Financial Management

Health financing Problems?

Lack of fundsMal-distribution of resourcesRising cost of medical careWastage of resourcesInefficiency in spendingLack of coordination

These problems generate the need for a strong financial management system in the health sector

Every Government Official is accountable and responsible for proper utilization of government funds authorized by legislature and show proof of proper use of such expenditure.This accountability is the basis of Financial Management.

What is Financial Management all about?Answers the basic questions:- How to finance (fund) health care?Where to invest in health care?What is the outcome of investment

in health care?

F.M. deals with the “procurement of funds and their effective utilization for the achievement of common goal of the organization.”

Basic decisions under Financial Management

Financing DecisionInvestment DecisionDividend Decision

Financing DecisionDeals with the procurement of funds from

various sourcesSources of funds in the Health Sector

so u rce s o f Fu n ds

P ub lic &G o ve rnm en t so urces

P r iva te S o u rcesin clud ing

V o lu n ta ry o rg .

E x te rna l C oo p era tion1 .In te rna tio na l

2 . B i la te ra l

H e a lthS ec to r

Investment DecisionConcerned with the effective utilization of

funds in one activity or the other.Types of investment decisions:- Long-

term & Short –term. Investment in the Health sector can be

in the various forms:Purchase of High Quality & sophisticated

Medical Equipments.Construction of hospitals, PHC’s & CHC’sInvestment in various Health

programmes, such as leprosy, TB, HIV/Aids etc.

Dividend DecisionIn simple terms, Dividend means return

on investment.Practically there is no return in public

healthLogically-------------- “Every Investment bears a return.”

ExampleIn India we have Pulse polio programmeTarget population is all children below 5 yrs of age.In this case the investment is identifiable: The amount spent by the govt. to launch & sustain this programme.Identify the return?

Tools of Financial Management

CostingBudgetingAccountingAuditing

Cost

Costs provide the basis for preparing Budgets.

Cost is intended as the value (expressed in monetary terms) of resources used to produce something.

Cost AccountingFormal system of accounting for costs through which costs of products or services are ascertained and controlled.

NEED:Ascertainment of costCost monitoring and controlDecision making

Cost ControlCost Containment - within the budget Cost Reduction - reduce budgeted

cost (eg. Non-utilization of certain facilities, idle capacity etc)

Cost Removal - cost not incurred but services availed

Cost Containment

Need Flexibility to built into the system

Consider time factor –inflation Credit control Control Salary/wages etc –over time

salary, other fringe benefits

Postponement of non-essential purchase

Economy in purchase/consumptionRational use of electricity, gas,

water etcPruning of miscellaneous areas-

printing, stationery, telephone bills etc.

Outsourcing of services

Cost Containment

How to reduce costs?Substitution – eg. Generic vs branded

drugsEconomies of scale – utilizing fixed

assets fullyCost sharing – eg. Supply costs of deptts.Bulk purchasing – eg.drugs Reducing idle capacity – examine

utilization of staff

The Budget

The device that allocates the shortage of public money

There is never enough money to do all the things people want done.

The Budget

We use budgets to decide what is most important and who gets what proportion, or share, of public resources

Therefore:

A budget (should) =

a priority list of government actions and policies

BudgetIt is a document that projects the costs,

and in many cases the revenues, of defined activity, programme or project, or organisation

A good budget is a fundamental tool for financial management

It is a financial plan that quantifies the organisation’s programmatic goals and objectives by guiding the allocation of financial & human resources

Good Budget ?Covers a defined set of activities

(single/whole)States the time period covered – fiscal yearIt is realistic about expected revenuesIt includes indirect costs –(eg. Fringe

benefits, OH costs, general admn etc.)It is based on collaboration between the

programme & financial managers

Performance Budgeting

It is a presentation indicating the work done in the hospital for the particular year, the work proposed to be done in the ensuing year and the cost of carrying them out.

