Type: Management
Pages: 13 | Words: 3758
Reading Time: 16 Minutes

The study of health and social care financial management is rewarding and fascinating. It is fascinating because several concepts involved have consequences for both personal and professional behaviour. It is rewarding in the sense that the environment of healthcare in the foreseeable future, is demanding to increase focus on financial implications from a manager while concluding operating decisions. First and most significant, knowledge of financial management are a decision science, where accounting equips decision makers with a rational means to budget for and evaluate financial performance of business. This article highlights the ways by which the unique aspects of the healthcare services impact decisions of financial management. Although this article includes a theory and financial management concepts, it does not conclude the traditional end of questions and problems, but opens a way for further improvement in financial management of the healthcare sector.

How systems are used to manage financial resources in health and social care

The principles of costing in business control systems

The costing is significant for good financial management, because of its ability to measure, identify, interpret, and present costs, which relate to a firm’s economic flow of services and are the firm’s drivers of value and profit.

The key fundamental Principles of Costing are as follows:

Cost always relates to its cause

It is observable that a cost relates as closely as possible to its cause. After collection of cost figures, they are analysed according to the characteristics and allocated on a basis of casual relationship.

Abnormal costs are charged in costing

A cost, which takes place, because of loss by theft, riot, accident or fire is an abnormal cost and never charged to production as it does not concern with the production part. They can only distort cost figures and misguide the management for controlling cost. Hence, the normal cost incidental to service is chargeable to cost centres. Moreover, these types of expenses that contain title or do not possess a relationship with costing are also abnormal and hence not charged to costing.

Cost is chargeable after it is incurred

In case cost has been incurred it is regarded no cost and it is not chargeable to a cost centre. For instance, normal wastage or loss has to be included by that unit where loss took place. Such loss never imposes on those units, which are yet to undergo for production.

Previous costs are not considered to future costs

It is usually the system in which the cost of any specified period must be met in that period only. If the consideration of costs of a past period is for future recovery, then it will be a wrong step, because the future costs will be meaningless over burdened with the load of the previous costs that can lead to misunderstanding. Exception to this is advertisement where consideration for advertisement expenses is as a deferred revenue expense; therefore, it is possible to charge during the period of benefit.

Maintenance of accounts for cost is based on principle of Double entry

The double entry principle follows in maintenance of the cost ledgers and cost control accounts. The financial accounting also adopts the same principle. No doubt, costing needs a wider use of cost statements and cost sheets for ascertaining cost ascertainment, control of cost and guidance to management.

The examples of the inefficient application of principles of costing in business control systems

Enron Corporation, the international energy giant, failed miserably in one of the biggest bankruptcy cases in the United States corporate history. Tyco International, which is a diversified service and manufacturing company, had to forgo its future development plans, because of apprehensions in its accounting practices. The shocking news of WorldCom, the telecom wizard, had intentionally increased its earnings by $3,9 billion shook investors’ confidence and rocked the corporate world. WorldCom’s irregularities in accounting involved the deliberate accelerating of expenses as capital expenditure, so as to inflate the inflow of cash shows that there was considerable manipulation in the principles of accounting and not followed accurately. These examples point out, the malfunctioning or absence of business control systems can lead to bankruptcy and enormous losses.

The information required to manage financial resources

Every activity that healthcare organization carries requires a commitment of financial resources. This holds true in management of operational resilience activities such as security and continuity of business that are resource intensive, and the cost of these activities expand as new threats arise, technology becomes much complex, and healthcare centres focus its asset base from solid assets to liquid assets such as information. Further, in health services, assets also need sophisticated protection and continuity in planning. This demands organization armed with comprehensive information on financial commitment to asset development, implementation, and long term support in operations. Moreover, ensuring appropriate funding consideration for resilience activities, information of financial resources is also obligatory for managing the activities. Besides, the cost of strategies for protecting and sustaining assets and services needs optimization to the value of the possible loss of productivity in the services and assets. In the absence of relevant information on the cost of sustaining and protecting assets, the organization cannot find when costs are misaligned with contribution and asset value. The healthcare organization needs information to formulate a definite planning for defining their financial resources and allocating these resources to these flexible activities. This enables in the establishment of budgets. Besides costs are tracked, and financing gaps identified and documented. With such effective information on financial resources, the organization develops its ability to measure return on investments with the means of calculating risk versus reward and by distinguishing cost recovery opportunities.

The regulatory requirements for managing financial resources

In order to make suggestions for expenditure and management of financial resources, it is necessary for a manager to collect information regarding expenditure in the past and premeditate current developments and trend as well as other aspects that are likely to impact expenditure in the future. While presenting suggestions, manager needs to clarify the expected benefits from the expenditure he is suggesting and also any potential negative impacts. There is a requirement to select the expenditure choices most consistent with plans and objectives of an organization. In order to control expenditure against budgets for managing financial resources, a manager needs to advice members on how they can assist control costs, and include them in the process of controlling and monitoring expenditure. Where there are key variations between budget and actual costs, it is necessary to take immediate corrective action.

The regulatory requirements for managing finance resources in the financial reporting and planning process demand that, the provisions should be in accordance with the budget for the financial year and to submit the budget to appropriate authorities for approval. Further, budget needs to maintain the income and expenditure within budgetary target set by the healthcare organization. If the expenditure exceeds income, there must be prior approval to set a deficit budget, and if the deficit occurs for reasons other than planned spending of previously accumulated reserves, a manager must show a plan how the deficit in the budget they will recover.

Systems for managing financial resources in a healthcare organization

An efficient health system’s resources must include earnings, cash flow, donations, the usage of debt and the capability to attract capital spread risk. The structure of finance in healthcare organizations depends upon socioeconomic and political conditions. It converts into certain social goals in health care delivery and finance such as efficiency, affordable cost and equity. There is an enormous variation both between health care financial resources systems and health care as well as policy sectors of different countries in the relative value delegated to each objective. The transfer of money from a patient or population is necessary, which is the first party, to the provider of service, the second party for financing a health care system. All financial systems in the most countries adopt a third party to pay or to cover health expenditure for beneficiaries of health services for the times when they are patients. This solidarity in mechanism reflects consensus that it will not be wise to surrender health care to a free market alone.

The role of planning in the management of health and social care budgets

The diverse sources of income, which may be encountered in health care

During this period of economic uncertainty, healthcare organizations encounter several challenges while providing high quality care to low income people. Uninsured populations continue to increase with growth in unemployment, putting pressure on facilities and providers. State budget deficits also force deductions in entitlement programs. Health care centres face difficulty to hire and retain staff for lower salaries, which are often in older facilities than private practice equivalents. Besides, addition to increasing costs, shifting of reimbursement streams, and the pressure of a continuous demand of their services, health organization traditionally face difficulty in securing appropriate structured funding for working capital, equipment needs, and building projects, because of a perception that their funding and clientele leave them in a higher than average risk. The experience shows that community based health centres are remarkably resourceful and resilient. Even during the period of tight state budgets and deductions in reimbursement, these health centres continue to be stable financially with diverse sources of revenues.

The factors, which may impact the availability of financial resources in health care organizations

There are several factors in the health care organizations, which both facilitate or compel change causing scarcity of financial resources in health organizations. While three of them explained below are extremely crucial making it difficult to achieve financial goals, others are adjustable in financial management planning.

First, increase in health spending is because of factors influencing demand and supply in health services; some of them are technological developments, demographic changes and increased people expectations. Second, constraints in the allocation of resources that relate to inability of government or unwillingness to allocate enough resources to meet health system obligations. Finally, health expenditure is increasing as a proportion of GDP. In case, this expenditure increases at a faster rate than spending in other areas of the economy, there is a concern that it will eventually crowd out spending on other services, which provide welfare gain.

The cost of offering healthcare continues to increase despite the latest rapid increases in the availability of financial resources, causing signs of strains. The pressure on health centres to reduce costs, because of state deficit budget, increase costs of modern medical equipment, growth in number of poor people, and lack of infrastructure has put healthcare centres in a dilemma on how to adjust within available financial resources.

Different types of budget expenditure in health care organizations

a) Personal Services:

1. Salaries and Wages: The gross amount of salaries and wages before deductions include payments for personnel of part time, contract employee or full time workers.

2. Fringe Benefits: Includes the percentage of total salary for all paid workers charged to community service block grant.

3. Payroll Taxes: Health care organization share of unemployment, social security and miscellaneous taxes based on payroll amount.

4. Employee Benefits: Benefits paid by an organization on behalf of workers that include retirement benefits, health, and insurance.

b) Delegate Agencies:

This includes the total amount of contracts concluded by the organization with non-profit organizations for carrying out a certain amount of work.

c) Contractual Services and Audit:

Technical and professional services required for the performance of community based funded program.


Technical specialists hired on a project basis for research, training, counsel, and other specialized activities.

Data Processing and Book Keeping:

Services hired such as automated payroll service and administrative related services.

d) Equipment Lease/Purchase

An amount to be paid on all equipment hired on lease and purchase of new apparatuses and equipment.

How decisions regarding expenditure are carried within a health care organization

The prime objective of expenditure in health care organization is to offer an early indication of performance of resources within the limits of money and time, so that, if essential appropriate interference is possible. The expenditure in health care is possible through a systematic process in which both responsibility and spending authority delegated to those managers who are efficient to maintain a spending discipline. The system, which facilitates this function, is a tool of management that signals variations from a predetermined target and assists remedial action to be implemented in time. With the focus strongly on appropriate interventions and spending controls, it follows that the reporting systems about expenditure should be near to real time. Much emphasis is on availability of financial resources in the budget for priorities and emergency requirements, provisions of specialists during emergency, maintenance of land and building as well as benefits to disabled and old people.

The importance of monitoring budget expenditure in health and social care organizations

How financial shortfalls can be managed

The healthcare organizations’ budget often reports overspending and deficits without an associated increase in productivity. As deficits continue, the health centres start to experience financing issues, solution to deficit can be possible by short term financing. This repeated process is not sustainable. For having a system, which offers sustainable, best quality, and integrated health care, financial effectiveness requires careful receipts of revenues and appropriate allocation of expenditure proportionately for may processes and functions and minimize the overhead expenditure that can bring saving of 10 to 12% of revenue wastage. Further, eradicating waste is a onetime saving. The health care cost continues to increase in recent years as a result from the innovative methods of treating people and availability of those services to even more people. It is not clear if health systems modernization can reduce the long run growth of health costs. By reducing the focus on volume associated payment and expanding the focus on better outcomes could help increase the incentive to introduce technologies, which are more effective and less expensive, which consequently may enable to manage financial shortfalls.

A Case Study of How financial shortfall can be managed

This case study offers an overview of managed health care system to overcome the financial shortfalls while planning the financial budget by healthcare organizations in the United States. This case study provides a good lesson for policy makers also in other parts of the world. The repercussion by healthcare providers and recipients make the future of managed healthcare uncertain, but the results show that it has a positive impact on streamlining the rate of growth of health care expenditure, without a negative impact on quality. More significantly, managed healthcare has produced innovative technologies, which are not dependent on the United States market, but can be implemented in private and public healthcare systems globally. The managed healthcare systems provide increase cash flow, enhance revenue cycle, and disclose net revenue opportunities. This is possible by identifying supply chain opportunities, including ways to reduce of cost of pharmaceuticals, supplies, medical devices and contract services of specialists and physicians. The policy makers also suggested providers using a group of the purchasing organization to reduce spending of medications and other supplies. Besides, identifying the methods to minimize the duration of stay of patient, control labor expenses and improve patient throughput the following strategies were recommended to manage financial deficits.

  1. Controlling cost of labour by examining productivity, staffing, and developing operational solutions to reduce expenses without compromising on the quality of care.
  2. Improving relationships with doctors and reduce patient duration of stay by bringing physicians and nurses to share efficient management practices and techniques.
  3. Using a new patient model for effective bed control system and patient throughput.
  4. Streamlining IT functions to improve purchasing technology.
  5. Performing risk mitigation related to upgrading of systems.

The actions and measures to be considered in the event of suspected fraud

Health care fraud is intentionally billing the government and providers for services that were never availed or provided. In case of suspected fraud, the Medicare office advises that if a person does not recollect a listed procedure, he should first call provider, physician or supplier listed on Medicare Summary Notice. Quite often a slight negligence and an error can result in occurrence of fraud, which can be rectified by provider, physician or supplier. The fraud detection office maintains a hotline that provides a confidential reporting for fraud and other key issues. At the federal level, there are several law enforcement agencies having authority to investigate fraud. The primary responsibility of each investigating agency to investigate fraud on health care program shall not be translated to any other federal investigation agency. This program promotes significant coordination among law enforcement agencies that include investigations, which goes beyond jurisdictional boundaries of the law enforcement agencies.

