Cost and Budget

  1. Several Factors that are Escalating the Costs of Health Care

Although the trajectory of health care costs has decelerated (somewhat) in the aftermath of the great recession of 2007, a number of key drivers are still at work. First, the lack of coordinated care, and the predominance of expensive technology used to diagnosis, drive up costs.  Though these concepts may seem quite different on the surface, they are related.  Often times, patients that have complex, chronic conditions do not receive coordinated care to address primary and secondary symptoms.  That is, there is a lack of coordination between the primary and specialist doctors that results in the administration of extra appointments and tests that may or may not with the patient’s interests. Part of the problem is expensive diagnostic tests: the issuance of MRIs and CT scans, in situations where the diagnostic information may not be useful, drives up costs substantially.

  1. Various reimbursement strategies

There are two main reimbursement methods currently used in health care settings; however, numerous derivations of the basic reimbursement methods may exist.  Fee-for-service is still the main reimbursement strategy regardless of payer type (public or private). The fee-for-service reimbursement typology is simple: the doctor (or medical) professional reimburses based on each service or test provided.  Thus, a doctor’s appointment a blood test, and surgery are all billed based on the type of service provided regardless of the result.  Although the fee-for-service reimbursement strategy is easy to comprehend, it has come under (withering) criticism for giving doctors and medical professionals the wrong incentive to induce supply.

Risk-based reimbursement is the second main type of reimbursement scheme.  The difference between fee-for-service and risk-based reimbursement lies in the allocation of risk based on outcomes.  Under a fee-for-service arrangement, doctors and hospitals are not responsible for outcomes (except for liability related to malpractice), under risk-based reimbursement schemes, doctors and providers have some percentage of the reimbursement based on quality outcomes related to the procedure performed.

  1. Differentiate costs, charges, and revenue

In the health care environment, it is imperative to distinguish between concepts such as charges, costs, and revenue. A “charge” is usually based on a contract with the insurance provider; the charge could be different based on the payer, even if the diagnosis or test is the same.  While the “charge” is dependent on the payer, the cost to the hospital of delivering the service is uniform.  That is, while the hospital may charge a higher amount for a blood test to an uninsured patient compared to an insured patient, the cost of providing that service is the same. Finally, revenues for a healthcare organization are essentially the total of all charges for an organization.

  1. Why all healthcare organizations must make a profit

In practice, health care organizations (particularly hospitals) are divided into profit and non-profit. While this differentiation is largely for legal and tax purposes, health care organizations must make a profit.  This is because health care organizations must continually invest in new technology, infrastructure, and human capital improvement.  Even if a non-profit organization’s goal is not to maximize profits for shareholders, it still must make some type of profit in order to invest in the organization.

  1. Give examples of cost considerations for nurses working in managed care environments

Nurses working in a managed care environment versus a non-managed care environment must be more cost conscious. That is, they must pay more attention to the costs of the care being offered to patients.  For example, nurses working in managed care environments would likely need to pay attention to the type of medication offered to patients (generic versus prescription), as well as the coordination in care between the primary doctors and specialists. This would particularly be of concern for patients with chronic symptoms.

  1. Discuss the purpose of and relationship among the operating, cash, and capital budgets

The operating budget is the budget established for a health organization’s operating expenses. These expenses are typically considered to include utilities, personnel salaries, and budget items related to providing care for patients.  The capital budget, on the other hand, directly deals with items such as investments in clinic infrastructure, diagnostic machines, and operating room technology.  Finally, the cash budget deals with items related to reimbursement of cash expenses- that is, how the health organization pays its bills.

  1. Identify variances on monthly expense reports

On a monthly expense report, there may be a number of expenses that vary on a monthly basis.  For example, utilities are one expense that typically vary from month-to-month based on the differences of services used.  In addition, based on the need for employees, the wages paid out may be different on the amount of over time used.  Finally, there may be differences in the expenses paid on equipment rented.


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Shadish, W. R., Cook, T. D., & Campbell, D. T. (2002). Experimental and quasi-experimental designs for generalized causal inference. New York: Houghton Mifflin Company.

Shuttleworth, M. (2008a). Quasi-Experimental Design. Retrieved from Explorable: