Budgeting for cyclicality in a healthcare setting – accounting for economic shocks in the budgetary process
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Date
2024
Authors
Gibbs, Ruth
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Publisher
University College Cork
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Abstract
The budgeting process is a critical component of any healthcare system’s response to economic shocks. Recent events, such as the global financial crisis or the Covid-19 pandemic, have shown that the budgetary response is often insufficient to maintain a consistent level of service. This dissertation addresses these significant challenges by demonstrating how healthcare budgeting capabilities should be enhanced to better account for the impact of business cycle fluctuations.
Current healthcare accounting practices, such as annual incremental and global budgeting, are reactive and often fail to respond to economic shocks adequately. For instance, recent shocks have led to emergency reactionary budgets, subsequent austerity budgets and budgetary over-estimation for multiple years after the shock. Even the widely used DRG or PLIC costing systems, which aim to improve efficiencies and transparency, arguably come at the expense of financial resilience during and after recessions. These inadequacies underscore the need for more proactive, data-driven capabilities to inform budgeting decisions. By leveraging more data and analysis, systematic risks such as a recession can be assessed, and the impact of such shocks can be measured to inform budgetary responses and improve the financial resilience of healthcare systems.
The Irish Healthcare System is used as a case study to demonstrate how data and analysis can enhance budgeting decisions. Archival data on government and private healthcare expenditure were gathered, while data measuring the utilisation of services was also collected and used to calculate healthcare utilisation indices for three different areas of expenditure. The VAR methodology, a novel approach in healthcare budgeting, measures the impact of GDP shocks on healthcare expenditure and utilisation indices. The VAR methodology is a flexible way to understand the dynamic relationship between variables without imposing restrictive assumptions. Furthermore, qualitative interviews with C-level finance and research executives working in the healthcare service in Ireland were also conducted to understand how political and institutional factors can be addressed with this analysis.
The interviews highlighted the need to understand the impact of shocks on the healthcare system. Currently, the budgetary response is reactionary and has adversely impacted the delivery of services and the financial management of healthcare services. The VAR analysis results further highlight the significant and growing need to understand the impact of the business cycle on budgetary processes. For example, GDP shocks impact public and private healthcare expenditure and public healthcare utilisation for multiple years after a shock occurs. However, the impact of a shock on healthcare budgets is multifaceted. For example, there is a positive relationship between government and private healthcare expenditure, and this impact can last up to 9 years after a shock occurs. In contrast, the impact of shocks on the utilisation of services is complex. Each sector responds differently to a shock, and the impact varies over time. By measuring the impact of shocks on healthcare services and accounting for these impacts in the budgeting decision-making process, adverse impacts on the provision of healthcare services at all stages of the business cycle could be minimised.
This dissertation, therefore, demonstrates how VAR methodology could expand healthcare budgeting capabilities to better account for the complex impacts of business cycle fluctuations. Specifically, using data and analysis to support resource allocation decisions by measuring the effect of a GDP shock on healthcare resources and healthcare utilisation can ensure that budgeting responds in an informed way rather than reacting to changes in the external environment. Secondly, the VAR methodology calculates a permanent level of resources that is likely to remain available even if economic conditions change and a temporary level of resources at risk after an economic shock. Ensuring that long-term budgetary decisions are based on a permanent level of expenditure, a consistent level of services is more likely even in an economic downturn.
Finally, this dissertation contributes to the evolution of the literature on financial resilience. For example, by measuring the impact of a shock on the utilisation of healthcare services and including these impacts in the estimation of the existing level of services, healthcare budgets are more likely to be based on a more reliable level of services, particularly after a shock occurs.
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Keywords
Healthcare financing , Healthcare budgeting , Business cycle , Econometrics , Vector autoregression , Forecasting
Citation
Gibbs, R. 2024. Budgeting for cyclicality in a healthcare setting – accounting for economic shocks in the budgetary process. PhD Thesis, University College Cork.