Sign Up
For the best experience, choose your profession & state.
You are not currently logged in. Please log in to CEUfast to enable the course progress and auto resume features.

Course Library

Healthcare Economics for Executives and Managers

3 Contact Hours
CEUfast OwlGet one year unlimited nursing CEUs $39Sign up now
This peer reviewed course is applicable for the following professions:
Advanced Practice Registered Nurse (APRN), Certified Nurse Midwife, Certified Nurse Practitioner, Certified Registered Nurse Anesthetist (CRNA), Clinical Nurse Specialist (CNS), Licensed Practical Nurse (LPN), Licensed Vocational Nurses (LVN), Midwife (MW), Nursing Student, Registered Nurse (RN), Registered Nurse Practitioner
This course will be updated or discontinued on or before Wednesday, July 26, 2023

Nationally Accredited

CEUFast, Inc. is accredited as a provider of nursing continuing professional development by the American Nurses Credentialing Center's Commission on Accreditation. ANCC Provider number #P0274.


Those who are responsible for budget management will understand that the outcomes of budget management depend on knowing and understanding basic financial terminology; and how to apply this knowledge in a struggling economy with declining reimbursements and a growing number of people without access to insurance (Muller & Karsten, 2012).


At the completion of this activity, the healthcare professional will be able to:

  1. List the five basic steps involved in the budgeting process.
  2. Discuss three revenue streams for healthcare organizations.
  3. Identify three advantages of Managed Care.
  4. Identify three disadvantages of Managed Care.
  5. Discuss two approaches to cost containment in healthcare.
CEUFast Inc. and the course planners for this educational activity do not have any relevant financial relationship(s) to disclose with ineligible companies whose primary business is producing, marketing, selling, re-selling, or distributing healthcare products used by or on patients.

Last Updated:
To earn of certificate of completion you have one of two options:
  1. Take test and pass with a score of at least 80%
  2. Reflect on practice impact by completing self-reflection, self-assessment and course evaluation.
    (NOTE: Some approval agencies and organizations require you to take a test and self reflection is NOT an option.)
Author:    Donna Thomas (RN, MSN, BSHEd)


A key competency for nurse executives, nurse managers, and those in leadership positions is understanding the budgeting process. If nurse leaders want to continue to have a seat at the strategic table and remain influential advocates in future healthcare decisions, they must become fluent in the language of finance (Muller & Karsten, 2012).

This course stresses that the budget can be managed effectively by educating nurse executives, hospital managers, and leaders responsible for budgetary decisions. This knowledge helps those involved in the budgeting process to set accurate budgets, establish accountability, monitor variances, and manage expenses.

Today, CEOs of hospitals and health systems are challenging the status quo and searching for new revenue streams (Muller & Karsten, 2012).

Many health systems are being urged and incentivized to treat patients outside hospital walls. To illustrate the impact, the proportion of revenue from inpatient services relative to outpatient services has fallen 18 percent since 1994 (Muller & Karsten, 2012).

CEOs are pursuing new cost-cutting measures. Among these are developing new staffing models, shifting patients to outpatient services, and reducing administrative and supply costs (Muller & Karsten, 2012).

Health systems are looking for new revenue sources to offset rising costs. Competing for funding can be rigorous: For example, teaching and research hospitals are seeing less grant support. However, until this year, funding has not increased, and inflation has eroded the value of some of these grants (Muller & Karsten, 2012).

Hospitals and health systems are also leveraging the revenue potential of developing a physician network. Some hospitals are looking to capitalize on their intellectual property (IP). Hospitals and health systems can work with employees to develop any number of innovations; medical devices, training videos, health information technology (HIT) tools, or patient safety solutions (Muller & Karsten, 2012).

Health systems are continuing to pursue growth through mergers and acquisitions (M&A). They are working to increase their physician networks, expand their geographic reach, and diversify their specialized offerings and talent. Such growth can assist with building clinically integrated networks and provide the scale needed to reduce costs (Muller & Karsten, 2012).

Nurses involved in the budgeting process need to know what the CEOs are planning and should take an active role in the planning and the implementation of the processes. In the long run, these decisions affect everybody involved resulting in improving or damaging the healthcare we provide to the public.

Budgeting Process

A budget is a formal quantitative plan for coordinating the financial goals of an organization which reflects management’s plans, intention, or expectations. Budgetary information permits executives and managers the ability to develop actions to control results in future reporting periods. The quantitative statement is usually expressed in monetary terms, of the plans and expectations of a defined entity (e.g., company, department, unit) over a specified period (Muller & Karsten, 2012).

Budgeting is part of the overall process of planning and control. A budget is a plan which will assist in achieving objectives from top to bottom about the plans to be implemented and a flow of feedback from the supervisory level to the top management. A budget forces nurse executives and managers to think ahead, compels them to make intelligent choices, provides an action plan, potential forecast of what may occur, provides communication within the organization and a basis for evaluation and control.

The budgeting process is an ongoing dynamic process which if used correctly can provide feedback. Like the Nursing Process, it includes a collection of data from multiple sources, the creation of a plan for activities and services to be delivered, and implementation of the plan, and an evaluation of the outcomes.

The outcomes of budget management include: cost control, market expansion, and plans to be able to respond to current economic trends and technology. All this information helps to demonstrate the fiscal responsibility and financial health of an organization. The “generated income” is placed in a “trust” of the organization so that the resources can be used effectively and wisely for their intended purposes.

Steps in Budgeting

Five basic processes or steps involved with budgeting are (Danna, 2018):

  1. Development
  2. Monitoring
  3. Reporting
  4. Justifying
  5. Variance Analysis

Developing a Budget

Before developing an effective budget, information should be supplied to those creating the budget in advance of the annual budget-planning cycle. This information should provide a retrospective history of the financial activities and status of the unit and organization as a whole. This information should show the past revenue sources, anticipated sources, and any potential uncertainties related to revenue streams. This allows for discussions to deal with future challenges related to the budget.

When developing the budget, a timeline is needed to create a preliminary, revised, and then a final budget which is consistent with the organization's practices and goals. Review and approval processes of the organization need to be followed. The goal is to make sure that once the final budget is confirmed and released that there should be no hidden surprises unaccounted for. These surprises are not appreciated!


Those nurse managers and executives in charge of budgets are expected to routinely monitor budget reports which are usually generated monthly. This allows the manager to justify deviations and to make the necessary adjustments accordingly. This may entail dividing the allocations monthly which could be based on historical trends. Because of this, managers need to be knowledgeable of the trending methodology and current trends within their organization. Over-or-under correction of variance can result due to a lack of knowledge of the current trends and more unexpected difficulties in the future.


Budgetary reports are sent to managers and nurse executives on a monthly, quarterly, and annual basis. This helps them to better and more appropriately manage their units and or services. The overall financial status of the organization is also received at least bi-annually, but this is determined by the financial department of the organization and authorized center director.

Once reports are received they must be checked and analyzed for accuracy and any hidden content to justify an increase in expenditures.

Case Study

Sarah, the full-time, night, Charge Nurse on the hospice unit had to work 12 hours overtime. During the same time frame James, another RN had to work a double to cover the hospice unit. Two Nursing Assistants also worked 2 extra shifts to meet the needs of the patients. Sharon, the Nurse Manager, was informed that during this period five staff members came down with the Flu and could not work. They also did not want to infect the already sick Hospice patients and other staff team members. Due to the “Short Staffing” there were more expenses on staffing for the month. Sharon could justify the added expense and overtime.

Today, the nurse executives and managers receive their financial reports electronically using the sophisticated software the hospital or healthcare facility has purchased. Managers and Nurse Executives all need to know how to use both the paper spreadsheets and software as part of their practice.


As noted in the Case Study, Sharon, the Nurse Manager of the Hospice unit, had a justified reason for the added staffing expenses on her unit. Naturally, this justification was consistent with the overall objectives and fiscal plan of the organization. She had the documentation to justify the added expenditures.

Many organizations have a justification plan in place which often requires a business case to justify the expenditure. Some expenditures may put the organization into a negative variance but are justifiable because of the long-term return on investment which will ultimately yield a financial benefit to the organization.

Variance Analysis

Because budgets are fluid, line items are rarely on target. Therefore, variance analysis is an essential part of the budgeting process. Variance analysis is a tool applied to financial and operational data that aims to identify and determine the cause of the variance. In project management, variance analysis helps maintain control over a project’s expenses by monitoring planned versus actual costs.

Effective variance analysis can help a company spot trends, issues, opportunities and threats to short-term or long-term success. Variances between planned and actual costs might lead to adjusting business goals, objectives or strategies (Cross, 2018).

Variances may be characterized as volume, efficiency, rate, or non-salary expenditure (Cross, 2018):

  • Volume variances in the hospital are usually in response to a fluctuation in patient days.
  • Efficiency variances in the hospital are usually expressed in changes from the anticipated hours per patient day (HPPD).
  • Rate Variances reflect the differences between the budgeted hourly rate and the paid hourly rate.
  • Non-salary expenditure variances may be caused by changes in patient mix and volume, supply quantities and costs, price paid, or new technology or regulations.

Budget Categories

Managers deal with four major budget categories: revenues, expenses, capital, and operating budgets (Danna, 2018).


“Revenue” is the total amount of income anticipated during a defined period.

Three Revenue Streams for Healthcare Organizations include but are not limited to are the following:

  • Reimbursement for patient care
  • Sales of goods and products
  • Membership dues in the case of direct-member health maintenance organizations (HMOs)

Revenue generation is seldom under the direct control of managers. However, a certain percentage of anticipated or actual revenue is allocated to specific cost centers which are under the manager’s direction. The extent to which the manager can control fixed expenses is often limited.

The Nurse Executive and Nurse Managers are responsible for operating within the revenue allocation by controlling expenses and/or creating services that will generate revenue. The greatest influence that those responsible for working within the budgetary constraints is on fiscal stability by controlling variable expenses, including payroll costs.


“Expense” budget is comprised of salary and non-salary items. Managers are responsible for managing expenditures within an assigned cost center (outflow of resources/cash). Some managers may be responsible for a profit center with an inflow of cash.

In business, the term operating expense (OPEX) appears in budgeting and spending, but also as an income statement term in financial accounting (Danna, 2018). In brief, "Operating Expenses" include most expenditures for operating the firm's usual line of business—expenditures that are not capital spending. Operating expenses do not result in capital assets. Instead, they serve entirely for—not surprisingly—"operating" the business. In most organizations, employee wage and salary expenses account for a large percentage of the operating budget (Danna, 2018).

Costs are either fixed or variable (Danna, 2018):

  • Fixed costs remain constant for the organization regardless of fluctuations in activity levels, such as insurance premiums, contract fees, or rental fees.
  • Variable costs fluctuate in response to external or internal changes such as changes in the census, staff mix, patient acuity, or product costs.


“Capital” budget includes equipment and renovation expenses needed to meet long-term goals. Capital budgeting is the process in which a business determines and evaluates potential expenses or investments that are very large (Danna, 2018).

This process includes the specific criteria organizations have when purchasing certain equipment. These items must have an expected lifespan (performance) of one year or more and exceed a certain dollar value. Additional costs also need to be determined, such as installation, delivery charges, and service contracts (Rudio, 2018).

Today, managers are expected to understand the capital budgeting process to work effectively within their organization. Part of the capital budgeting process is understanding amortization which includes an assignment of costs to the capital item for its lifetime. Knowing the “Life Expectancy” of equipment, programs, or services is vital so that a replacement strategy can be set in motion if need be. This can be built into the capital budgeting process.

Environmental needs of many healthcare organizations require on a larger scale, constant capital planning. This includes providing for space and buildings needed to conduct business while making sure that regulatory requirements are implemented as required. The rate of technology innovation has put a greater demand on construction schedules. The challenge is that the regulatory requirements that surround building plans need relatively long lead time. Because of this, by the time the building is constructed to house designated clinical services it has become outdated!

Operating Budget

“Operating” budget or annual budget is a plan to monitor anticipated day-to-day activities, resources, personnel, and supplies, typically over a one-year period which may or may not be in concert with the calendar year. To allow for easy calculation of “bottom-line” profit or loss revenue and expense segments are separated. Throughout the year the operating budget is revisited to determine if the organization is on target to meet its projected financial goals. Management practices have a significant impact on the success of the operation budget.

Budgetary Terms

  • Assets: The financial resources an organization receives often called accounts receivable.
  • Break-even-point: The point at which revenue covers cost. A formula which can be used is to divide the fixed cost by the contribution margin.
  • Contribution margin: Portion of the charge to a patient for a procedure or for supplies that is over and above the actual cost and which the cost center contributes to revenue. For example, if the procedure costs $10, and the patient is charged $25, the contribution margin is $15. The contribution margin is the profit that is contributed by a cost center without the indirect costs.
  • Capital budget: Long-range planning tool for organizations which includes replacement items budgeted under capital usually having a 1-5-year life span.
  • Case Mix: The types of patients served by the organization which is usually defined by variables such as, payment source, diagnosis, personal characteristics, and documented patterns of treatment.
  • Cash flow: The rate at which dollars are received and disbursed.
  • The Centers for Medicare and Medicaid Services (CMS) is the federal body responsible for administering Medicare and Medicaid programs. CMS also runs the State Children’s Health Insurance Program (SCHIP), which is jointly financed by the Federal and State governments and administered by individual States.
  • Contribution Margin (CM), is defined as the selling price minus variable cost and is a measure of the ability of a company to cover variable costs with revenue. The amount leftover, the contribution, covers fixed costs or is profit.
  • Cost-benefit analysis (CBA): is a systematic approach to estimating the strengths and weaknesses of alternatives that satisfy transactions, activities or functional requirements for a business.
  • Cost-benefit ratio: Numerical relationship between the value of an activity or procedure in terms of benefits and the value of the activity’s cost. The cost-benefit ratio is expressed as a fraction. It the fraction is greater than 1, benefits outweigh costs (i.e., the activity is economically beneficial).
  • Cost Center: Smallest functional unit for which cost control and accountability can be assigned. A nursing unit or floor is usually referred to as a cost center, but there may be other cost centers within a unit. (i.e., Orthopedics is a cost center, but often the cast room is considered a separate cost center within Orthopedics).
  • Cost finding: Cost finding is the process by which the company obtains estimates of the costs of producing a product, providing a service, performing a function, or operating a department. This process determines the full cost of services or procedures by allocating indirect costs and adding them together with direct costs.
  • Diagnostic-related groups (DRGs): Medical classifications under which a Medicare patient’s diagnosis are assigned a DRG code. Each DRG has a set payment reimbursement rate. The rate may, actuality be higher or lower than the cost of treating a patient in a certain situation. This Grouping system is implemented by the U.S. government for determining how much Medicare should reimburse hospitals for medical care.
  • Direct costs: Cost attributed to a specific source such as treatments or medications.
  • Endowments: Resources contributed by a donor which are held aside to generate additional income for a hospital. For instance, income property that produces an additional income.
  • Expendable supplies: Supplies that are consumed and not reusable.
  • Fixed budget: A fixed budget, also called a static budget, is a financial plan based on the assumption of selling specific amounts of goods during a period. In other words, fixed budgets are based on a set volume of sales or revenues. A fixed annual level of volume, such as the number of patient-days or test performed, can be used to arrive at an annual budget total. Totals are then divided by 12 to determine a monthly average. The fixed budget does not make provision for monthly or seasonal variations.
  • Fixed costs: Costs that do not vary such as a mortgage or loan payment.
  • Flexible budget: Budgeting system that considers account variations in volume. The range of activity is estimated based on the projected range of volume from low to high.
  • Full-time equivalent (FTE) or Full-time equivalent employee (FTEE): The ratio of total paid hours during a period to the total of working hours in that period. (part time, full time, contracted). Typically done for a Monday-to-Friday period covering part time, full time, contracted. For example, 1.0 FTE = 5, 8-hour days or staffing, which equals 40 hours of staffing per week. One FTE can be divided in different ways. Such as 2 part-time employees, each working 20 hours per week, would equal 1. FTE. If the position requires coverage for more than 5 days or 40 hours a week, the FTE would be greater than 1.0 FTE for that position. Now if a position requires 7-day coverage, or 56 hours, then that position requires 1.4 FTE coverage (56 divided by 40 = 1.4). This means that more than 1 person is needed to fill the FTE position for a 7-day period.
  • Gross income: Total income received before expenses are deducted.
  • Health Care Financing Administration (HCFA): is now called the Centers for Medicare & Medicaid Services (CMS), which is a federal agency within the United States Department of Health and Human Services (HHS) that administers the Medicare program and works in partnership with state governments to administer Medicaid, the State Children's Healthcare.
  • Hours Per Patient Day (HPPD): Hours of nursing care provided per patient per day by various levels of nursing personnel. HPPD is determined by dividing total production hours by number of patients.
  • Indirect costs: Costs that cannot be directly attributed to a specific area, such as housekeeping, and are usually spread among different departments.
  • Inflation factor: Percentage of the rate of inflation which is needed to project the budgeting amount in the future.
  • Liabilities: Financial obligations of an organization such as bills that need to be paid.
  • Major diagnostic categories (MDC): Major categories of DRGs.
  • Master Budget: The total budget for the entire organization which combines the individual cost center budgets.
  • Net income: Income that remains when expenses have been subtracted from the total revenue.
  • Net Loss: Loss sustained when expenses exceed total revenue.
  • Operating Expenses: Daily costs required to maintain and run a hospital of other healthcare facility.
  • Outliers: Under the classification of patients by DRGs, this term refers to inpatients who are atypical, and expenditures greatly exceed DRG reimbursement.
  • Patient Classification System: is a method for grouping patients according to the amount and complexity of their nursing care requirements. This system was developed to determine workload requirements, staffing needs and required work hours objectively. It serves as a tool to measure patient needs, caregiver interventions and skills level.
  • Planning: Process by which goals and objectives are set. Future problems and decisions in advance can also be determined.
  • Position control plan: Plan for staffing requirements that determines how many FTEs are required to deliver the amount of care necessary.
  • Preferred Provider Organization (PPO): Physician, group of physicians, hospital, or other healthcare facilities that has contracted with private insurance companies or individual businesses to provide healthcare services.
  • Production hours: Known as actual hours are the total amount of regular time, overtime, and temporary time.
  • Program budget: This style of budgeting entails:
    • Planning for 5 to 10 years ahead.
    • Being aware of external events that might affect the organization.
    • Determining specific objectives that will lead to the achievement of the plan.
    • Determining the costs required to meet these objectives.
    • Planning alternative objectives and their costs to provide greater flexibility.
    • Prioritizing programs in order of importance.
  • Restricted Resources: Financial resources such as a donor who placed restrictions on their use and wants their donation used for a specific purpose.
  • Revenue: Items or amounts of income after expenses are subtracted.
  • Semi-fixed costs: Costs that run at a certain level for a given period and then increase or decrease.
  • Staffing Distribution: Determination of number of personnel allocated per shift. (e.g., 45%, day shift, 35%, evening shift, 20%, night shift).
  • Staffing mix: Ratio of various types of personnel to one another (e.g., a shift on one unit may have 40% RNs, 40% LVNs, 20% other personnel).
  • Turnover rate: Rate at which employees leave their jobs other than death or retirement. The rate is determined by dividing the number of employees leaving by the average number of workers employed in the unit during the timeframe.
  • Unrestricted resources: Financial contributions that have no restrictions placed on their use by the donor.
  • Variable costs: Costs that vary with the volume (e.g., payroll costs).
  • Variance: Difference between planned costs and actual costs.
  • Workload index: Weighted statistic that reflects the acuity level of patients, census, and production hours. This index can serve as a baseline for productivity improvement. One way to determine a workload index is as follows:

Acuity index X Workload Units = Workload index

Production Hours

  • Zero-based budgeting: Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period. The process of zero-based budgeting starts from a "zero base," and every function within an organization is analyzed for its needs and costs.

Decision Support Systems

Decision support systems allow managers to make financial decisions and adjustments through computer modeling that utilizes real-time data (Archimedes, 2018).

A Decision Support System DSS) is a specific class of computerized information system that supports business and organizational decision-making activities. Properly designed Decision Support Systems are interactive software-based systems intended to help decision makers compile useful information from raw data, documents, personal knowledge, and/or business models to identify and solve problems and make business decisions (Archimedes, 2018).

Computer-generated financial forecasting allows organizations to develop alternative scenarios among numerous variables. It is still the wisdom and knowledge of the people of the organization that can define the most probable scenarios that the organization is most likely to face in the near and far future.

Wise, experienced and astute managers and healthcare administrators inform themselves about scenario development, the availability and capability of computerized forecasting systems, and the most beneficial process the organization can use in its forecast planning (Archimedes, 2018).

Unlike strategic planning, scenario development is characterized by a focus on possible futures. The benefit of scenarios is that this allows organizations or departments to compensate for errors common in the planning process, such as under-prediction and over-prediction allowing for the organization’s focus to be on key concerns in areas of uncertainty.

Case Study

James, CEO of Care Unlimited, was working with the financial consultant to develop a new strategic plan to present to the Board of Directors. The current strategic plan predicted 3%-4% growth over each of the next 10 years and based its resource acquisition on this assumption. They determined that there would be grave consequences if its financial position of growth fell below 2.6% per year on average.

The Scenario development process assisted the CEO and financial consultant in examining the possible consequences of excessive growth or excessive loss. Now in their new strategic plan, they compensated for the potential outcomes that could occur and put additional funds into an emergency trust fund for the time being.

Cost-Benefit Analysis

The cost-benefit analysis entails the process of examining scenarios to determine the relative value of intervention when measured against predetermined criteria (The Real Puvlic Perception, 2018). As an example:

  • Which is most cost-effective, to provide home care or to pay for care in a skilled nursing facility?
  • Which is most cost-effective to care for indigent patients in the emergency room or to establish a community health clinic?

In answering these questions, it is important to remember that we are dealing with human lives and the emotions of the decision makers, along with the target population.

Essentially, a cost-benefit analysis in healthcare is an assessment of the costs associated with a given medical treatment contrasted with the benefits for the patient or society. This is a component of health care economics, the study of economic factors that may play an integral role in decisions about medical treatment from patients, doctors, insurance companies, and public health agencies. Subjecting medical decisions to this type of analysis can make many patients uncomfortable. Evidence-based medicine and other measures can be used to determine whether treatment should proceed.

Presently, along with the traditional cost-benefit analysis techniques, core technology is utilized. The Archimedes Model used in healthcare is a clinically realistic, mathematical model of human physiology, diseases, interventions and healthcare systems. The Model is continually validated by comparing the results of simulated trials to the results of real multi-national clinical trials and cohort studies. Thus, all aspects of care-faculties, personnel, care processes, protocols, logistics and costs, multiple disease conditions, and needed or required interventions over time are evaluated.

Still under evaluation is Biomathematical modeling which allows analysts to address complex problems at a rapid pace and inexpensively when contrasted to other methods such as time-consuming clinical trials, observational studies, or the judgment of experts. Biomathematical modeling is divided into three parts: the derivation of models, the fitting of models to data, and the simulation of data from models. Using software to evaluate all this data helps in the process of cost-benefit analysis outcomes (Biomathematical, 2018).


Productivity is an economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in revenues and other gross domestic product (GDP) components such as business inventories (Beattie, 2018).

The Agency for Healthcare Research and Quality (AHRQ) in 1989 commissioned Patient Outcome Research Teams (PORTS) to initially answer critical questions related to the effectiveness and cost-effectiveness of available treatments for clinical conditions (Archimedes, 2018). The focus of the PORTS was to take advantage of readily available data on the clinical conditions that are costly to Medicare and Medicaid programs and for which there is regional variability in outcomes and use or resources.

Port investigators consisted of a multidisciplinary team of researchers ranging from clinicians, health economists, quality of life experts, and epidemiologists. In evaluating each situation, the Port evaluators had to answer the following questions:

  • What works and at what cost for which patients or subgroup of patients?
  • When did the occurrences or situation happen?
  • Why is there variation in the use of treatments?
  • What can be done to reduce inappropriate variation?
  • Whose perspective is the opinion from? Is the patient the ultimate judge or the healthcare provider?
  • Is there a potential for the creation of a new process and use of patient-reported outcome measures?

There are basically two models specific to nursing related to productivity:

  1. The industrial model
  2. The systems framework

The industrial model measures the ratio of work output to work input or the efficiency produced. An example of this is HPPD (hours per patient day) or costs per unit of service.

