Health-care budgeting may be the problem

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This article was published 15/02/2025 (262 days ago), so information in it may no longer be current.

Some of the issues raised in recently released audits of Manitoba’s health authorities during 2019-2024 may not be because of excessive spending, but because of inappropriate budgeting.

If the budgets are not developed based on appropriate cost drivers such as the geographical area that is being served (for budgeting ambulance transportation cost) or “normal” staff absenteeism (for budgeting nurse staffing costs), then the budgets may end up being understated and the variance between actuals and budgets overstated.

The variances between actual expenses and budgeted expenses may have nothing to do with workplace culture in the health-care sector, as implied by the audit reports.

The independent audits focus their spotlight excessively on the variances between actual costs and budgets, with perhaps less attention paid on whether the budgets are being formulated appropriately.

Providing health care is a team sport.

For example, a surgery involving a staff of five may need to be cancelled if two of the staff are absent. This may result in the remaining three staff being less fully utilized but still needing to be paid.

By anticipating some staff absences and building in some anticipated slack within the budgets and within the surgical operations schedule, the budgets as well as the surgical operations will be more realistic and the differences between actual costs and budgets (the variances) will be more meaningful.

The audit reports also recommend that health authorities which report deficits in a given quarter be required to identify cost-saving measures equivalent to three times the reported deficit within 90 days.

This would be almost impossible to enforce, even in the absence of a crisis.

If such cost-savings ideas were so easy to produce, they would have been implemented in the first place. Such recommendations reflect wishful thinking, instead of realistic fiscal management.

Budgeted costs could go up non-linearly if high patient volume necessitates overtime pay.

Such variation in volume needs to be incorporated into budget formulas, otherwise they will be dwarfed by actual expenses that reflect the realities of exponentially increasing non-linear costs.

Overtime pay plus staff absences may make the situation exponentially worse. Hiring nurses from private sector agencies in such cases may be necessary for a health agency to continue to operate.

Another recommendation is for health-care agencies to implement zero-based budgeting, whereby every line item of expense has to be justified from zero. This is almost impossible to implement in the health-care sector, where health agencies do not have any choice but to treat patients that walk in through the door or are brought in by ambulances.

Some health agencies were imposed a 15 per cent cut in recent years. Others were relying on planning processes that were based on cost and demand trends from two years ago.

It is not clear whether such agencies were then authorized to see fewer patients or allowed to decline cost-intensive treatments. Or to plan for staff burnout during the pandemic.

Budgets should reflect the work that needs to be done and the anticipated volume of patients that needs to be treated.

Insufficient budgetary resource allocations means inadequately small budgets, and the first symptom of it would be more red ink when actual costs are compared to budgets.

Once sufficient resources are allocated and the budgets reflect sound relationships between costs and volume of patients, then the variance between actuals and budgets will be more meaningful.

Simple directives such as redirecting eight per cent of administrative costs to frontline workers may not work if the accountabilities are not aligned with the decision-making.

Administrative management is essential to make the resource allocation decisions, including the decision to hire nurses from private agencies in order to keep the hospitals open.

Focusing on cost overruns between actual expenses and budgeted expenses requires first identifying if budgets are designed properly and whether budgeted expenses reflect the realities of health-care operations.

Amin Mawani is the director of the Master of Health Industry Administration program at the Schulich School of Business at York University in Toronto.