Reengineering the Budget Process to Help Hospitals Save Money

UC Riverside study combines hospital data and concepts from accounting information systems to fight the increasing cost of U.S. healthcare

A stock photo of a main entrance of a modern hospital building with signs.

A UCR study showed hospitals can save on their bottom lines by budgeting at the business process level, rather than on a department or organizational level. iSTOCK

RIVERSIDE, Calif. ( — A team of researchers, including one from the University of California, Riverside, has identified a new, more efficient way for hospitals to design their operating budgets that could help offset the rising costs of U.S. healthcare.

The research, accepted for publication in the Journal of Information Systems, shows hospitals can save on their bottom lines by budgeting at the transaction cycle level, rather than on a department or organizational level.

Barry Mishra, a professor of accounting in UCR’s School of Business, led the study with researchers from the University of Akron in Akron, Ohio and George Mason University in Fairfax, Va. The research explored data from 99 hospitals in Washington State, each of which supplied 12 consecutive years of budget data. It is the first-of-its-kind study to combine the transaction cycle approach, a fundamental concept in accounting information systems (AIS), and budgeting, an important notion in management accounting, to analyze real-world healthcare data.

Currently, U.S. hospitals mostly budget at the department level, using a variance-based budget approach in which operating budget variances are used to guide future budgets. A concern with this type of budgeting, Mishra says, is that it is affected by a phenomenon called “asymmetric ratcheting,” in which overspending results in increased budgets, yet underspending does not lead to proportional decreases.

“There are several reasons why underspending doesn’t typically result in a decrease in a department’s future budget, primarily because department heads are possessive about their resources, and so politics and a manager’s influence within the organization play into the budget process,” Mishra said.

To tackle the problem, Mishra and his colleagues turned away from department-level budgets, instead analyzing operating budgets through the lens of five transaction cycles that are closely tied to business processes. The cycles are: production, expenditure, financial, revenue and human resources. In the study, each cycle was mapped to an aspect of healthcare: production to patient care; expenditure to IT, purchasing, and transportation; financial to fiscal services; revenue to patient accounts, admitting, and medical records; and human resources to hospital administration, personnel, and employee benefits.

“By studying operating budgets as they relate to transaction cycles we could remove the problems associated with budgeting at the department level, such as budget padding and slack,” Mishra said.

The researchers posit that creating budgets for the five business cycles is more efficient than doing department-based budgeting, and reduces the likelihood of dysfunctional budgeting. The study finds that patient care, which maps to the production cycle, has the most asymmetric ratcheting of the five business cycles.

“This is an area that hospitals could explore to save money and avoid increasing the costs for their services. However, budget reductions in this area must be done without compromising regulatory compliance or quality of patient care,” Mishra said.

In addition to Mishra, contributors to this research included Akhilesh Chandra, professor of accounting at the University of Akron, and Nirup Menon, associate professor of information systems and operations management at George Mason University. A copy of the paper is available to journalists on request.

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