Management information system and cost accounting are two essential pillars of PB

Zero Base BudgetingIntroduced by GOI in 1986It is not a budgeting process but a

management approach to the planning process

Under this approach, budget making for the ensuing year should be started from zero instead of treating the current year’s budget as a bench mark

Zero Base BudgetingView all activities of the organisation

afresh and to determine priorities with reference to analysed objective criteria.

For eg. While deciding budget for pediatric department, expenditure on counselling may be deleted with the reason that it is not worth spending.

BudgetIt is a document that projects the costs,

and in many cases the revenues, of defined activity, programme or project, or organisation

A good budget is a fundamental tool for financial management

It is a financial plan that quantifies the organisation’s programmatic goals and objectives by guiding the allocation of financial & human resources

Some types of Budget

Plan & Non-Plan BudgetRolling & Fixed Plan Budget Capital & Operating Budget Departmental & Master Budget

BUDGETThe government budget primarily constitutes

Revenue budget - refers to expenditures and receipts of an annually recurrent nature; for example, staff-salaries of a hospital is revenue expenditure

Capital budget - refers to investment expenditure incurred with the object either of increasing concrete assets of a material and permanent character or of reducing recurring liabilities.

Health Family Welfare

General Administration

Vertical Programs Public Health And Health Care Programs

•Vector Borne Diseases Control•Tuberculosis Control•HIV / AIDS Control•Blindness Control•Leprosy Control•Cancer Control•Mental Health Program•Prevention & Control of Communicable Diseases

•Primary Health Care

•Secondary Hospital Development Program

•Bureau of Health Education and School Health

•Direction and Administration

•Drugs Logistics and Government Medical Stores

•State Transport Organisation

•Public Health Institute and Training

•Reproductive Child Health Program

•Immunisation Program

•Urban Family Welfare Program

Program Chart of Health and Family Welfare

29

AYUSHMEDICAL

EDUCATION& RESEARCH

FAMILYWELFARE

HEALTH

Responsibilities in Health by levels of Government

CENTRALGovt. level

STATEGovt. level

LOCALGovt. level(ULB/PRI)

CommunicableDiseases

SecondaryHealthcareFacilities

Clinics &Dispensaries

RCH-II

PrimaryHealthcareFacilities

MedicalEducation &

Research

MedicalCollege

Hospitals

SecondaryHealthcareFacilities

Clinics &Dispensaries

MedicalEducation &

Research

30

Structure of Health Budget

PLAN

NON PLAN

CENTRALLYSPONSOREDSCHEMES

StateFunds

EXTERNALLYAIDEDPROJECTS

REV

EN

UE

EX

PEN

DIT

UR

E

CA

PIT

AL

EX

PEN

DIT

UR

E

LO

AN

AC

CO

UN

TEX

PEN

DIT

UR

E“SOCIETY” ROUTE

(NRHM & RCH-II Flexi-pools; NACP-III)

22102211

42104211

62106211

“TR

EA

SU

RY

” R

OU

TE

31

All India: Health as proportion of total Budget

Health as % of All India Budget

5.41%

5.58%

5.93%

5.10%

5.20%

5.30%

5.40%

5.50%

5.60%

5.70%

5.80%

5.90%

6.00%

2005-06 2006-07 2007-08

Budgeting Process Budgeting is supposedly from below

Block to District to State

Exercise begins sometime around October -November

Draft discussed with Finance Dept (around December)

Finance Department reviews and indicates a ceiling

Draft is reworked to fit the ceiling Back to Finance Dept (around February) Finance consolidates demands of all Depts

and State budget finalised

Health Budget Document: A Glance

Health budget is organised into numerous heads

Medical and Public HealthUrban healthRural HealthMedical Education & ResearchPublic Health

Family Welfare These consist of a large number of line

items (3000 to 7000)

Performance BudgetingIt is a presentation indicating the work done in the

hospital for the particular year, the work proposed to be done in the ensuing year and the cost of carrying them out.