The systems framework consists of both efficiency and effectiveness. Effectiveness includes quality and appropriateness. Efficiency relates to nursing output with minimal waste. Together efficiency and effectiveness take into consideration the special characteristics of nursing, such as caring and providing the quality of care expected at all levels in the healthcare system.

Formulas and definitions used to help maintain productivity are the following:

  • Nursing HPPD (hours per patient day) = Divide total paid hours for nursing personnel for a specific period by the total number of patient days in the same period.
  • Salary costs per patient day = Divide total payroll expenses for nursing personnel for a specific time by the total number of patient days in the same timeframe. This is more sensitive than HPPD since it accounts for staff mix.
  • Utilization rate= Divide required hours of care by paid nursing hours. Hours of care required are based on a patient classification system, and thus results show differences between the required and actual staffing ratios.

Patient Classification

Classification systems assign patients to defined categories by care intensity, care level, assumed or average utilization of resources, or other variables.

Patient classification systems (PCS) are also known as patient acuity systems. Acuity has become a reference for estimating nurse staffing allocations and budget determinations. The classification used in a facility should be applied to forecasting staffing needs within each department. Charge nurses should be informed of the patient care ratios that are relevant to each department and should understand how to predict staffing needs based upon the system utilized by the organization.

There are different kinds of PCS available. The three most commonly used PCS are:

  1. Descriptive: This Classification system is a purely subjective system. A nurse selects which category best suits the patient.
  2. Checklist: This is another subjective system. The acuity level of a patient is assigned as a numerical value based upon the level of activity in the specific pre-set categories. The numerical value is then added up to give the nurse an overall rating of the patient’s needs. Based on this rating is the assigned acuity.
  3. Time standards: This acuity determination method is created when the charge nurse assigns a time value based upon the various and specific activities that need to be completed for the patient. The time value is then totaled and converted to an acuity level.

Acuities are used to assist a nurse leader to determine workload requirements and staffing needs. Most acuity systems are automated and support services provided by the company.

Non-Classification Systems

There are some organizations which do not use a specific PCS system. Charge Nurses are taught that the less a patient can do for themselves and the more activities that need to be done for or with a patient, the higher the acuity. Naturally, the higher the acuity, the more staff are needed.

The challenge is that whatever the approach is to determine acuity that there is a consistent practice in decision making, regardless of the charge nurse, shift, and department that they work on. Thus, specific guidelines still need to be established and implemented by all which will result in improved patient care and use of resources within an established budget.

Staff Mix

Staff mix is defined as assigning defined categories of staff to care for a specific group of patients. Staff mix includes the use of Registered Nurses, Licensed Practical / Vocational Nurses, and unlicensed assistive personnel such as nurses’ aides and other disciplines which provide direct and indirect care. The use of specific personnel should be determined by a patient’s overall condition, intensity of needs, and requisite competence of the staff to determine the best and safest staff mix.

Case Study

Jennifer, an ICU RN, lives in California and usually has at the most two patients depending on their acuity for at times she can only manage one patient safely, especially if her patient has had recent open-heart surgery, is critical and unstable.

She was assigned two patients because there were several people who called in because they were ill. Working with the Charge Nurse, they assigned her to a second patient who was stable and was to be transferred to a step-down unit the next day. An ICU Nurse Tech was assigned to help her out with her critical patient. The Charge Nurse was aware of the state required staffing ratios (Greene, 2018).

Fortunately, Jennifer was in California, and the California Governor Gray Davis signed into law a bill mandating minimum nurse-to-patient staffing ratios (Greene, 2018). The challenge was during a Nursing Shortage the ratio depended on the availability of RNs. Support personnel working in specialized areas often were trained above and beyond the average nursing technician.

Cost Containment

Every year the cost of health insurance continues to outstrip the rate of inflation by at least several points. The forces that increase the costs of healthcare include:

  • The aging of the population
  • The burden of chronic disease
  • The rising costs of pharmaceuticals
  • The cost of technology
  • The increased expectations of the public about what the healthcare system should be providing and doing
  • The impact of lifestyle choices on the public
  • The lack of implementing efficiency measures to improve healthcare practices

Out of necessity, several cost containment approaches have been created in the form of:

  • Managed Care
  • Cost-Benefit Analysis
  • Productivity
  • Patient/Client Classification
  • Staff Mix
  • Reduction in Staff and Services
  • Material Management

Managed Care

Managed care, in terms of healthcare, means a person agrees only to visit certain doctors and specialists contracted with their health care plan. In turn for this agreement, the costs are kept low by a managing company who oversees all health care interactions of their clients. The reason these costs are kept significantly lower is that the company has contracts with specific healthcare providers and hospitals. Thus, patient utilization and provider practices are overseen by an entity that has a fiduciary interest in the interactions between the two (Cross, 2018).

There are three different types of managed care plans that are available:

  1. Health Maintenance Organizations (HMO)
  2. Preferred Provider Organizations (PPO)
  3. Point of Service plans (POS)

Each is a little different from the other but, provides the same basic service (Cross, 2018).

Initially, advocates of managed care expected that it would do the following:

  • Optimize the use of resources, avoiding over or under use.
  • Ensure better outcomes of care.
  • Increase accountability at all levels.
  • Reduce variations in practice.
  • Contain or reduce expenditures.
  • Shift focus from acute care and crisis intervention to disease prevention and health maintenance.

Advantages of Managed Care:

  1. Lower cost
  2. Accredited Care
  3. Cheaper Prescriptions

Disadvantages of Managed Care:

  1. Restricted Care
  2. Strict Approval
  3. Referral Problems

While many people criticize the quality of care and the ethical practices of managed care providers, they still provide a great service to a large population who would go without healthcare until they became extremely sick, had no other recourse and became deathly ill. Without health insurance, even the most minor illnesses can cause an incredible amount of financial stress (Cross, 2018).

Reduction in Staff and Services

Costs can be contained through a reduction in force strategies (RIF) and cutting back or elimination of services not critical to the organization’s goals. This may include that of maintaining fiscal viability. A frequent practice is outsourcing specific services such as food services, housekeeping, and linen services. Some organizations contract out their payroll, transcription, and other business services. As with both practices, there may be hidden costs which out-strip the anticipated cost savings.

Before the initiation of a RIF to contain costs, the following needs to be considered:

  1. Are there potential ethical issues which will affect safe patient care?
  2. Will there be more preventable accidents and then the intrusion of regulatory agencies and sanctions?
  3. Do present contracts for members of the organization and their organized labor have a stipulation that there will be “no-layoffs”?

Thus ethical, legal and contractual issues need to be considered when RIFs are considered a means of reducing costs (Danna, 2018).

Cost Shifting

The practice of cost shifting was initially used to allow hospitals to recover some uncompensated billings by transferring these costs to Medicare and other payers. Prospective Payment Systems (PPS) was instituted to deter cost shifting, and this resulted in the closure of many hospitals or consolidation with other healthcare organizations.

The advent of DRG classifications and linking them with nursing acuity classifications resulted in cost savings which are attributed to two factors:

  1. Decreased lengths of stay
  2. Avoidance of admissions when care can be provided safely in another setting

Consequently, a sub-industry was created. In response to the implementation and compliance with DRGs, we have the following:

  1. Coders
  2. Case management
  3. Nurses who specialize in discharge planning and patient placement
  4. Publishing companies that produce DRG manuals
  5. Government departments whose job is to ensure compliance with PPS Regulations

Materials Management

Administrators, Unit Managers, Economists, Efficiency Experts and Front-Line Staff believe that resources can be better managed through the development and application of better business information, and successful care systems.

To control the cost of supplies and equipment a process called, “competitive bidding” is used. This allows organizations to obtain discounts on quality products from various vendors and distributors. Most hospital employees and patients have no idea of the cost of supplies and equipment and the cost of processing.

Controlling the cost of supplies and equipment is a never-ending battle, and the development of “inventory control systems” help to match supply and demand and decrease utilization and loss due to theft. When staff is informed of “pricing /cost of frequently used items on their unit they may “comparison shop” for the most cost-effective products and supplies to be used in their own department.

Some departments end up sharing some high-priced equipment and have set up processes to do so. Monthly, managers receive reports detailing material costs for their units or departments.


