This article was written by Lisa Miller.
In part 1 of our budget management series, we highlighted the many complexities which are found in the healthcare industry. In this second part, we explore effective budget management and healthcare innovation.
Part 1 recap
In our previous blog, in examining numerous complexities, we noted the following issues:
- Disruptive external forces including regulatory and compliance requirements.
- Payment reform.
- Risk sharing.
- Changes in care delivery.
- Continual innovation in technology.
All of these issues create a myriad difficulties in forecasting and budgeting for health system leadership.
In addition, we examined the governing structure necessary to intertwine the clinical and financial aspects of caring for patients while maintaining the financial stability of the organization.
Although those nuances present unique circumstances in healthcare, there are also similarities that can be explored and learned from other industries.
Budgeting lessons garnered from the business world will help healthcare leaders to obtain maximum efficiency in their departments and for the organization as a whole.
Three barriers to the hospital budgeting process
In an article published in the Harvard Business Review, Haas, Jellinek and Kaplan suggest that hospitals have been “slow to adopt digital innovations…but much of the blame can be attributed to hospitals’ misaligned budgeting and incentive systems.” 
Although they explain how senior executives realize the importance of digital innovation, the current budget strategy limits their abilities to move forward.
The authors explain that there are three barriers to the hospital budgeting process.
These barriers include:
1. “Unaligned budgeting units”
Traditionally, hospital budgets are organized in disconnected units, by individual departments (for example, clinical, different care areas, and ancillary services). Each department manager is responsible for their own cost budget. If managers seek to implement a new, more efficient technology, they must find room in their departmental budget to afford the innovation.
In lieu of traditional hospital budgeting, the authors recommend a “centralized innovation budget” to pay for digital innovation that will benefit the whole organization. This holistic approach will remove high cost technology from the individual departmental budget. Other suggestions include implementing a budget based on the IPU (Integrated Practice Unit) model, where all costs associated with patient care per service line is addressed.
If the organization implements a “centralized innovation budget”, an intensive, cost benefit analysis for each project is completed. The analysis would review possible patient care improvements, efficiencies, ROI and cost for the total care of the patient. This innovation analysis is necessary prior to the organization’s final decision to move forward with the project. When implemented, the realized benefits can be spread throughout the various units/departments.
These methodologies seem to align with value-based care and bundled payment reimbursement. As the organization reviews the total cost to care for a particular patient’s condition, they can choose digital innovations that will enhance services, reduce waste, improve the patient experience and lessen the burden to providers and staff.
Many hospitals have heeded the need for digital innovation and have launched new innovation centers. There is a realization that transformation is inevitable.Many hospitals recognize the need for digital innovation & have launched new innovation centers. Transformation is inevitable. Click To Tweet
Telehealth, AI, machine learning, enhanced data analytics, voice recognition modalities, and home-based care delivery require sophisticated digital tools and play a role in the health system of the future. Academic Medical Centers have traditionally encouraged innovation and have taken the lead in this arena. Community hospitals often lack funding and are looking to develop community partnerships to promote innovation.
2. “Rigid Annual operating budgets”
Hospital department budgets are created annually, and the “centralized innovation budget” concept will solve over budget issues which are created if new technology is needed.
An organization wide standardization of departmental budget methodology should be implemented. Annual budgets should be created, but monthly review of cost targets, variances, patient volumes, and revenue streams should be part of the budget process. Open communication and shared data reporting between finance and department leaders can help with this monthly review.
3. “Separating operating and capital budget timelines and processes”
Capital budgets should be utilized for infrastructure, and the centralized innovation budget can capture digital technology innovations.
“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.” 
As in all businesses, the push to “do more with less”, continues to prevail in healthcare.
As one reviews the current business literature, all corporations struggle with the need to move forward with digital innovation.
Common threads include:
- How and when to implement new AI, predictive analytics, robotics and machine learning modalities.
- When to transition to all cloud based processes
- How much to invest in ever changing digital systems.
The answer lies in the need to be “rigorous, but flexible” in deciding which investments to make, states the CFO at Power Distribution. 
Healthcare companies may have to choose projects based on compliance or new regulatory requirements. In those instances, healthcare entities may have no choice as to which innovation to select.
Healthcare presents many challenges, but the industry can learn from businesses that perform extensive forecasting and designate a specialized team to review, analyze, and inform leadership about new digital innovations. Transparency and good communication throughout the organization is essential in effective budget management. Budgets should be designed using present, past and future insight provided by department and executive leadership.
5 ways to fund innovation on a budget
With digital innovation in the minds and budgets of all companies, CIOs look to a few basic principles to follow, as listed in the article “Five Ways to Fund an Innovation on a Budget”: 
- Talk benefits, not savings: In relation to healthcare: How will this project help patients, save time, improve efficiency, help our providers?
- Lots of little bits: In relation to healthcare: Start small, test the waters, measure, evaluate, and then expand.
- Make time for innovation: In relation to healthcare: Invest in training. Provide a platform for your employees to share ideas, learn new processes, and gain valuable experience with new technologies.
- Organize for innovation: In relation to healthcare: Build an innovation hub – a center for brainstorming and concept development. Invite experts within the community and from other disciplines to advise and share knowledge-use peer-review networking principles. Be open to change and change course if warranted.
- Novel funding sources: In relation to healthcare: Look toward community and corporate partnerships, higher education resources, grants, industry associations, and innovation award opportunities.
Effective budget management does not stop with the annual task of creating capital and organizational budgets. It requires a total management perspective from executive and clinical leadership to be forward thinking, open to innovation and a dedication to evoke change and provide high quality patient care and maintain the health of the organization.
The concept of a ‘’centralized innovation budget” dedicated to digital innovation spearheaded by the leadership team will be the best way to forge ahead to succeed for your patients and the entire enterprise.
 Derek A. Haas, Michael S. Jellinek and Robert S. Kaplan; Hospital Budget Systems are holding back Innovation, Harvard Business Review, March 29, 2018. Retrieved at:
 Russ Banham, The Best Path Forward, CFO Magazine, Oct 3, 2017. Retrieved at: https://www.cfo.com/budgeting/2017/10/best-path-forward/
 Ellis Booker; 5 Ways to Fund Innovation on a Budget; Online CIO/IDG. Retrieved at:
 Christ Margaret H. and Cianci Anna and Napshin Stuart; The Interactive Effects of Perceived Environmental Uncertainty and Control System Type on Managers’ Willingness to Recommend Strategic Change (August 15, 2016). AAA 2017 Management Accounting Section (MAS) Meeting; http://dx.doi.org/10.2139/ssrn.2824135
 “Our take: Moody’s says nonprofit hospital market should stabilize in 2020”;
Advisory Board Daily Briefing- December 18, 2019. Retrieved at:
 Jackie Drees, “How to strategically plan for health IT budget reductions: Q&A with CIO Lehigh Valley Health Network Mike Minear”; Beckers Hospital Review/Health IT and CIO Report; January 22, 2019. Retrieved at:
 Dinesh Divakaran; “Engaging with Academic Medical Centers for Digital Innovation”, HIMSS, February 4, 2020. Retrieved at: