What is zero-based budgeting, and why might it be used in healthcare?

• A. A budgeting approach that starts from zero for each line item and requires justification; can drive cost containment and prioritization.
• B. Budgeting that ignores fixed costs.
• C. Budgeting based on historical expenditures with minor adjustments.
• D. Budgeting that assumes zero growth and reallocates only within existing budgets.

Answer: (A)

Zero-based budgeting starts from a clean slate for each budgeting cycle, with every expense needing justification as if it were new. Instead of carrying forward last year’s numbers and making only minor adjustments, every line item is rebuilt from zero, accompanied by a decision package that explains the need, cost, expected benefits, and alternatives. This forces deliberate prioritization and reveals where funds are being spent on activities that may no longer align with current goals.

In healthcare, this approach is useful because costs are high and resource limits are tight, while priorities can shift with new quality targets, regulatory changes, and shifts in patient needs. By requiring rigorous justification for every item, zero-based budgeting helps identify waste, redundant programs, or low-value activities and reallocates resources toward high-impact areas—such as patient safety, outcomes, and efficient care delivery. It can drive stronger cost containment and clearer alignment of spending with strategic objectives, though it requires more time, disciplined processes, and clear criteria to evaluate and compare many potential investments. Other budgeting methods tend to carry over historical spend, ignore full costs, or assume growth, which can perpetuate inefficiencies.