Financial diss and assnt7

5 APPROACHES TO EFFECTIVE BUDGETING AND FORECASTING

IN HEALTHCARE

A publication from:

5 APPROACHES TO EFFECTIVE BUDGETING AND FORECASTING IN HEALTHCARE / 2

Much has been written about the impact that healthcare industry reform is having on hospitals and health systems. With the challenge of reduced reimbursements looming, Finance teams understand that realizing the bottom-line benefits of cost containment and process improvement initiatives is becoming a business imperative. However, as organizations critically evaluate their financial management capabilities, many realize they have ineffective approaches designed around antiquated tools that aren’t up to the task.

Sound familiar? Does the notion of redesigning your planning processes sound daunting? The five approaches in this ebook represent a framework that can improve the efficiency and accuracy of your budgeting and forecasting processes.

INTRODUCTION Healthcare Finance in the Post-Reform Era

www.kaufmanhall.com

5 APPROACHES TO EFFECTIVE BUDGETING AND FORECASTING IN HEALTHCARE / 3

Disconnected Planning Processes As modeling uncertainty becomes more common, it is increasingly important to intelligently and efficiently link multi-year, monthly forecasting and annual budgeting models. However, organizations that rely on spreadsheet- based, stand-alone financial models struggle to modify assumptions and evaluate the impact of changes across plans -- at an entity and operational (by dept.) level -- because it is too resource-intensive and error-prone.

Fragmented Data Across Financial and Patient-Centric Sources Finance is being asked to produce more sophisticated financial models. Data to support decisions are increasingly being sourced from data not contained in the General Ledger to support volume, workload, revenue, and labor planning. Most organizations lack a common platform to effectively manage this data, adding increased complexity and inefficiencies to the planning process.

OBSTACLES TO EFFECTIVE PLANNING A Lack of Process and Data Integration

www.kaufmanhall.com

5 APPROACHES TO EFFECTIVE BUDGETING AND FORECASTING IN HEALTHCARE / 4

Best practices are often advertised as "silver bullets." As Finance teams look to re-engineer inefficient and ineffective budgeting and planning methodologies and tools, they realize that one approach can’t be right for every hospital or healthcare provider.

In reality, a "best practice" planning methodology can’t be hard-wired and applied to every organization. An optimal process is often a function of

5 APPROACHES TO EFFECTIVE BUDGETING AND FORECASTING IN HEALTHCARE

an organization's culture or even the competitiveness of its market. This publication describes five effective budgeting and forecasting approaches used by successful healthcare provider organizations.

www.kaufmanhall.com

5 APPROACHES TO EFFECTIVE BUDGETING AND FORECASTING IN HEALTHCARE / 5

1 Align rolling forecasts, multi- year plans, and detailed budgets 2

Embrace statistically- driven approaches to enable efficient "what-if" modeling

3 Incorporate Service Line Analytics to refine projections 4

Provide cross- departmental initiative-based modeling

5 Promote feedback loop with management and executives via reporting

www.kaufmanhall.com

5 APPROACHES TO EFFECTIVE BUDGETING AND FORECASTING IN HEALTHCARE / 6

Planning across multiple time horizons has becoming increasingly important due to industry reform. Historical run-rates are no longer the best indicator of future performance, driving the need for more dynamic forecasting and "what-if" modeling. Aligning plans, models, and budgets is imperative.

1 Align rolling forecasts, multi-year plans, and detailed budgets • Detailed Budgets – When done effectively,

budgeting gives each Manager visibility into how baseline projections and new initiatives are impacting his/her financial plan. Refinements are made collaboratively with each department, resulting in a plan that promotes ownership of the � numbers.

All of these plans must be kept in sync using the same assumptions to provide a holistic������ � �����short- and long-term outlook���� that supports informed decisions.

• Rolling Forecasts – Actual and monthly projections for 6-12 quarters � � � � ����� � � �provide a trended view of performance, typically represented at an entity level. The model helps assess current realities that will influence longer-range (multi-year) projections, as well as detailed operational plans.

• Multi-Year Plans – Multi-year planning enables orgranizations to understand not only the impact external market business drivers will have on bottom-line results, but also internal initiatives. Baseline assumptions (current outlook 3-5 years), combined with independently modeled initiatives projecting the impact of targeted growth strategies or cost containment efforts, can be used to evaluate different "scenarios�."

www.kaufmanhall.com

5 APPROACHES TO EFFECTIVE BUDGETING AND FORECASTING IN HEALTHCARE / 7

Multi-Year Planning Model scenarios to assess the impact of market and

volume drivers on bottom- line results.

(Outlook - 3-5 years)

Rolling Forecast Evaluate and trend actual

performance against defined plans, project outcomes given current situation.

(Outlook – 6-12 quarters)

Detailed Budgeting Translate defined strategies

into operational budgets and plans.

(Outlook – 12 months)

1 Align rolling forecasts, multi-year plans, and detailed budgets

5 APPROACHES TO EFFECTIVE BUDGETING AND FORECASTING IN HEALTHCARE / 8

When organizations are leveraging stand-alone spreadsheet models, or using "bottoms-up" approaches�, the ���models are not � � � � ��easily adjusted to reflect impacts to varying volume and rate assumptions.