Reimbursement for services is what keeps providers in business. Hospitals and clinics draw from many different payers for reimbursement, including Medicare, Medicaid and private insurance companies. Reimbursement can be affected by the following:

  • the claims process
  • out-of-network payments
  • denials
  • audits
  • legislation


On July 30, 1965, President Lyndon B. Johnson signed into law the bill that led to the development of Medicare and Medicaid. The original Medicare program included Part A (Hospital Insurance) and Part B (Medical Insurance). Today these 2 parts are called “Original Medicare.” This was created through Title XVIII of the Social Security Act. These programs were implemented in 1966 (History, 2018).

Over the years, changes were made to Medicare such as (Top Health Issues, 2018):

  • More people have become eligible. In 1972, Medicare was expanded to cover disabled, people with end-stage renal disease (ESRD) requiring dialysis or kidney transplant, and people 65 or older that select Medicare coverage.
  • More benefits, like prescription drug coverage, have been offered.
  • In 1973 Medicare was expanded to include people of any age who meet Medicare’s definition of disability. Today, more than 90% of Medicare beneficiaries are ages 65 or older.

The Medicare Prescription Drug Improvement and Modernization Act of 2003 (MMA) made the biggest changes to the Medicare program in 38 years. Under the MMA, private health plans approved by Medicare became known as Medicare Advantage Plans. These plans are sometimes called "Part C" or "MA Plans.” The MMA also expanded Medicare to include an optional prescription drug benefit, “Part D,” which went into effect in 2006 (Medicare Part D, 2019).

The Diagnosis-Related Groups (DRG) reimbursement methodology replaced the previous payment method for all private hospitals with admissions on or after July 1, 2013, and for non-designated public hospitals with admissions on or after January 1, 2014 (Finkler et al., 2007).

A per diem payment method is used for payment of rehabilitation services and administrative day services rendered by DRG hospitals (Finkler et al., 2007).


In 1982, Congress mandated the creation of a prospective payment system (PPS) to control costs. Congress looked at the success of State rate regulation systems in controlling costs and mandated the implementation of a prospective payment system model that had been successful in several States. This system is a per-case reimbursement mechanism under which inpatient admission cases are divided into relatively homogeneous categories called DRGs. In this DRG prospective payment system, Medicare pays hospitals a flat rate per case for inpatient hospital care so that efficient hospitals are rewarded for their efficiency and inefficient hospitals have an incentive to become more efficient (Finkler et al., 2007).

The DRGs classify all human diseases according to the affected organ system, surgical procedures performed on patients, morbidity, and sex of the patient (Beattie, 2018). The classification also accounts for up to eight diagnoses in addition to the primary diagnosis, and up to six procedures performed during the patient’s stay. This reimbursement system was initially used in 1983 to deter rising costs within the Medicare system (Finkler et al., 2007).

Initially, DRGs and PPS were applied to care provided to care for Medicare patients in Acute Care Hospitals and was based on the projected case mix for the institution, adjusted for age. Medicaid and other payers along with private insurance companies adopted Medicare’s approach (Finkler et al., 2007).

Payment by Diagnosis Related Group (DRG) encourages access to care, improves transparency, rewards efficiency, and improves fairness by paying similarly across the board to hospitals providing similar care. Therefore, payment by DRG simplifies the payment process, encourages administrative efficiency, and basis payments on patient acuity which reflects the intensity of need (Finkler et al., 2007).

The DRG reimbursement rate is fixed and is calculated based on the law of averages. In the upcoming case study, Mitch’s diagnosis placed him into a specific reimbursement category. The cost of his services may have exceeded the reimbursement rate; for others, the cost of care will be less than the reimbursement rate. Thus, the law of averages applies (Finkler et al., 2007).

Medicare’s PPS is the mechanism used for transferring funds to hospitals based on the facility’s DRG profile. PPS provides a pre-determined amount of funds to the organization, based on the anticipated utilization by a defined group of patients (HMOs, 2018).

Initially, DRGs and PPS were used by the Federal Government to constrain Medicare costs. However, these processes were adopted first by Medicaid and then by private sector insurers. PPS effectively signaled the end of the “usual and customary” reimbursement system based on charges for care or service rather than on the cost of those services (HMOs, 2018).

Case Study

Mitch is a 52- year old man who was hit by a car and was taken via ambulance to a nearby trauma hospital. He was admitted with multiple broken limbs and organ injuries which involved multiple body systems. The physician diagnosed him for the most severe condition. The physician then recorded additional diagnosis and procedures used to treat the patient. This information was needed for reimbursements to be made to the hospital for the care and medications Mitch receives.


At first, Medicaid gave medical insurance to people getting money assistance. Today, a much larger group is covered:

  • Low-income families
  • Pregnant women
  • People of all ages with disabilities
  • People who need long-term care

States can tailor their Medicaid programs to serve the people in their state best, so there’s a wide variation in the services offered (History, 2018). Medicaid is funded jointly by the federal and state governments. The state’s per capita income determines the amount of federal matching funds.


Capitation is a payment arrangement for health care service providers such as physicians or nurse practitioners. It pays a physician or group of physicians a set amount for each enrolled person assigned to them, per a specific agreed upon period, whether that person seeks care or not. As a payment model, capitation offers opportunities for primary care physicians to influence the future of health care by improving the management of resources at a local level (Greene, 2018).

Organizations financed under capitation are expected to manage their business in such a way that they provide all needed and agreed-on care to patients covered under this plan. The capitation business model calls for risk to be spread within the group for the array of services that are agreed ahead if time. Generally, the care provided is “conservative” that is, the services provided are primarily intended to prevent illness, to maintain health, and to care for episodic acute care needs based on known or proven therapies (Greene, 2018).

When an organization provides care beyond the agreed upon plan, such organizations open themselves up for considerable risk. The regulations that govern managed care require that only the services agreed upon are given to patients and if an organization goes beyond the agreed upon services it can become in financial and regulatory jeopardy. The public finds this concept difficult to understand and often places the healthcare organization in a negative light (HMOs, 2018).

Health Maintenance Organization (HMOs), Preferred Provider Organizations (PPOs), and Medical Service Organizations (MSOs) are financed through Capitation (Greene, 2018).

During the budgeting process, various income streams need to be evaluated which includes capitated contracts. Healthcare organizations decide if a certain population group should be given discounted rates for services and that if it would be reasonable and profitable to do so. The organization needs to evaluate the potential financial risk before a decision is made.

Health Maintenance Organization (HMO)

The Health Maintenance Organization Act of 1973 required employers with 25 or more employees to offer federally certified HMO options if the employer offers traditional healthcare options (HMO, 2018).

An HMO covers care rendered by those doctors and other professionals who have agreed by contract to treat patients in accordance with the HMO's guidelines and restrictions in exchange for a steady stream of customers. HMOs cover emergency care regardless of the health care provider's contracted status.

The HMO is a type of medical insurance group that provides health services for a fixed annual fee. It is an organization that provides or arranges managed care for health insurance, self-funded health care benefit plans, individuals, and other entities, acting as a liaison with health care providers on a prepaid basis (HMO, 2018).

HMOs often require members to select a primary care physician (PCP), a doctor who acts as a "gatekeeper" to direct access to medical services but this is not always the case. PCPs are usually internists, pediatricians, family doctors, geriatricians, or general practitioners (GPs). Except in medical emergency situations, patients need a referral from the PCP to see a specialist or other doctor, and the gatekeeper cannot authorize that referral unless the HMO guidelines deem it necessary.

Some HMOs pay gatekeeper PCPs set fees for each defined medical procedure they provide to insured patients (fee-for-service) and then capitate specialists. This means that the HMO pays a set fee for each insured person's care, irrespective of which medical procedures the specialists perform to achieve that care. While others use the reverse arrangement. HMOs tend to have lower monthly premiums and lower costs-sharing (HMOs, 2018).

Prepaid group practice is considered the precursor to HMOs. The prepaid group practice type of health care plan was pioneered by the Ross-Loos Medical Group in California, U.S., in the 1920's and the Kaiser Permanente, in the 1930's and are the models for pre-paid group practice (Pew Research, 2017).

