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Common Misconceptions About PBMA

Even though PBMA has been around longer than smart phones, DVDs and the World Wide Web, there remains some uncertainty about its purpose and how it works to help manage an organization’s budget. So, to set the record straight, we’ve compiled and responded to the most common misconceptions about PBMA in a quick and easy listing that will provide you with more information on this highly effective decision-making tool.

Misconception #1: “PBMA is a cost saving process”

PBMA is a tool designed to guide all resource allocation decisions. PBMA is associated with deficit situations because it is used most often in this context, at least since the fiscal crisis of 2008. This is not because PBMA is a cost cutting process per se but because in a budget deficit environment, resource allocation decisions are more difficult, and certainly more scrutinized, which often leads decision-makers to seek a more formal process than what is already in place. In fact, PBMA can help with resource allocation decisions irrespective of the financial situation. Ideally, PBMA is used on an on-going basis regardless of the specific fiscal situation in order to move an organization closer to its stated objectives.

Misconception #2: “PBMA is a tool designed to help with one-time challenges”

PBMA can help with one-time challenges such as an immediate financial challenge or a change to the organization objectives. PBMA is often used to help with such challenges because one-time challenges typically heighten the focus on resource allocation decisions (i.e., what funding changes will be made to balance the budget or to address the new objectives). In fact, the features of PBMA that make it a desirable tool in times of emergency also make it a desirable tool at any time. Ideally, organizations will rely on the same tool, and the same decision criteria, when looking for short term solutions to a budget gap as well as longer term solutions for re-allocating resources to meet the most need or achieve the greatest health gain.

In essence, what PMBA helps an organization achieve, year-over-year, is a balanced budget that reflects its strategic goals and objectives.

Misconception #3: “PBMA is extremely time-consuming and doesn’t work without all relevant data.”

PBMA facilitates evidence-based decision-making. This does not mean that the process can be implemented only when all information is available and therefore involves enormous demands for data. In fact, in any organization, resource allocation decisions are being made continuously with the information that is at hand. PBMA can be implemented with this same information and further, it will improve the rigor and transparency in how decisions are being made. Ideally, decision-makers will draw on the best data available but will not be hampered when presented with imperfect information. PBMA provides a straightforward approach for decision-making regardless of data constraints.

For more background reading and references, click here.

PBMA doesn’t just help balance your budget, it maximizes every dollar spent.

Program Budgeting and Marginal Analysis (PBMA) is a framework designed to guide resource allocation decisions in a manner that is explicit, rigorous and transparent. PBMA has been around for over 30 years and has been applied to many fields, including application in over 150 health care organizations worldwide. Typically, PBMA is used where resource allocation decisions are based on a multitude of factors or objectives, and over time the approach has become much more user-friendly and a better fit with the realities that decision makers face.

Marginal Analysis Simplified

Marginal analysis refers to the overall approach to funding decisions embedded in the process. Marginal analysis looks at incremental changes, addition or subtraction. This approach can be contrasted with a ‘program evaluation’ where entire programs or services are assessed. Marginal analysis is quite pragmatic as funding decisions are often about volume levels and not about entire programs or services. It should be noted that ‘marginal analysis’ does not refer to an analysis of small changes but refers to incremental changes. In the extreme, an incremental change could be an entire program or site, but often it will be a part of a program or site. The incremental changes to be considered come from the organization itself, that is, from the staff managing and delivering the services. The best way to understand what these possible changes could be is to view them as the response that would be provided by managers and staff to the question: what action would you take if your budget was increased (investment changes) or decreased (disinvestment changes) by a given percentage or amount? It should be noted that while the process is fundamentally about shifting resources to best meet the organizational objectives within a certain budget, it can also apply only to investments or only to disinvestments, if desired.

Measuring Impact Against Strategic Objectives

Once proposals for change are developed, their potential impact on the ability of the organization or the decision-making unit to meet its objectives is assessed. The impact of any possible change (disinvestment or investment) is measured against a set of criteria developed specifically for this process. These criteria link directly with the strategic priorities and objectives of the organization or of the given decision-making unit. The assessment is done on the same basis across all areas of the organization involved in the process. Assessments of possible changes in any one area are therefore comparable to assessments of changes in other areas, that is, proposals from across the organization can be ranked in two lists: one for investments and one for disinvestments.

Ability to Compare Across Services and Programs

Thinking about the margin does not only apply to the development of proposals for changes but also to the comparison of ranked investment and disinvestment proposals. With marginal analysis, a decision maker assesses the benefit lost associated with a disinvestment, to the benefit gained associated with an investment. Such comparisons lead to recommendations on re-allocation of funding. In this context, the highest benefit gain estimate is an estimate of opportunity cost, or an estimate of what is foregone by allocating resources as they are. In addition to the fundamental economic principles of opportunity cost and the margin, the best implementations of PBMA also incorporate key ethical conditions to ensure that the process is administered in a fair and transparent manner.

For more background reading and references, click here.