An Exploration of Hospital Budgeting and Best Practices

Hospitals are highly complex operations that involve huge costs. From equipment and medical instruments to perishable care items and the upkeep, the amount of expenses that hospital managers need to account for can be overwhelming. Add to that the fast, high-stakes nature of the medium, and budgeting is all the more critical.

As a premier provider of medical equipment, MDF Instruments understands the elaborate budgeting processes involved in the day to day running of a modern hospital. Therefore, this article will explore hospital budgeting - from its importance, the components of a budgeting system to a list of best practices.

What is a hospital (or healthcare) budget?

A hospital budget describes an estimation of revenue and expenses over a specific time period. In simple terms, healthcare budgets help hospitals and related institutions understand how much money they need and over what period.

This process also involves assessing where and how funding is allocated, from equipment and staff to medical items and other services. Some of the components that hospital managers look at during the budgeting process include expected volume growth, past expenses, and inventory management data.

What Is The Importance of The Hospital Budgeting Process?

Michael Byrne outlines the importance of the hospital budgeting process as follows:

Financial control

In the context of the COVID-10 pandemic, hospitals had to deal with dwindling resources as the system was stretched to its absolute limits. Hospital budgeting helps hospitals outline plans and corrective measures and ensure financial control in fringe situations.

As the same paper further notes, top-down budgetary processes are typically susceptible to political influence" - making the linking of budgets to relevant performance indicators all the more important.

Resource allocation

Hospitals have to deal with the fact that resources are constantly finite, and in some cases, the resources allocated do not match the realities on the ground.

Although it may encourage a culture of departmentalism, it has been found that allocating resources to areas where they are most needed incentivizes efficient decision-making. Well-designed budget processes can help hospital administrators allocate funds where it matters.


Budgets are critical to the planning process because they effectively set the business and administrative direction in the following cycle. Through budgets, administrators decide what items to order and their quantities, equipment orders and upgrades, etc.

For example, administrators may determine following an audit that the hospital had overspent on perishable items, leading to them expiring in the storage room. Accounting ensures that the hospital's spending policies are aligned with historical data.


As with any business, human capital is essential to its success. An underfunded institution leads to low morale, thus affecting the quality of the services provided. In this case, a mix of efficient budgetary allocation and employee empowerment will do wonders for staff morale and, by extension, the organization. More specifically, a top-down approach where employees are encouraged to contribute to the budgeting process by providing supplementary estimates.

The fundamental budgeting systems

In a constantly changing field such as that of healthcare, hospital managers and administrators have to continually tackle the dilemma of which budgeting system best translates to the realities of the organization they are managing.

In the same paper, citing Ross' "Budgeting of results," the author argues that "instead of viewing budgeting merely as a tool to estimate revenues and expenses, organizations should utilize budgeting as a process to translate organizational values into operational roadmaps." Using this argument as a starting point, there are five budgeting systems whose applicability extends to healthcare institutions:

• Incremental budget. Managers use current and historical expenditure data to estimate the total cost of production and allocate a certain budget. The goal of this system is to control the costs and keep them within budget. The catch is that unspent resources don't carry over to the next budgetary cycle - so the staff either uses the entire budget or loses it.

• Flexible budget. Flexible budgets are the polar opposite of incremental budgets. Instead of allocating a fixed, non-transferable budget, managers acknowledge that future output could fluctuate. This acknowledgment is reflected in the more flexible budgetary policies managers employ through this system. The caveat is that managers of this budget system need to have a keen sense of the operation's fixed and variable costs so that the budget can be adjusted within reasonable limits.

• Zero-based budget. This budget system outright rejects the idea that past expenditures should dictate future budgets. The goal of zero-based budgeting is to aim for the "optimal product mix, production method, and quantity." Thus, managers of this budgeting system need to assess whether a product needs to be produced, how it should be produced, and the scale.

• Program budget. The program budget has an inherently top-down structure - it starts at the executive level based on overarching objectives, and it's passed down through the hierarchy to middle management to produce department-level budgets. Its principal aim is to achieve organization-level goals, be it medical research, public health initiatives, and so on.

• Activity-based budget. It's the most systematic approach to budgeting. Essentially, leaders (budget planners) outline, examine and deconstruct the activities required to produce a specific output and estimate the costs generated from these activities. Its main goal is to maximize efficiency through action.