In this model, physicians are organized into a group practice, and there is one insuring agency. Insurers, employers, or others contract with the physician group to provide a predetermined range of benefits to a specific population for a fixed and agreed upon price. Providers in this group are at risk in that they were required to provide the full range of agreed-on services, regardless of whether the cost of benefits exceeded the established pre-arranged rate of payment (Pew Research, 2017).

In Medicaid terminology, a Pre-Paid Health Plan (PHP) is not the same as an HMO even though the terms are often used interchangeably in commercial managed care business. PHPs can contract on a capitated basis for a non-comprehensive set of services, which is often called partial capitation, or on a cost basis. Federally qualified health centers can also be designated as PHPs if they meet certain conditions (Pew Research, 2017).

Today there are several HMO Models which still exist. Some insurers are exiting HMO market and some excellent programs are becoming insolvent due to financial crisis (Reimvursement, 2018).

Independent or individual practice association (IPA) is an Open-panel system in which individual physicians or the practice association contract to provide care to enrolled members. In this system physicians retain their right to treat fee-for-service patients, however many IPAs have had to cease existence due to financial problems (Reimvursement, 2018).

Staff Model is when most of the physicians are on the staff of and derive their salary from the HMO. These physicians are the sole source of care for enrollees (Reimvursement, 2018).

Group Model is when a single, large multispecialty group is the sole or major source of care for enrollees and the contract is exclusive with one HMO. This is very similar to the staff model and often is labeled staff/group model (Reimvursement, 2018).

Network Model consists of two or more group practices which contract to care for most of those patients enrolled in the HMO plan. Usually, the physicians can care for fee-for-service patients as well as those patients from the HMO (Reimvursement, 2018).

Care from non-HMO providers generally is not covered except for emergencies occurring outside the HMO’s treatment area. HMO members are required to obtain all treatment from HMO physicians. The HMO will not pay for non-emergency care provided by a non-HMO physician. Additionally, there may be a strict definition of what constitutes an emergency. Those who choose to use non-HMO providers must pay out of pocket for those services since their own HMO often has the same services. When a consult is requested the Primary Physician must contact the consultant if it does not go against the HMO policies (Reimvursement, 2018).

Market Share for HMOs tends to be geographical and usually is in the metropolitan regions where there is a larger clientele which will utilize the HMO’s services. Initially, it was thought that HMOs would prevail over time except now many respected programs have collapsed due to the growing pessimism within the medical community and constant reimbursement conflicts under various managed care contracts (Reimvursement, 2018).

Social Health Maintenance Organization (SHMO)

The definition Medicare gives a Social Health Maintenance Organization (SHMO) is a health care insurance plan offering a complete range of coverage and benefits, including personal care services, hearing aids, dental care, eyeglasses, prescription drug, chronic care benefits, short-term nursing home care, and medical transportation services. An SHMO is more expensive, but enrollees are covered for far more services than Original Medicare (Schmidt, 2018).

The program for All-Inclusive Care for the Elderly falls under the auspices of the Health Care Financing Administration. Now Centers for Medicare and Medicaid Services (CMS) conducted demonstration projects to determine the feasibility of increasing Medicare long-term care benefits. Early findings showed that SHMOs were able to reduce hospitalization rates compared with the rates of non-SHMO Medicare population but, that the total costs were not necessarily reduced. All the experimental sites experienced substantial losses during the first three years of operation. By year 5, two projects broke even or had a modest gain and the other 2 suffered substantial losses.

The SHMO demonstration tests which were initiated in 1985 evaluated a model of Service Delivery which intended to integrate acute, chronic, and Long-Term Care. The Secretary of Health and Human Services submitted the final two evaluations to Congress within set timelines. The end results found that the demonstration reflected the following:

  • The demonstration did not consistently reduce hospital use or long-term nursing facility use
  • Did not consistently deliver superior quality care
  • Favorable effects on service use and use of preventative care were attributed to general characteristics of tightly organized managed care rather than to the features of the model being tested in the demonstration

A concern dealt with equity for plans and beneficiaries which concluded that all beneficiaries should be able to receive the same benefits package regardless of where they live and that certain plans should not be advantaged relative to other plans and requires that Medicare treat no one plan above another plan and all plans should be treated equally. The only difference would be if a payment differential was warranted based on the performance of an organization.

SHMOs are paid more than regular Medicare Plus Choice plans and are thus mandated to provide certain additional services. However, because both programs enroll similar types of members converting SHMOs to Medicare Plus Choice plans and paying them as Medicare Plus Choice plans is feasible. After the SHMOs demonstration, this process was encouraged.

Medicare does make risk-adjusted payments to Medicare Plus Choice plans to improve the accuracy of payments to plans that enroll a cross section of beneficiaries. However, some beneficiaries need certain payment adjustments based on the type of enrollee, such as those who are members of the frail population needing healthcare.

The Medicare Advantage Plan will probably have a payment increase in 2019 since the U.S. government proposed a 1.84% payment increase for those enrolled in Medicare Advantage for the fiscal year 2019. January data indicated that Medicare Advantage 2018 enrollment was 20.9 million elderly and disabled individuals and accounted for 35% of all Medicare enrollment (Medicare Part D, 2019).

Case Study

Tom, the chief financial advisor for Care Unlimited, was given a proposal by the benefits coordinator, Joyce, to provide discounted rates to a group whose population was composed of young, healthy members with low utilization and no chronicity. She wanted to negotiate a lower rate, preferably with no increase in co-pays. Tom had to determine if the organization could sustain the risk and if it would be feasible to agree to a steeper discounted rate. If he did agree in principle, then he still had to address the co-payment issue.

Naturally, Tom would not even consider changing the rates per member, per month for a moderate risk group, mixed in age, with a history of reasonable use of services. Joyce’s group was healthier and required fewer services at this time.

Joyce realized that today, in the healthcare market place “low rate, high deductible” products are becoming most popular with payers and members. The group that is most attractive to this are those who see themselves as being in terrific health and thus in need of fewer healthcare services. The downside is that things can unexpectedly change and that a catastrophic accident could result in an extremely high “co-pay.” These are the chances her group needed to be aware of and willing to take the risk.

Preferred Provider Organization (PPO)

Preferred Provider Organizations (PPO) developed due to the discontent people had with other models of managed care. Essentially, this integrated system served as a broker between the purchaser of healthcare and the provider. The PPO system enables its clients the option to use or not use the preferred providers on the healthcare plan. In-plan providers are considered most beneficial because of lower costs and greater benefits (HMOs, 2018).

Providers are paid a discounted fee for service and do not participate in financial risk sharing with this system. The downfall is that even though the client has a greater choice than many of the HMOs its ability to control costs is limited by the level of discount that can be negotiated with providers (HMOs, 2018).

Third-Party Payers

The third-party payer is an agent composed of the financial institution that pays the insurance claims. The first party is the patient; second party is the provider. Traditionally third-party payers do not provide direct care, and therefore they pay providers or provider groups to care for defined groups or individuals. Payment is for care, products, and services rendered.

The largest third-party payer is the U.S. government. It pays for Medicare and Medicaid at rates varying from state to state. These rates are based on contributions each state makes. Many Medicare and Medicaid are now negotiated as managed care contracts (Top Health Issues, 2018).

An Indemnity health insurance plan is a healthcare plan that allows you to choose the doctor, healthcare professional, hospital or service provider of “your choice” and gives you the greatest amount of flexibility and freedom in a health insurance plan. The insurance company pays most of the care the patient receives in an acute care facility and pays varying amounts for outpatient services based on the patient’s chosen healthcare plan (Araujo, 2017).

Case Study

Leslie is a young, healthy man with no health issues at this time and because of this, he chose to pay a high deductible plan in which he will pay out-of-pocket for most of his outpatient services within the year. This decision seems reasonable until an unexpected accident or illness occurs and then his co-pay would be devastatingly higher.

However, Harold who is a senior citizen with multiple health problems chose a lower deductible with a higher annual premium. In some cases, as in Harold’s, the premiums for people with pre-existing health conditions are prohibitively high, or they may not qualify for indemnity insurance at all, even if they are able to pay the higher premiums. There are still some well-known and major HMOs and PPOs that still do offer indemnity plans to those with high-risk chronic health conditions.

Children's Health Insurance Program (CHIP)

The Children’s Health Insurance Program (CHIP) was created in 1997 to give health insurance and preventive care to nearly 11 million, or 1 in 7, uninsured American children. Many of these children came from uninsured working families that earned too much to be eligible for Medicaid. All 50 states, the District of Columbia, and the territories have CHIP plans (Araujo, 2017).

