Monthly Archives: March 2012

Academia, Health Care

Investment in Capital Improvements

To Buy or Not to Buy, That Is the Question

Outlays for capital improvements can be daunting, whether for a business or within a personal budget. It makes sense to invest in capital improvements when a realistic return on the initial investment can be expected. Computers, motor vehicles, and homes are all good examples of large personal investments that can generate significant returns or provide security that increases stability. In health care, outlays for expensive imaging devices, real property, and specialization programs can generate the same returns or stability to seek returns, especially when resulting from strategic business planning. Penner (2004) describes these outlays, or expenses, “as inputs or costs incurred in the process of producing goods and services” (p. 65). These inputs are designed to enhance existing revenues streams or provide for additional revenue streams.

Although health care budgeting is much more complicated than personal budgeting, the concepts are very similar. Penner (2004) demonstrates various types of budgets that account for many more revenue and expense items than is typically seen in personal budgeting. For instance, a hospital would account for every charge for every patient seen in each department seen. The hospital would also have to account for a number of expenses, such as personnel costs and the cost for each piece of patient care equipment (Penner, 2004). However, budgets can be consolidated and simplified the further they move from direct care (e.g. budget overviews used by the board of directors would not be so specific to account for each patient’s stay; instead, the budget overview would reflect revenues and expenses departmentally with references to the budgets of each specific department).

Recently, I made two large purchases that had to be budgeted: a) a Chevy Suburban (financed) and b) a Harley-Davidson motorcycle (cash). With both purchases, I needed to be sure that I needed the vehicle and I would benefit from the purchase. For the Suburban, because it was financed, required me to budget $500.00 / month; however, the vehicle allows me to get back and forth to work to earn my living, is reliable in all types of weather (important because I am required to report to duty even in severe weather), and maintains a high resale value. This purchase also required me to budget increased fuel costs due to poor fuel economy. The motorcycle purchase, admittedly largely recreational, also required significant forethought and budgeting; however, the excellent fuel economy certainly allows me to offset the Suburban’s fuel consumption during moderate weather. The motorcycle was also priced at a significant discount and requires little maintenance.

Again, the basics of budgeting are the same for business and personal finances; however, business budgets can get fairly complicated fairly quickly. For personal budgeting, the level of complexity is mainly determined by the needs of the individual. Tracking income and monthly bills requires little detail, though planning for a major future purchase or savings goal requires more significant accounting and detail.

References

Penner, S. J. (2004). Introduction to health care economics & financial management: Fundamental concepts with practical applications. Philadelphia, PA: Lippincott Williams & Wilkins.

Emergency Medical Services, Politics

Political and Technical Budget Strategies

When preparing an agency or department budget, two strategies may be employed, usually in combination: political budgeting and technical budgeting (Menifield, 2009). While most budgets are defended politically, the technical budgeting stategy is most useful when defending mandatory and base expenditures of a legally mandated service, such as a police or fire department (Menifield, 2009). New programs, especially those viewed largely as ancillary, or “nice to have,” would be largely defended using a more polital than technical strategy.

Menifield (2009) explains the technical budgeting strategy as “[concentrating] on the numbers or budgetary facts [and] split into two categories: mandatory, [sic] and discretionary spending” (p. 43) with base expenditures “to maintain the same level of service” (p. 44) identified for each. Efficiency and productivity are foci of the technical budgeting strategy. The political budgeting strategy, according to Menifield (2009), is used to “sell” a program based more on its merits or public demand than on mandate or efficiency and productivity.

In the emergency medical services, since its provision is usually not a legal requirement of the government, it would make sense to defend the budget politically if the service was started within the last few years; however, a more technical budget in continuing years might help to buttress the perceptions of the public that it is actually a needed service. Continuing to defend an emergency medical services budget with a more political strategy could make it actually appear less important and subject to tighter budget controls. Additionally, as the emergency medical service is the only public safety entity that routinely charges user fees, the structure of a technical budget would plainly show revenue offsetting expenditures, making it less likely to suffer cuts. Again, both strategies would be used proportionally to their need.