Hospital budget examples and the components of a budgeting system

It is a known fact that the overarching aim in organizations, including complex ones such as hospitals, is to create quality goods and services utilizing limited resources. Regarding hospitals, these resources include but are not limited to clinical and administrative staff, medical supplies and equipment, and government and private health insurance.

Further, as this paper puts it, the goods and services" that serve as outputs of a healthcare organization include patient care outcomes, patient satisfaction, and community and population health."

To get a better understanding of the factors that reinforce this "limited resources, quality services" dynamic, we need to look at the fundamental components of the budgeting processes utilized by hospitals. These are:
Budget objectives. These objectives represent the "why behind a budgeting system and includes overarching organizational goals and specific programming efforts. ". For instance, if a hospital plans to set up a new medical service to meet a specific local demand, managers need to outline how this initiative will play into next year's budget.
• Capital budget. It involves high-cost, long-term investments such as equipment and infrastructure. In this case, managers are required to look at the numbers and determine "whether the net benefit outweighs the net cost over the project's lifespan."
• Statistical projections. Think of these as a series of "health checks" of the budgetary systems employed. Statistical projections aid hospital managers with revenue projections, which can be further used in staffing and resource planning. Statistical projections also help prevent underfunding or overfunding specific hospital departments or spread the budget too thin between the organization's many divisions.
• Revenue budget. This involves the "estimated gross revenue from various output streams."
 Operating budget. Personnel salaries, supply and material costs, administrative overhead, and everything deemed absolutely essential to the functioning of the organization

4 Insightful, Cost-Saving Budgeting Tips

The healthcare industry is not a monolith, and neither are hospitals. Each hospital is subject to the limitations of its location and the healthcare system it’s connected to, so the budgetary policies that work for one hospital may not apply to others. However, MDF has narrowed it down to four universal tips that should translate well to your institution, regardless of the budgetary policies it adheres to. Without further ado, here are 4 cost-saving budgeting tips that you can apply right now:


This one may seem obvious. However, as stated above, hospitals are, by nature, incredibly complex from an organizational standpoint. Essentially, hospitals need a lot of equipment and items on a regular basis, which explains why many managers have the impulse to order more than is necessary.

Obviously, patient well-being should always be the top priority. But the reality is that budget policies and quality are deeply intertwined. So, prioritization is key - look at the big picture and determine what the hospital actually needs instead of spreading the budget thin on "nice to haves."

Rethink shipping processes and strategies

Shipping costs are one of the most overlooked expenses - typically thought of as in the realm of "cost of doing business." However, rethinking shipping processes can help managers ensure that the hospital is well-supplied while staying within budget.

Something as simple as leveraging your buying power with carriers can cut inbound and outbound expenses by a lot: "The problem is [shipping] doesn't get separately coded, and it gets buried in hospitals' general ledger, so you don't have a good idea of how much you're spending on in- and outbound delivery" said Mark Bogen, CFO of South Nassau Communities Hospital in Oceanside, N.Y., cited by "But you need to take advantage of those situations where vendors are having difficulties closing sales. If they ain't crying, we ain't buying."

Maintain Warranty Database

Hospitals use highly complex and expensive equipment to provide quality care to patients. One piece of equipment breaking at the wrong time can mess up the entire operational flow of the hospital.

Then there are the costs involved with fixing said equipment. While a warranty database won't prevent the inevitable, it can save the hospital a lot of money in the long run.

In other words, make it a habit to keep track of the date and the warranty conditions each time you buy a new piece of technology or equipment. You will have a resource you can consult in order to reduce costs when it is time to repair or replace something.

Track Down Inventory

Inventory management is critical to any hospital's bottom line - after all, a hospital is still a business.

There are many ways to go about inventory management, from tagging equipment, collecting data, and determining usage patterns, to assigning staff specifically to manage inventory.

And while the chaotic nature of hospitals will eventually lead to some equipment and instruments getting lost in the shuffle, it's important to acknowledge this reality and put tight inventory management procedures in place to mitigate this.

Hospital Budgeting Wrapped Up

The importance of proper hospital budgeting cannot be overstated. Hospital budgeting is crucial for healthcare institutions as they face huge costs for equipment, medical instruments, and upkeep on a regular basis.

Hospital budgeting helps hospitals outline plans and corrective measures, ensure financial control in fringe situations, and link budgets to relevant performance indicators. But the main takeaway is that budgeting and the quality of the services are connected - the healthier the hospital is from a financial standpoint, the safer the patients.