Affordable Care Act (ACA)

“The 2010 Affordable Care Act (ACA) brought the Health Insurance Marketplace to a single place where consumers can apply for and enroll in private health insurance plans. It also made new ways to design and test how to pay for and deliver health care. Medicare and Medicaid have also been better coordinated to make sure people who have Medicare and Medicaid can get quality services (Araujo, 2017).

Medicare and Medicaid have existed for 50 years and have built a smarter and healthier system. These programs will continue as the standard bearers for coverage, quality and innovation in the American health care system. Though Medicare and Medicaid started as basic insurance programs for Americans who did not have health insurance, they’ve changed over the years to provide more and more Americans with access to the quality and affordable health care they need (History, 2018).

Indemnity Insurance

The traditional method of obtaining health insurance was through an Indemnity Insurance program. This healthcare plan allows an individual to choose the doctor, healthcare professional, hospital or service provider of their choice and gives them the greatest amount of flexibility and freedom in a health insurance plan. Indemnity insurance generally covers a predetermined percentage of acute care services regardless of the absolute charge for those services (Araujo, 2017).

Case Study

Jane and Bonnie both have indemnity insurance and pay the same monthly amount for their insurance based on the similarity in their risk factors. Jane needs a hysterectomy due to cancer and goes to Hospital A for surgery and care. Hospital A charges $2,000 for the care provided. Jane’s insurance carrier pays 80% of the bill or $1,600, and she then is responsible for the difference of $400.

Bonnie also needs a hysterectomy and choose Hospital B for her surgery and care. Hospital B charges $3,000. Her insurance also pays 80% of the bill, or $2,400. Bonnies must pay the difference out of her pocket which was $600.

Both patients had “their choice of hospitals,” and based on the fact each one’s insurance paid 80% they had to pay out of their pocket the 20%.

Today, there are numerous varieties of indemnity insurance plans and in a “tight economy” employers are less willing to pay for high insurance premiums for their employees and thus more people are put in the position of assuming responsibility for their own health insurance coverage. Therefore, low premiums, high deductible plans are purchased by more individuals (Araujo, 2017).


The purpose of marketing is to identify customer needs and meet them in a way that returns value to the organization. Today the fundamentals to marketing still include the four P approach (Our take, 2018):

  1. Product
  2. Pricing
  3. Place
  4. Promoting

Effective marketing orientation is known as “customer orientation” focuses on energy, identifying the wants and needs of consumers, and on delivering services that meet their needs.

Healthcare establishments still use “market analysis” to determine potential customers, their needs, the products and services that are important to targeted groups along with the status and techniques used by their competitors (benchmarking) and what price the market will bear. The organization’s “market share” is the percentage of the total available market for product or service that is captured by the organization or the producer.

A “market mix” is the organization’s individualized blend of marketing tools, variety and scope of products offered, along with specialized tactics to achieve its goals. “Market penetration” refers to how well the organization has exposed its services to potential users or buyers. “Market share” is that portion of the market that is supplied by the organization such as how many patients does an organization provide services for within a specific time frame.

Advertising and the Media

Advertising is expensive and creating “brand recognition” is vital along with “brand loyalty.” Due to the costs of advertising, many organizations take advantage of “free” publicity and providing the public with interest stories which shed a positive image of their services. Many hospitals and healthcare systems have an ongoing presence on the internet (Greene, 2018).

Most hospitals using the internet for marketing subscribe to the eHealth Code of Ethics. The goal of the eHealth Code of Ethics is to ensure that people worldwide can confidently and with a full understanding of known risks realize the potential of the Internet in managing their own health and the health of those in their care (Medicare Part D, 2019).

Today the U.S. healthcare industry's ongoing transformation creates both challenges and opportunities for marketers. This transition is driven by two variables:

  1. One is the evolution from a fee-for-service payment system to a healthcare delivery model based on transparency, quality outcomes and patient satisfaction.
  2. The second is the rise of the empowered healthcare consumer. These changes affect both the "how" and the "who" of medical marketing strategies. As a result, the role of physicians as decision-makers is undergoing a transformation (Greene, 2018).

Healthcare Marketers

Healthcare marketers continue to adapt to the new reality brought about by the shift to payments based on outcomes, increasing transparency, and an empowered healthcare consumer. We see growth in marketing budgets over the lows of 2013. The largest increases are going to digital marketing tactics (Healthcare Marketing Trends, 2017). They realize the need to recognize patients as value-conscious shoppers and have had to reshape ad strategies. Emphasis is on educating patients and engaging them in their growing role as healthcare consumers (Greene, 2018).

Patients are on the hook for an increasing portion of their healthcare costs given the steady increase in health plan deductibles, copays and co-insurance. That has given them a stronger financial incentive to shop around for their providers. Providers want to convince these consumers that they are the highest-quality and most affordable option (Healthcare Marketing Trends, 2017).

Many organizations have developed their own surveys usually aimed at brand recognition or identification. Professional and well-structured focus groups provide organizations with useful information allowing the organization to better target subsequent survey activities.

Organizations have an image that they want to project that must be believable, honest, appealing, and sustainable. Those individuals that already part of the organization or who utilize its services should be loyal to the organization. The goal is to increase the target markets. At the executive level, there needs to be a “buy-in” by all which ensures that everyone is “on board” and improves the public persona (Greene, 2018).

Public Relations

Public Relations is an ongoing function of many organizations. People who are public relation professionals must interface with the public, press, community constituents, law enforcement, regulatory bodies, employees, patients and families. This requires them to know when to be enthusiastic, positive, respectful and caring (Sullivan, 2018).

Another function is to do “damage control” and absorb, deflect negative comments while maintaining professional and personal dignity, and being respectful to others, even those who are detractors (Rudio, 2018).

Shifts in Treatment Decision Making

Five Key trends take decision-making power away from physicians (Healthcare Marketing Trends, 2017):

  1. Doctors Becoming Employees
  2. Consumers Becoming Avid Researchers
  3. Marketers Targeting Consumers and Payers
  4. Digital Channels Overtaking Traditional Marketing
  5. Digital Content is Key to the Decision Process

Doctors Becoming Employees

Due to the changes in regulation which is a result of the Affordable Care Act of 2010, hospitals have been buying up physician practices at an accelerated rate. Integrated systems are better able to coordinate care among physicians, hospitals and other parts of the healthcare delivery system. Doctors are becoming employees (Healthcare Marketing Trends, 2017).

According to a Jackson Healthcare survey of physicians (Healthcare Marketing Trends, 2017):

  • 21% of physicians in all specialties are employed by a hospital
  • 14% are employed in a single or multi-specialty owned by a hospital
  • 14% are employed by a privately owned single or multi-specialty clinic
  • 9% are employed as independent contractors or Locums

Now that physicians have become employees they lose their ability to make final decisions which means when it comes to buying and selling medical product and services they must rely on the organization they belong to. Now they work with others involved in the purchasing process. However, they still play a key role as advocates and others make the final purchasing decisions.

Consumers Becoming Avid Researchers

The internet has greatly influenced today’s healthcare consumer. No longer is the healthcare consumer content to accept what a doctor tells them blindly. They do their homework before visiting a doctor. Many people research their conditions and treatment options after visiting a doctor as well. They see healthcare as a collaboration between themselves and their doctors. They take responsibility for their health and the decisions that affect it. The doctor no longer has the only say on treatment, hospitals, medications, etc.

According to Pew Research:

  • One in three American adults has gone online to figure out a medical condition.
  • 72% of internet users say they looked online for health information within the past year.
  • 47% of internet users search for information about doctors or other health professionals.
  • 38% of internet users search for information about hospitals and other medical facilities.

The most common research topics are specific diseases or conditions; treatments or procedures; and doctors or other health professionals.

To summarize according to Pew Research consumer marketing tactics, the greatest growth is taking place in mobile/tablet apps, social media and digital ads. Hospital providers are also shifting to digital channels to market to healthcare consumers.

Marketers Targeting Consumers and Payers

Constant changes to the U.S. Healthcare delivery environment affect healthcare marketers. The major players/groups include healthcare consumers, providers, and payers. These groups constitute the primary “who,” depending on the product or service (Healthcare Marketing Trends, 2017).

