long-term investment projects in hospitals (43).
Characteristics of Capital Budgeting:
- Focus on long-term investment in fixed assets (42).
- Repayment method as a primary evaluation criterion (43).
- Challenges in accurately accounting for inflation (42.
- Use of discounted cash flow (DCF) methods like NPV and IRR (43.
- Risk of comparing project revenue to the status quo instead of considering market dynamics (42).
- Preference for measurable project aspects over intangible benefits (42).
- Importance of realistic assumptions regarding reinvestment rates and inflation (42).
- Physician influence on investment decisions, sometimes without accountability for financial outcomes (21).
- Project selection based on direct cash flows exceeding investment costs (44).
Practical Results of Capital Budgeting:
- US hospital studies suggest problematic application of capital budgeting techniques, particularly ignoring ROI and TVM (42).
- Concerns about incorrect handling of inflation and excessive discount rates (42).
- Hospitals often rely on diverse funding sources for capital budgets, requiring projects to cover the weighted average cost of capital (WACC) (44).
- Multi-hospital systems may exhibit better project management and resilience compared to smaller hospitals, especially post-COVID-19 (44).
Performance-Based Budgeting: Linking Funds to Outcomes
Performance-based budgeting allocates funds based on the intended purpose and outcomes of activities rather than relying on historical spending (45. It is a valuable tool for aligning planning and budgeting processes (46). Key technical elements include setting short, medium, and long-term goals (46).
Characteristics of Performance-Based Budgeting:
- Budget allocation based on activity purpose and outcomes (45).
- Strong alignment of planning and budgeting (46).
- Emphasis on setting strategic goals (46.
- Increased flexibility compared to other methods (47.
- Promotes participatory management and budget execution commitment (47.
Practical Results of Performance-Based Budgeting:
- Reports of unsuccessful implementation due to separation between budgetary and executive institutions (48.
- Challenges arising from rapidly changing planning and budgeting environments (49.
- Difficulties in goal setting due to lack of reliable data, leading to top-down approaches (49.
- Failure to update financial management systems can hinder implementation (50.
- Successful implementation requires shifting to accrual accounting, developing cost price systems, productivity management, and evidence-based decision-making (51.
Summary of budgeting methods, characteristics, and practical results in healthcare systems.
Discussion: Integrating Budgeting Tools for Financial Managers
This review highlights several crucial budgeting methods for healthcare financial managers. Global budgeting, while aiming for cost control, shows varied results in practice. Studies indicate that while it can curb costs, it may not consistently improve primary care access or reduce hospital service utilization (16). Furthermore, strict cost control measures under global budgeting can negatively impact physician behavior and potentially patient satisfaction (36). Successful global budgeting implementation requires careful consideration of service coverage guidelines and quality maintenance (33). Its benefits include the potential to eliminate unnecessary services and enhance service coordination (32). Financial incentives within global budgets can stabilize hospital finances, particularly in rural areas, but careful structuring and monitoring are essential (34).
Capital budgeting, essential for infrastructure investment, faces challenges in healthcare settings. The repayment method remains a common evaluation criterion, yet hospitals sometimes struggle with accurately accounting for inflation and applying sophisticated techniques like discounted cash flow analysis (42). Physician involvement in capital project decisions is significant, highlighting the need for alignment between clinical perspectives and financial accountability (21). Access to diverse funding sources and robust financial management are critical for successful capital budgeting, especially in smaller hospitals facing economic pressures (44).
Performance-based budgeting offers a promising approach by linking resource allocation to outcomes. The Medium Term Expenditure Framework (MTEF), promoted by institutions like the IMF and World Bank, provides a structure for performance-based budgeting, particularly in developing economies (46). However, effective implementation requires institutional integration of planning and budgeting, reliable data for goal setting, and stakeholder engagement (49). Flexibility and responsiveness are key advantages of performance-based budgeting, enabling better alignment of public health priorities with financial resources (50). Successful adoption necessitates changes in accounting practices, cost price systems, and a focus on productivity and evidence-based decision-making (47, 51).
Budgeting within healthcare systems is further enhanced by engaging operational managers and department heads in the process (28). Participatory budgeting improves commitment and performance (26). Decentralization and delegation of authority can also improve resource allocation and responsiveness to local needs (27). Regular budget feedback is crucial for monitoring performance and incentivizing effective budget management (24). Arthur’s study outlines a comprehensive budgeting process in healthcare, emphasizing goal setting, negotiation, and ongoing management (29). Various budgeting methods exist, including population-based, facility-based, and case-mix approaches, each with specific applications (31). Ultimately, improved hospital-level prioritization through aligned budgeting and planning, clear decision-making structures, and stakeholder engagement can lead to more efficient and equitable healthcare resource allocation (23.
Conclusion: Selecting the Right Tools for Healthcare Financial Management
The healthcare sector is a significant economic component in every country, necessitating careful financial oversight. Simply increasing healthcare spending does not guarantee improved public health outcomes. Therefore, strategic budget allocation across healthcare departments is paramount. Healthcare organizations utilize various budgeting methods, with global budgeting, capital budgeting, and performance-based budgeting being prominent examples. Each method presents unique advantages and disadvantages and is suited to different organizational contexts and national infrastructures. Financial managers must thoroughly assess their specific circumstances before selecting and implementing a budgeting approach. The optimal choice depends on a detailed analysis of the healthcare system’s infrastructure, organizational goals, and the broader economic and policy environment. By understanding and applying these basic budgeting tools, healthcare financial managers can contribute significantly to the financial health and operational effectiveness of their organizations, ultimately supporting the delivery of high-quality patient care.
Journalism Ethics Considerations
The authors have adhered to ethical standards, ensuring originality and integrity throughout the research and manuscript preparation.
Availability of Data and Materials
Data utilized in this study are available upon reasonable request from the corresponding author.
Acknowledgements
The authors express gratitude to all participants for their contributions to this research. No external funding was received for this study.
Footnotes
Conflict of Interest
The authors declare no conflicts of interest.
References
Associated Data
Data Availability Statement
The datasets used and/or analyzed during the current study are available from the corresponding author on reasonable request.
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