Financial Management

Health financing
Problems?
 Lack of funds
 Mal-distribution of resources
 Rising cost of medical care
 Wastage of resources
 Inefficiency in spending
 Lack 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 Decision
Investment Decision
Dividend Decision
Financing Decision
 Deals with the procurement of funds from various
sources
 Sources of funds in the Health Sector

s o u rc e s o f F u n d s

H e a lt h S e c t o r

P u b lic & P r iv a te S o u rc e s E x te r n a l C o o p e r a tio n

G o v e rn m e n t so u rc e s in c lu d in g 1 . In t e r n a tio n a l
V o lu n t a r y o r g . 2 . B ila t e r a l
Investment Decision
 Concerned 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’s
 Investment in various Health programmes,
such as leprosy, TB, HIV/Aids etc.
Dividend Decision
 In simple terms, Dividend means return on
investment.
 Practically there is no return in public health
 Logically--------------
“Every Investment bears a return.”
Example
 In India we have Pulse polio programme
Target 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
Costing
Budgeting
Accounting
Auditing
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 Accounting
 Formal system of accounting for costs
through which costs of products or
services are ascertained and
controlled.
NEED:
 Ascertainment of cost
 Cost monitoring and control

Cost Control
 Cost 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
 Cost Containment
 Postponement of non-essential purchase
 Economy in purchase/consumption
 Rational use of electricity, gas, water etc
 Pruning of miscellaneous areas-printing,
stationery, telephone bills etc.
 Outsourcing of services
How to reduce costs?
 Substitution – eg. Generic vs branded drugs
 Economies of scale – utilizing fixed assets fully
 Cost 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
Budget
 It 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 year
 It is realistic about expected revenues
 It 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 Budgeting
 Introduced by GOI in 1986
 It 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 Budgeting
 View 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.
Budget
 It 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 Budget

 Rolling & Fixed Plan Budget
 Capital & Operating Budget
 Departmental & Master Budget
 BUDGET
The 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.
 Program Chart of Health and Family Welfare

Health Family Welfare

General
Administration

Vertical Programs Public Health And

Health Care Programs

•Vector Borne Diseases Control •Direction and •Reproductive Child

•Tuberculosis Control •Primary Health Care Administration Health Program
•HIV / AIDS Control
•Blindness Control •Secondary Hospital •Drugs Logistics and •Immunisation Program
•Leprosy Control Development Program Government Medical
•Cancer Control Stores •Urban Family Welfare
•Mental Health Program •Bureau of Health Program
•Prevention & Control of Education and School •State Transport
Communicable Diseases Health Organisation

•Public Health Institute

and Training
Responsibilities in Health by levels
of Government
MEDICAL
FAMILY
HEALTH EDUCATION AYUSH
WELFARE
& RESEARCH

Medical Medical
CENTRAL Communicable RCH-II Education & Education &
Govt. level Diseases Research Research

Secondary Primary Medical Secondary

STATE Healthcare Healthcare College
Govt. level Healthcare
Facilities Facilities Hospitals Facilities

LOCAL
Clinics & Clinics &
Govt. level
Dispensaries Dispensaries
(ULB/PRI)

29
 Structure of Health Budget
2210 4210 6210
2211 4211 6211

PLAN
“TREASURY” ROUTE

State

LOAN ACCOUNT
EXPENDITURE

EXPENDITURE

EXPENDITURE
Funds

REVENUE
NON PLAN

CAPITAL
CENTRALLY
SPONSORED
SCHEMES
EXTERNALLY
AIDED
PROJECTS

“SOCIETY” ROUTE
(NRHM & RCH-II Flexi-pools; NACP-III)

30
All India: Health as proportion of total
Budget
Health as % of All India Budget

6.00%
5.90% 5.93%
5.80%
5.70%
5.60% 5.58%
5.50%
5.40% 5.41%
5.30%
5.20%
5.10%
2005-06 2006-07 2007-08

31
 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 Health
 Urban health
 Rural Health
 Medical Education & Research
 Public Health
 Family Welfare
 These consist of a large number of line items
(3000 to 7000)
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
Program Performance Budgeting vs
Traditional Budgeting
Traditional Budgeting Program Budgeting

Inputs Outcomes
Line Items Programs
Control
Performance
Incremental changes
Resource Allocation
at margin
based on need
Centralized budget
execution Decentralized budget
execution (in the long-
run
Zero Base Budgeting
 Introduced by GOI in 1986
 It 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 Concern
Budgeting in India is an annual exercise- plan
expenditure unspent
Long term projects – generally delay occur in
implementation leading to lapse of funds
 March –rush expenditure
Lack 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 Processes Outputs

•Labor •Assemble Frosted Cake

•Equipment ingredients
•Oven •Turn on oven
•Pans •Mix the batter
•bowls •Prepare the pans
•Materials •Pour batter into
•Flour pans
•Sugar •Bake for 25 minutes
•butter •Frost the cake
Moving From Inputs to Costs
 Identify the inputs
 Measure them
 Value them
 Multiply amount of each input used by its unit cost
 Sum up
Measure the Inputs – Providing ANC
 Labor  Equipment
Nurse – how much  How much of the exam
time is spent table is used to support
providing ANC ANC
Receptionist – how  How much of the office
much time is spent
supporting the nurse computer is used to
support ANC provision
 Supplies
 Vaccine used
 Needles
 Syringes
 How much of the
office supplies are
used to provide ANC
Classification of Costs
 Fixed 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 Annual salary

Rs.1,10,000

20 % Curative %

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 outcomes
 Outcomes are measured in natural units
Clinical outcomes:
- Diseases cured
- Diseases prevented
- Lives saved
- Years of lives saved
Accounting
 Accounting 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 Process
 Identify the transaction
 Analyse the transaction
 Journal 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