Contract-Based budgeting in health care: A study of the institutional processes of accounting change

Abstract

The managed care system is a provider–purchaser model, in which the hospitals sell their output at a predetermined price to public sector purchasers. The purpose of contract-based budgeting (CBB) is to control the flow of resources in this system so that what is budgeted as revenue in the hospitals is budgeted as an expense in the municipalities. This study explores the process of how budgetary bias prevails in municipal and hospital district budgets despite the introduction of CBB. The data, which consists of budgetary documents and interviews, is informed by the framework by Burns and Scapens (Management Accounting Research, 11(1), pp. 3–25, 2000). The results obtained indicate that the changes in budgeting practices were not revolutionary, but incorporated the prevailing institutionalised practices into new ones. It also appears that the municipal frame budgets, conservative revenue estimation and the strict requirements for budgetary balance have a great potential to resist demands of change originating from outside.

Acknowledgements

The authors would like to acknowledge the helpful comments on the earlier versions of the paper offered by Lasse Oulasvirta and the PSA parallel session participants of the 25th Annual Congress of the European Accounting Association in Copenhagen, Denmark, 25–27 April 2002.

Notes

1. In the block contract, the service provider gets a lump-sum reimbursement regardless of the actual volume of patients treated. In other words, the service provider also carries much of the financial risk, if service demand should exceed the original estimate. Should this be the case, the provider, that is, the hospital, has options of either showing a deficit or not admitting part of the patients (Kokko, 1995; Punkari et al., 1995; Punkari, 1996; Raftery et al., 1996).

2. In addition to block contracts and cost and volume contracts, there is also a third possible form of contractual management, the cost per case contract, but this is not in use in the public sector (see, e.g. Punkari et al., 1995; Punkari, 1996).

3. See also Hood (1995) for the basic concepts for the issue.

4. In public sector settings the majority of management accounting related literature has drawn on new institutional sociology (NIS; see Meyer and Rowan, 1977; DiMaggio and Powell, 1991; Scott, 1995), for example, Broadbent et al. (1991), Lapsley (1992), Preston (1992), Preston et al. (1992), Covaleski et al. (1993), Pettersen (1995, 1999, 2001), Llewellyn (1998), Kurunmäki (1999a, 2004), Aidemark (2001), Modell (2001), Northcott and Llewellyn (2003, 2005). It is suggested in NIS research that institutional forces are particularly strong in the public sector environment, whereas private enterprises are possibly more subject to market forces. The emphasis in NIS-related literature is on macro institutions, and outside institutional forces shaping the organisations' accounting systems. Recently, NIS-oriented research in management accounting has also been applied to studying private sector organisations (e.g. Granlund and Malmi, 2002; Jones and Dugdale, 2002; see also Carruthers, 1995; Granlund and Lukka, 1998). To date there has been very little old institutional economics (OIE) oriented management accounting research in public sector settings.

5. The Finnish Speciality Health Care Act grants some ‘subjective rights’ to citizens, for example, that hospitals must provide care to patients in a critical condition. In addition, a patient may seek care from another European Union country if care is not provided in reasonable time, although this is a new phenomenon and so far of little overall importance.

6. Some mimetic institutional pressures may also have contributed to the adoption of CBB since reference was made to earlier adoption of managed care in the Helsinki region (see Hyks-toimikunta, 1995).

7. A health economics study confirms this. Koivukangas et al. (2000) investigated the main variables influencing Finnish health care spending. The explanatory variables behind health care spending were found to be not demand-related (such as population ageing) but rather related to the municipal economic situation (such as the annual margin of the municipal accounts).

8. Conservative estimation of revenues is deeply embedded in the Finnish public sector accounting textbooks, which, no doubt, were studied by most of the administrative personnel in the sub-cases. For example, the classic Finnish textbook on municipal fiscal management by Hosiaisluoma (1969) strongly recommends that revenues be conservatively estimated and if actual revenues exceed budgeted figures, an additional budget can and should be prepared.

9. Eight such joint purchasing committees operated inside the hospital district area.

10. See, for example, Cyert and March (1963) and Hofstede (1984) for the positive effect of budgetary bias.

11. The offices of the chief of administration and the chief physician were physically located on opposite sides of the street.

12. In practice, most of the hospital districts in Finland produce a deficit, that is, their annual income statements show a loss.

13. In an overspending situation, a provider can only charge for the variable costs of the additional services provided. In an underspending situation, the provider is allowed to charge the fixed costs of services purchased but not actually used.

14. One example of such an action was the employment of an emergency room gatekeeper, whose purpose was to ensure that the citizens would not excessively use the university hospital's emergency room, but would get themselves treated in the municipal health centres' emergency rooms.

15. This means that willingness to pay may in fact be one criterion for allocating the costs of health care services (see, e.g. Belkaoui, 1991, for allocation criteria).