Traditional hospital budget systems are holding back innovation, experts say

The typical manner in which hospital leaders construct their budgets is by clinical and ancillary departments, which can hinder innovation.
By Beth Jones Sanborn
04:19 PM
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Though it's a formula that has functioned well historically, the way hospitals construct their budgets is hurting the integration of innovation, not helping it. To help grow innovation, decentralizing the hospitals budget is essential, say three experts in an article for Harvard Business Review.

Avant-garde Health CEO Derek Haas, former Newton-Wellesley Hospital President and Harvard professor emeritus Michael Jellinek and Robert Kaplan, co-author of "How to Solve the Cost Crisis in Health Care" co-authored the piece, which said that while recent research shows 75 percent of senior hospital executives support digital innovation overall, hospitals remain slow at adopting them. While at least some of that is due to overburdened IT staff, the authors say the real issue is the now-prohibitive manner in which hospitals construct and follow their budgets. They narrowed it down to three primary barriers.

First, the typical manner in which hospital leaders construct their budget is by clinical and ancillary departments, each having its own cost budget. With this built-in disconnect, it is hard to budget for innovation tools, which often come with hefty price tags, because any department that wishes to acquire new technology must pay for it entirely out of its own department budget. One department head could attempt to convince another to co-invest, but that can be difficult as every department has its own list of expenses, projects and needs.

The authors proposed a centralized innovation budget, which could be used to acquire tools that would benefit multiple units or departments. 

"Once acquired, the cost of the solution could be attributed, in approximate proportion to its benefits, to the budgets of each organizational unit," the authors wrote. 

They also proposed creating "integrated practice units" or IPUs that manage a patient's entire treatment for a high-volume condition and would be accountable for the outcomes and total costs when treating patients for that particular condition. The authors proposed that an IPU structure combined with a bundled payment system might have more incentive and ability to spend more on technology for a particular tool that would be useful at some stage of care if that technology had the potential of reducing the overall cost of care for that condition.

Second, the typical operating budget for a hospital is fairly set in stone, whereas expenditures that cause an overage in the budget must be compensated for by a reduction in spending in the next year to reconcile and stay on track. 

"A centralized innovation budget would again somewhat offset this dysfunction by shifting the spending from a department's annual operating budget to a centralized budget," the authors wrote.

Third, the authors pointed out that technology, including software, is often purchased under the capital budget and software sold as an annual subscription is purchased under the operating budget. So the acquisition of tools and software often hinges on whether it fits into its respective budget, not the potential benefits of having it.

Instead of this traditional structure, the authors argued that hospitals should use a capital budget for physical infrastructure, but also allow for the acquisition and implementation of software tools based on "performance considerations and discounted cash-flow calculations," not whether it fits into a capital or operating budget.

"Traditional budgetary systems prevent clinical and ancillary departments from being agile and responsive to innovative technologies that deliver performance improvements for patient care.

Hospital leaders should consider establishing a central innovation budget and decentralized service line/IPU structures. Such changes will make it easier for them to acquire innovative technologies that will enhance patient outcomes and lower their service lines' costs," the authors wrote.

Twitter: @BethJSanborn
Email the writer: beth.sanborn@himssmedia.com