References

Menifield, C. E. (2009). The basics of public budgeting and financial management: A handbook for academics and practitioners. Lanham, MD: University Press of America.

Academia, Health Care, Politics, Society

Mind Your Own Business: Health Care Economics

Regardless of funding levels or overhead, health care must be provided ethically. The goal of the health care industry is to improve health, and unlike other industries, this market is driven not by choice but by need. Other markets perform, according to Friedman and Friedman (1980) and Smith (1910), only when mutual benefit can be achieved, that is, without external force, coercion, or unnatural limitation. Penner (2004) presents the economy of health care representative of many of the ideals that were accepted at the turn of this century. However, the current state of health care economics is the result of the unnatural force of these ideals in attempting to mold the market against natural market pressures, as described in detail and warned against by Friedman and Friedman and Smith.

Health care demand is based on need. Within that need, demand is reflective of pricing. For example, patients do not elect coronary bypass surgery, but if needed, the demand could be reflected by pricing constraints realized in negotiations of hospitals and insurance carriers. In this case, the patient may be transferred to a center that has negotiated reduced rates with the carrier for coronary bypass procedures. Ergo, health care demand is reflective of patient need and is variable only in the context of insurance pricing. It is within this negotiation that the aspects of quality, access, and cost are accounted. Government policy, however, has a negative and downward effect on these negotiations. If health care institutions are perceived to be able to provide the same services at discounted prices for government payors, then the institution should be able to provide these same services to private payors for the same or similar cost. This cost adjustment conversely affects quality and access.

Penner (2004) makes a logically flawed argument in respect to regulation arguing that increases in skilled nursing facility (SNF) safety regulations created a demand for more nursing assistants; however, this is an increased input to be provided by the SNF, not an output to be demanded by the patient. The cost will be borne by the private insurance payor, ultimately, and not the regulatory agency or the patient, which increases premiums decreasing access to private health insurance. Regulations negatively impact the relationship between supply/demand, quality, access, and cost. This is not to say that safety should not be a concern, as it is one of the few areas that I agree should be regulated, though, minimally.

Penner (2004) goes on to state “one role of government is to intervene in cases of market failure” (p. 21), using the pharmaceutical industry as an example. Unfortunately, with the focus on the new and significant health care and health insurance legislation and regulation, many academic discussions surrounding health care economics are now outdated and trivial. Without entertaining a constitutional debate, recently, governmental involvement has shown to have a negative effect on the health care industry actually causing market failures instead of alleviating them. Recent over-regulation by government on the pharmaceutical industry has resulted in a significant and dangerous shortage of life-saving emergency medications (Malcolm, 2012). This economic constraint will lead to higher demands of other, inferior, medications and increase the price, effectually increasing cost and decreasing both access and quality. This effect is also seen in the emergency medical services when states fix the price that can charged to users leaving the municipal taxpayer to face tax increases or decreases in access to emergency services and the quality of the services delivered (American Ambulance Association, 2008). Over-regulating an industry without regard to survivability is inefficient and unethical, limiting access and quality while increasing costs.

Insurance companies have sought to minimize their exposure to the rising costs of health care (Penner, 2004). By developing common sense incentives, insurers can advocate for their customers financially while expressing desire for optimal outcomes. By maximizing consumer and provider choice, these incentives can be used as natural pressures within the market to improve upon cost, quality, and access (Penner, 2004). This realization, according to Penner (2004), resulted in the emergence of the health maintenance organization (HMO) — the first widely accepted form of managed care. Unfortunately, HMOs faced scrutiny in the 1990’s and later augmented business models to reflect newer preferred provider organizations (PPO) and point-of-service (POS) plans. PPO and POS plans were created to promote the more inexpensive use of general providers and those providers that have negotiated fees. Unfortunately, Penner writes, the pressures of these PPO and POS plans on the consumer limit choice within the market; however, the consumer still has a choice of insurance carrier, which minimizes the pressure faced within each plan. This freedom is not expressed in governmental plans, such as Medicare and Medicaid.