Management information system and cost accounting are two essential pillars of PB

Program Performance Budgeting vs Traditional BudgetingTraditional Budgeting

InputsLine ItemsControlIncremental

changes at marginCentralized budget

execution

Program Budgeting

OutcomesProgramsPerformanceResource Allocationbased on need Decentralized

budgetexecution (in the

long-run

Zero Base BudgetingIntroduced by GOI in 1986It is not a budgeting process but a

management approach to the planning process

Under this approach, budget making for the ensuing year should be started from zero instead of treating the current year’s budget as a bench mark

Issues of ConcernBudgeting in India is an annual exercise- plan expenditure unspent Long term projects – generally delay occur in implementation leading to lapse of funds March –rush expenditureLack of flexibility – rigid budget lines Not need based

Issues of Concern Lack of Vision, planning, research,

evidence Inability/ unwillingness to move away from

“Tradition, Rules, Regulations” (at the cost of society, wasting scarce resources)

Lack of feedback, monitoring the system, disconnect/ disintegrated functions & systems

Lack of ownership, accountability, transparency

Lack of public participation

Costing An effective tool for budget control

Cost Centres : represents allied group of activities or functions Eg. Laboratory services

Cost Units : represents measurable details of service rendered in the cost centres Eg. X-ray investigation

The Model to Estimate Costs:Making a Cake

Inputs

•Labor•Equipment

•Oven•Pans•bowls

•Materials•Flour•Sugar•butter

Processes

•Assemble ingredients•Turn on oven•Mix the batter•Prepare the pans •Pour batter into pans•Bake for 25 minutes•Frost the cake

Outputs

Frosted Cake

Moving From Inputs to CostsIdentify the inputsMeasure themValue themMultiply amount of each input used by its

unit costSum up

Measure the Inputs – Providing ANC Labor

Nurse – how much time is spent providing ANC

Receptionist – how much time is spent supporting the nurse

SuppliesVaccine usedNeedlesSyringesHow much of the

office supplies are used to provide ANC

EquipmentHow much of the exam

table is used to support ANC

How much of the office computer is used to support ANC provision

Classification of CostsFixed vs. Variable

Direct vs. Indirect

Joint vs. Non-joint

Fixed vs. Variable Costs

Fixed:Costs which do not vary with the level of output

Variable:Costs which do vary with the level of output (e.g., supplies, nurse hours, etc.)

Fixed or variable?Hospital building

Brochures given to clients

Salary given to nurses

X-ray machine

Surgeon: paid on a per-procedure basis

Direct vs. Indirect Costs

Direct:Value of resources specifically attributed to the production of a service

Indirect:Value of resources used to support the production of a service

Direct or Indirect?Salaries of clinical staff

Physicians salary

Electricity bills

Salaries of accountants

Hospital building

Joint Costs Definition: Costs of resources used to produce more than one type of output (shared equipment, labor, etc.)

Usefulness of joint costs definition: Identifies resources whose costs should be allocated to different outputs

Allocation of Joint Costs of ANM

40% FP

30% ANC

20 % Curative %

Annual salary Rs.1,10,000

10% MIS

Cost-Benefit Analysis (CBA)A technique of economic evaluation which values both costs and benefits in monetary terms: compares them and assessing whether the health programme/s or project is worthwhile

Cost-Benefit Analysis (CBA)Estimation and evaluation of net profit in

terms of rupees associated with alternatives

It is used to justify particular health

services programme is relatively more beneficial.

Benefits include social benefits (where applicable)

Cost-Effectiveness Analysis (CEA)

Comparison of costs and outcomesOutcomes are measured in natural

units Clinical outcomes:- Diseases cured- Diseases prevented - Lives saved- Years of lives saved

AccountingAccounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof.

Accounting ProcessIdentify the transactionAnalyse the transactionJournal entries Post to ledger Trial balance Financial statements

Financial Auditing

It is required to verify that the procedures adopted are in confirmation with regulations, of utilizing funds.

Internal Vs External Audit