What is Capital Budgets and Why is it Important?

What is Capital Budgets and Why is it Important

Moody’s and Standard and Poor’s report in 2013 states that 18 percent of the nonprofit hospital it rates had operating losses in 2011. The health care system is changing over from the traditional fee-for-service payment method to value based payment system (Zismer, 2013). A better future outlook for revenue generating from patient service is going to be a challenging task for health care organizations due to the reform of the health care system. Health care managements need to have a thorough understand of finance in the health care system to better prepare an organization for the upcoming challenges. Health care organizations, especially non-for-profit health care organizations, need to have accurate and strong financial plans and capital budgets to accompany their organizations’ strategic plans. “Their position is very different from that of taxable firms, whose access to capital for both replacement and new capital access can and should be directed back to equity investors” (Cleverley, 2011, p. 506).

                                   

Health care providers used to be able to cover the revenue lost by cost shifting. Cost shifting is when providers increase price for service provided to patients with commercial insurers in order cover the lower charges from government programs like Medicare and Medicaid. However, with change in the overall health care environment, more and more private insurance companies are following the payment schedule of Medicare. Cost shifting is no longer a viable option for health care providers to recuperate lost revenues.

Since cost shifting is coming harder and harder to achieve, health care organizations need to find other venues to maintain its’ financial viability. Financial expenses are expected to grow continuously, and financial planning becoming increasingly critical for health care organizations. In order to maintain market share and revenue, health care providers would need to continually access the markets’ need. Health care providers need to keep up with the market with new popular programs, sufficient staffing, renewed facilities, renovation of old equipment, and the use of new technology, etc to maintain customer satisfaction and improve future financial stability.

Capital budgeting, also known as investment appraisal, is a process used by organizations to determine an organization’s long-term investment’s worthiness.  “Capital budget is the yearly estimate of resources that will be expended for new programs during the coming years” (Cleverley, 2012, p. 420). Some of the major methods used for capital budgeting are net present value, payback period, and profitability index. The main goals for capital budgeting is to rank projects on hand to set priorities by providing forecast of revenues and expenditures of different new projects. It is very important to the strategic and financial planning of a health care organization since it usually involves a large capital investment and a long time frame. 

Resource 

Cleverley, W., Song, P., & Cleverley, J. (2011). Essentials of health care finance (7th
           ed.). Sudbury, MA: Jones & Bartlett Learning.

Zismer, D. K. (2013). How Might a Reforming U.S. Healthcare Marketplace Threaten Balance Sheet Liquidity for Community Health Systems?. Journal Of Healthcare Management, 58(3), 168-172.