As health care costs rise, the writings of Friedman and Friedman (1980) and Smith (1910) would suppose that we lessen regulation within the industry, allow new and novel approaches to insurance paradigms, and create an environment with as little unnatural market pressures as possible in order to allow natural market pressures to ensure equitable cost, access, and quality through competition

References

American Ambulance Association. (2008). EMS structured for quality: Best practices in designing, managing and contracting for emergency ambulance service. Retrieved from fitchassoc.com/download/Guidebook-April08-V2.pdf

Friedman, M. & Friedman, R. D. (1980). Free to choose: a personal statement. Retrieved from http://books.google.com/

Malcolm, A. (2012, January 4). Vast web of federal regulation causing drug shortages. Investor’s Business Daily. Retrieved from http://news.investors.com/article/596775/201201041859/big-government-behind-drug-shortages.htm

Penner, S. J. (2004). Introduction to health care economics & financial management: Fundamental concepts with practical applications. Philadelphia, PA: Lippincott Williams & Wilkins.

Smith, A. (1910/1957). The wealth of nations (Vol. 1). Retrieved from http://books.google.com/

Politics

Private vs. Public Budgets

Budgeting is an important concept that is pertinent to any organization. According to Menifield (2009), budgeting is a financial planning function that creates accountability for the funds made available to meet or work towards some goal. In the private sector, budgets create the bottom line, or the amount needed to earn making a profit. In the public sector, however, budgets reflect the accountability and stewardship of tax revenue and its application towards maintaining and improving infrastructure. Although Menifield focuses on public budgets and compares them to private-for-profit business models, many not-for-profit corporations and other philanthropic ventures use budgets to account for funding and spending without focusing so much on profit, much like public budgets (Maddox, 1999). Not-for-profit corporations still need to focus on maximizing funding and reinvesting gains, though — a difference of public budgeting (Maddox, 1999; Penner, 2004). Most important, a budget provides a sense of direction for the organization and should reflect the stated vision and values.

Menifield (2009) describes the primary difference of public versus private budgeting as public budgets are prepared based on organizational needs and the funding for the budget is directed through tax revenue. Private organizations, according to Menifield, do not have the luxury of compulsory funding enjoyed by public organizations and must generate revenue through a prospective business model that maximizes income while minimizing expenditures. Both types of budgeting have intrisic responsibilities inherent to the process, which, if ignored, could result in severe penalties to those responsible.

Additionally, there are functions of government which are served by private contractors. Employing this concept would be rationalized, planned, and tracked by utilizing both private and public budgets — the contractor would utilize an internal budget reflective of private organizations, and the contracting governmental entity would use its public budget to plan and track the contract. Whereas typical criminal justice agencies, such as local police departments, judicial systems, et al., rely on public budgeting, the recent use of private contractors to manage some federal prisons reflect this use of private-public budgeting (Austin & Coventry, 2001; Nelson, 2005).

Budgeting is a form of financial planning. A budget also serves as an important document that can be used to focus an organization towards specific goals and provides overall accountability in financial management.

References

Austin, J., Coventry, G. (2001). Emerging issues on privatized prisons (NCJ No. 181249). Retrieved from http://www.ncjrs.gov/pdffiles1/bja/181249.pdf

Maddox, D. C. (1999). Budgeting for not-for-profit organizations. Retrieved from http://books.google.com/

Menifield, C. E. (2009). The basics of public budgeting and financial management. Lanham, MD: University Press of America.

Nelson, J. (2005). Competition in corrections: Comparing public and private sector operations (IPR No. 11647 [Revised]). Retrieved from http://www.bop.gov/news/research_projects/published_reports/pub_vs_priv/cnanelson.pdf