The MM&M /Ogilvy CommonHealth Healthcare Marketers Trend Report 2016 covers pharmaceutical, biotech, medical devices, and diagnostic companies. Physicians continue to be the most important group for these companies with 93% of respondents stating that they belonged to their leading three target groups. They were followed by payers and patients (consumers) with each about 56% of respondents. It’s not surprising that doctors continue to be the primary marketing target. After all, they still buy, prescribe, recommend and advocate products and services.

What is significant is that payers and consumers were picked by the same number of respondents as a target group, ahead of other providers, shareholders and advocacy groups. This may reflect the new reality of decision making in healthcare. Doctor decision making is gradually shrinking as decision making shifts to payers and healthcare consumers. The trend is for healthcare marketers to increasingly target consumers and payers but keeping doctors as the underpinning for their overall marketing strategy.

Digital Channels Overtaking Traditional Marketing

Digital channels are overtaking traditional marketing channels. This is true for all marketing sectors, including provider-to-consumer marketing. The MM&M study cited above shows that the greatest growth for the pharmaceutical, diagnostics, biotech and medical device marketing budgets is taking place in social media, mobile/tablet apps and digital sales materials (Healthcare Marketing Trends, 2017). For consumer marketing tactics, the greatest growth is taking place in mobile/tablet apps, social media and digital ads. Hospital providers are also shifting to digital channels to market to healthcare consumers.

According to Think with Google’s The Digital Journey to Wellness: Hospital Selection:

  • 77% of patients use search engines prior to booking appointments.
  • Search drives nearly three times as many visitors to hospital sites, compared to visitors from other referral sites.
  • 44% of patients who research hospitals on a mobile device schedule an appointment.
  • Before the moment of conversion, patients typically search on symptoms and condition terms.

Digital Content is Key to the Decision Process

Prior to booking an appointment:

  • 77% of patients used search
  • 83% used hospital sites
  • 54% used health insurance company sites
  • 50% used health information sites
  • 26% used consumer-generated reviews

Nursing Image

The public’s perception of nurses has changed through the ages, but media images on television shows have diminished its image when in fact there is no doubt that nursing is a profession with the essential ingredients of accountability and autonomy. Nurses are not just to provide care and comfort.

Today the image of nurses is evolving. Nurses fill seats in the House of Representatives, and news stations use nurses as resources for their stories on healthcare issues. These opportunities allow nurses to represent the reality of nursing and to show how the profession contributes to health care.

There are corporations and foundations that help to promote the image and value of nursing to a variety of audiences in the hope of alleviating the nursing shortage and have created a website to help promote the profession.

The current and ongoing nurse shortage allows nurses to demonstrate the complexity, variety, and significance of the many roles they had to assume.

In Healthcare facilities today, there are nurses who have become Advanced Registered Nurse Practitioners (ARNPs).

An ARNP is licensed to do some of the following procedures (ARNP, 2018):

  • Examine patients and establish diagnoses by patient history, physical examination and other assessments
  • Admit, manage and discharge patients to and from health care facilities
  • Order, collect, perform and interpret diagnostic tests
  • Manage health care by identifying, developing, implementing and evaluating a plan of care and treatment for patients
  • Refer patients to other health care providers, services or facilities
  • Prescribe therapies and medical equipment
  • Prescribe medications when necessary


Healthcare economics is not just a title for a program for Nurse Executives, Nurse Managers, department heads and leaders. Those in key positions must become knowledgeable of how budgets are derived, establish accountability, monitor variances, and effectively manage expenses both planned and unforeseen. It is important that those responsible for their budgets are aware of what forces influence the care, cost, and safe, quality treatment of our patients nationwide and worldwide.

Cost containment is vital so that healthcare organizations can survive while providing the services they have advertised. Understanding the information in this course can help us all realize why healthcare is a trillion-dollar business and that we must keep abreast of the changes and use technology to improve the services that are needed by our patients and their families.

Managers who lack the financial educational background should develop working relationships with analysts and controllers in the finance department and take advantage of educational programs to expand their knowledge base thus enhancing their fiscal management skills.

This course is just the beginning and will assist those in power who are involved with deciding the direction you and your organization will go now and in the future.

Select one of the following methods to complete this course.

Take TestPass an exam testing your knowledge of the course material.
Reflect on Practice ImpactDescribe how this course will impact your practice.   (No Test)

Implicit Bias Statement

CEUFast, Inc. is committed to furthering diversity, equity, and inclusion (DEI). While reflecting on this course content, CEUFast, Inc. would like you to consider your individual perspective and question your own biases. Remember, implicit bias is a form of bias that impacts our practice as healthcare professionals. Implicit bias occurs when we have automatic prejudices, judgments, and/or a general attitude towards a person or a group of people based on associated stereotypes we have formed over time. These automatic thoughts occur without our conscious knowledge and without our intentional desire to discriminate. The concern with implicit bias is that this can impact our actions and decisions with our workplace leadership, colleagues, and even our patients. While it is our universal goal to treat everyone equally, our implicit biases can influence our interactions, assessments, communication, prioritization, and decision-making concerning patients, which can ultimately adversely impact health outcomes. It is important to keep this in mind in order to intentionally work to self-identify our own risk areas where our implicit biases might influence our behaviors. Together, we can cease perpetuating stereotypes and remind each other to remain mindful to help avoid reacting according to biases that are contrary to our conscious beliefs and values.


  • 2019 Medicare Part D Drug Benefit: - Retrieved September 15, 2018. Visit Source.
  • Araujo, Mila; 4 Important Facts About Indemnity Health Insurance updated December 26, 2017. Retrieved September 15, 2018. Visit Source.
  • Archimedes - Healthcare Modeling | LinkedIn Retrieved September 16, 2018. Visit Source.
  • Beattie, L. California.Tightening Nurse-to-Patient Ratios in 2008. Retrieved September 17, 2018. Visit Source.
  • Biomathematical and Biomechanical Modeling of …Retrieved September 16, 2018. Visit Source.
  • Cross, V. The Role of Variance Analysis in Business. Updated June 28, 2018. Retrieved September 30, 2018. Visit Source.
  • Danna, D. Learning and mastering the operating budget/ 2018. Retrieved September 3, 2018. Visit Source.
  • Finkler, SA, Kovner CT, Jones CB. Financial Management for Nurse Managers and Executives. 3rd ed. St Louis, MO: Saunders Elsevier; 2007.
  • Greene, J. Healthcare marketers reshape ad strategies. Retrieved September 18, 2018. Visit Source.
  • Health Maintenance Organization (HMO) | Retrieved September 14, 2018. Visit Source.
  • History - Centers for Medicare & Medicaid Services Retrieved September 15, 2018. Visit Source.
  • Healthcare Marketing Trends to Watch in 2017 | DMN3 Retrieved September 21, 2018. Visit Source.
  • HMOs, PPOs, and POS Plans - Retrieved September 14, 2018. Visit Source.
  • Muller, R., Karsten, M.; Do you speak finance? Retrieved September 2, 2018 from Nursing Management (Springhouse): March 2012 - Volume 43 - Issue 3 - p 50–54. Visit Source.
  • Our Take on Healthcare Marketing Trends That Matter …Retrieved September 21, 2018. Visit Source.
  • Pew Research:.5 Healthcare Marketing Trends to Watch in 2017 | DMN3. Retrieved September 18, 2018. Visit Source.
  • Reimbursement | Healthcare Finance News. 2018. Retrieved September 28, 2018. Visit Source.
  • Rundio, Al. The Nurse Manager’s Guide to Budgeting & Finance. Kindle Edition. Retrieved September 2, 2018. Sigma Theta Tau International.
  • The Real Public Perception of Nurses | Journal of Nursing. Retrieved September 20, 2018. Visit Source.
  • Top health issues 2018: Social determinants: PwC Retrieved September 15, 2018. Visit Source.
  • Schmidt, M. Operating Expense OPEX Defined, Explained as Non Capital Retrieved September 2, 2018. Visit Source.
  • Sullivan, E. Effective Leadership and Management in Nursing -Retrieved September 20, 2018. Visit Source.
  • What is an ARNP? Advanced Registered Nurse Practitioner Retrieved September 20, 2018. Visit Source.