“Zero Based” Budgeting for Healthcare Organizations

13 Jul 2020

For many organizations, the budgeting process typically relies on a baseline assumption of a dollar amount, often based on the prior years operating results, a standard increase, and then finally increases based on current year growth expectations. This process very often can be very much on “autopilot” without much critical analysis from department heads, the finance team and executive oversight. Over time, this mentality and approach can lead to bloat and inefficient operations for many healthcare organizations.

One tool which can be helpful to practices of all sizes can be to periodically implement a “zero-based” budgeting approach. Zero-based budgeting was first developed and implemented in the 1970s and then driven to extremes by investment firms such as 3G Capital in the 2000s as a tool to cut costs wherever possible and to extremes, such as focusing on such minute details as the number of pages printed and photocopies made by employees. As a result, zero-based budgeting has a reputation as an “austerity” measure and a tool used to cut costs to the bone. This zealous approach to the ideals may have its place in many organizations, however, the original ideals and principles of the system should be part of any organization’s planning toolbox from time-to-time.

In a “zero-based” budgeting system, departments should look periodically at each year and budget as if starting from a zero-dollar budget allocation, rather than just what was spent in the past. The real point of the exercise is to take a top-down approach and determine if all spend in any given department is required to fulfill the functions of this department. The additional scrutiny can be used to uncover potential inefficiencies, over or understaffing in departments, discover potential synergies between departments, and empower department heads to perform an overall review of their operations.

In implanting a zero-based budgeting system, a healthcare organization should take the following steps:

1.) Start a baseline zero for all departments; prior-year spending does not matter.

2.) Evaluate every cost area within the department (in conjunction with the department head). This evaluation should include:

a.) Required staffing to complete department functions

b.) Required equipment/software/hardware necessary to complete the function

c.) Required overhead costs needed to complete the function

When evaluating, consider how one would start a brand-new department from scratch. What staffing would be required at what experience levels & salaries; what costs are required to perform the necessary operations? The critical eye here is necessary and often best done in a collaborative effort with both an insider (someone in the department) and an outsider (someone outside the department).

3.) Justify the spending in these above areas and try to identify cost savings. Some examples may include:

a.) Looking at the cost of outsourcing billing vs. proving billing services in-house

b.) Staffing levels of reception/administrative staff

c.) Current marketing efforts and their efficiency

Part of any justification of spending should include an analysis of alternative possibilities (i.e. in-house vs. outsourced billing) and if the spending is truly necessary for the success of the organization (such as staff lunches). The justification does not need to be “militant” as often seen in zero-based budgeting systems, but rather a review of why something is important to the organization and if it should continue to be spent and allocated as part of the budget. Do not let the goal of budgeting and justification ruin the operations of the practice that made you successful in the first place.

4.) Streamline and eliminate any unnecessary spending as appropriate, including looking for potential economies of scale. Many larger organizations can see a case where different departments are using similar software packages that could be cheaper with a group license as an example.

The department heads will often be the subject matter experts for the department, and their expertise should be leveraged accordingly. However, having a level of “professional discourse” is important and the finance team should be working with the department heads to come to the right answer. At times this will feel adversarial as there will be competing forces here of finance wanting to keep costs down but departments wanting to have as many resources as possible. Finding the middle ground in this process with inputs from multiple stakeholders (department head, finance and executive) is the real value benefit for organizations.

Given that many organizations have taken zero-based budgeting to extremes and overly granular, the practice has a somewhat tarnished reputation and is often seen by many as an extreme cost-cutting move, however, the ideals of the practice on a global perspective can still offer many advantages to healthcare organizations. By starting from a zero-dollar, zero assumption base and building up departments from the ground level and requiring justification, organizations can help find cost savings or opportunities for organic growth. Focus on the point of the exercise rather than having it be an overwhelming mantra for your organization like many do. The questions should not be “do you really need xyz?” but rather “why do you need xyz?,” forcing an internal and granular look at spending patterns in departments. Organizations can sometimes find 10-15% savings by doing this and it should be part of your overall financial planning but not your organization’s only financial planning tool.

This article was also featured in our newsletter Best Practices Vol. 19