Budget monitoring arrangements in a health and social care organization

Broadly stating, budget monitoring arrangement provides three key benefits. They help the manager to manage within agreed limits, offer a coordinating process to both the manager and organization, and facilitate the health care organization to derive realistic decisions on both strategic and tactical levels. The budget is a key tool for monitoring the finances of an organization. The organizations use budget for:

1. Monitoring the expenditure and income to analyse the financial health of a company.

2. To make cash projections.

3. To report the financial performance to board and donors.

4. To make financial decisions.

The application of budget monitoring is to determine how closely healthcare organization is meeting its goals in terms of finances. Comparing of expenditure and actual income against the budgeted expenditure and income should be on a regular basis and for achieving this manager should prepare a variance report. This report shows, month by month where there is under spending, over spending or on target. In order to make a variance report and to do cash flow projections, manager should split overall budget into a monthly budget.

How systems and processes for managing financial resources influence health and social care services

Information needed to achieve financial decisions relating to health care service

There is particular information needed for long term decisions on investments. Although these decisions are more significant at senior level, but all managers must be concerned with the decision process on capital investment. Such information on decisions relate to the acquisition of new equipment and facilities as they are the key means through which an organization implements strategic plans; thus they perform a prime role in organization financial future.

Financing decisions: All organizations must increase funds for buying assets that are essential to support operations. The information on availability of finance resources enables to arrive at a decision that involve the option between the use of external versus internal funds, use of short term versus long term debt, and the use of debt versus equity capital.

Working capital management: Information on current or short term, assets, for example, cash, receivables, marketable securities, inventories is necessary to ensure operational effectiveness and cost reduction. The managers use this information in the short term asset management that is popular as working capital management.

The relationship between a health and social care service delivered, costs and expenditure

The health care organizations emphasize that current expenditure does not show the expenditure needed to offer quality service. They stated that funding of services is at total costs. Current expenditure shows the limitations of current funding and requirements of contracted services. Most healthcare organizations possess limited approach to other revenue streams for bridging the gap between funding and required expenditure. They do not possess accessibility to alternative, sustainable financing sources, which they apply to other contracted services. Some organizations have accessibility to other funding sources, which they apply for other purposes, for example, infrastructure and other services. Therefore, most organizations adjust compromise expenditure to achieve obligations by adjusting quantity or quality of services. For these reasons, historic evidence on expenditure is not sufficient to guide the model of future funding for quality service delivery. Therefore, the organization can assume that the extent of difference between full cost of services and expenditure is almost similar for all services and the proportion of the total cost of services on non-service expenditure is consistent with other expenses.

How financial considerations influence upon an individual availing health and social care service

In past years, the provision of sufficient and cost efficient care for the fast increasing number of disabled and older people has received significant attention from international organizations, local and national governments. The prime issues that concern for an integrated comprehensive approach towards meeting the health needs of older people, their families and children and weaker communities who continues to struggle health inequalities because of non-availability of financial resources. The race, ethnic and gender also influence individuals availing health services because of significant difference in their level of education and living standards when compared to whites. This unprivileged class do not have approach to insurance providers, cannot afford expensive medical care and moreover, their ignorance towards knowledge of disease is maximum. It demands interdisciplinary and multisectoral coordination among state government, insurance providers and health care organization to design appropriate strategies enabling for eliminating health inequalities.

Recommendations for improving health and social care service through changes to financial systems and processes

This paper reviews the mechanisms for financial health care integration used within health care, social care and across healthcare. It presents a microscopic view of different types of integration, presenting obstacles for insufficient funding for health care services. The article concludes lessons to be learnt while linking the sources of funding spent on patients, many of whom struggles for complex needs, and offers recommendations for redesigning and re-evaluation of financial mechanisms to support the provisions of care. This paper identifies the effectiveness and increased costs of healthcare services, and documented barriers in its implementation, and suggests integrated structural partnership coordination among various health agencies to achieve superior results in finance management.

Reforming health care delivery system in order to improve the value and quality of care is necessary to address rising costs, inferior quality systems, and increase in numbers of people without health insurance coverage. More concessions, grants, and subsidies should be made available for health care centres and appropriate authorities must audit the income and spending of health care centres. This would enable health centres to meet their goals and an effective budget implementation while providing services of health care. Reforms should improve access to the right care at the right time in the right setting.


In recent year, health providers have been emphasizing on redesigning their financial resources to recognize the changes that have been shaping the health services industry. Instead of focusing on value added services, most finance work in health care organizations focused on bureaucratic functioning. For providing cost effective services to people, organization’s finance system must support cost containment efforts and integrated delivery system participation. Managers must understand the significance of budgeting, costing and receipts of revenue and how to plan expenditure while anticipating the financial requirements and resources of an organization. An effecting planning in financial management will make them even more efficient and effective even with limited means of financial resources.

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