Establishing the proper statistical relationships to adjust hospital drivers to "flex" volume, workload, revenue, and departmental plans is essential to efficient planning in healthcare. Assumptions related to global volumes, reimbursement rates, inflation factors, labor rates, and efficiency targets should cascade down to "flex" revenue and expense plans. 2

Embrace statistically- driven approaches to enable efficient "what-if" modeling

When evolving to a driver-based model, the following are key design considerations related to data flow and "points of control" in the model:

 Identify with each department the statistic that represents its workload intensity (Acuity Adjusted Patient Days, Weighted RVUs)

 Establish the relationship each Department Workload stat has to Global Drivers (Acute Admissions)

 � � �Use intuitive � � calculation methods ����that enable managers �to clearly see impact of volume and rate changes on variable dollars/hours

 In Nursing floors, accommodate �differences in staffing various s � � � � � � � � �hifts so that changes in volume adjust daily census and flex hours using staffing grids �� � � � � � � � � � � � � � �

www.kaufmanhall.com

5 APPROACHES TO EFFECTIVE BUDGETING AND FORECASTING IN HEALTHCARE / 9

2 Embrace statistically-driven approaches to enable efficient "what-if" modeling

Multiple Versions and Scenarios

Global Plan Drivers

Consolidated Plan

Net Revenue Modeling

Departmental Planning

Inpatient

Outpatient

Other Deductions

• Admissions • Visits • Days

• Inflation • Efficiency • Workload

Updates to Gross

Charges

Charges

Staffing

Other Expenses

Management Reporting

• Plan to Actual • Flexible Budget • Rate/Volume • Outlier Variances • Commentary

General Ledger

Patient

Single Unified Database

Employee

Streamline Processes Consolidate data from financial, payroll, and patient-centric sources

Improve Accuracy A statistically-driven approach enables the efficient flow through of volume/rate changes

Promote Buy-in Efficiently consolidate results of baseline projections and add-on initiatives

Drive Accountability Effective management reporting can show volume adjusted plans, and identify controllable expenses

4 Key Improvement Initiatives:

5 APPROACHES TO EFFECTIVE BUDGETING AND FORECASTING IN HEALTHCARE / 10

More and more organizations are looking to incorporate patient-centric data into their planning models to drive more accurate volume and workload projections. Resulting plans more accurately reflect and offer transparency to the impact a service line’s growth would have on department budgets and net revenue. 3

Incorporate Service Line Analytics to refine projections

 Consistent use of service line volume, cost, and profit measures across multi- year plans, forecasts, and budgeting models aligns key functions such as market planning, physician recruitment, and revenue forecasting

 Historical or modeled department utilization profiles by service line can be developed to project workload statistics

 Such analytics integrate the volume planning with revenue planning so future reimbursement rates can be modeled more precisely by clinical population

 With volume and revenue plans based on service line categories, variances to the overall volume and mix of cases are better explained in plan-to-actual

reporting

Why incorporate Service Line Analytics into your planning model?

www.kaufmanhall.com

5 APPROACHES TO EFFECTIVE BUDGETING AND FORECASTING IN HEALTHCARE / 11

Adjustments for volume and growth made at Service Line

Level

For each "node," payer and department workload analytics are

derived

Impact of volume projections flows

through revenue and workload plans

Budgets are then finalized with rate and

bottoms-up adjustments

4500 -Radiology

IP Orthopedics

Commercial

IP Orthopedics

Total Hips

Knee Replacement

IP Cardiac

Heart Failure

Knees

IP Cardiac

IP Orthopedics

IP Cardiac

4800 –Laboratory

4500 -Radiology

Utilization Profile

Medicare

Commercial

Payer Profile

NET REVENUE PLAN

CONSOLIDATED RESULTS

DEPARTMENTAL BUDGETS

Revenue Drivers (Payer Volumes, Historical Rates)

Department Workload (By Service Line)

Derives the impact of each additional case

3 Incorporate Service Line Analytics to refine projections

Volume Projections

5 APPROACHES TO EFFECTIVE BUDGETING AND FORECASTING IN HEALTHCARE / 12

For most organizations, the applications and frameworks in place to forecast hospital budgets were structured at a Department level (i.e., Lab, Radiology), or in the case of multi-year plans, projections are performed at the entity level.

How are new planning realities influencing planning models?

4 Provide cross- departmental initiative-based modeling

Baseline and Initiatives-Based Planning – Budgets and multi-year plans are comprised of a baseline set of assumptions, based upon business as usual given known market and industry-related variables. More than one baseline set of assumptions might be needed (i.e., conservative, aggressive). Additionally, initiatives modeled separately allow organizations to evaluate how directed efforts related to growth, cost containment, or process improvement will (or should) impact functional departments.

What-if Modeling – To evaluate the best course of action, Finance teams need to evaluate which combination of baseline assumptions and initiatives offer the best "go-forward" plan. The ability to "turn on and off" the impact of these projections in consolidated reporting becomes essential.

www.kaufmanhall.com

5 APPROACHES TO EFFECTIVE BUDGETING AND FORECASTING IN HEALTHCARE / 13

ANALYSIS CONTAINS:

• Income Statement • Balance Sheet • Cash Flow • Key Ratios

Consolidated Results

Base Case Given current trends, what is our

financial outlook 3-10 years?

Initiatives What is the impact of various growth

and cost containment initiatives?

Scenarios To evaluate go-forward plans, what is the

financial impact of different strategies?

• Re-Design ER to Improve Patient Flow Through

• Expand Cardiac Cath Lab • Expend OP Urgent Care

Initiative #1

Initiative #3

Initiative #2

Initiative #4

EXAMPLES INCLUDE:

• Volume and Service Line Mix • Payer Mix and Net Revenue • Labor and Cost Rates

Base Case (Conservative)

DRIVERS MODEL:

4 Provide cross-departmental initiative-based modeling

5 APPROACHES TO EFFECTIVE BUDGETING AND FORECASTING IN HEALTHCARE / 14

All too often, reporting is a one-direction dump of statistics or numbers. Reporting is more effective when outlier variances have an explanation or action plan associated with them. This improved feedback loop promotes greater accountability across management levels. Reports for each level of the organization provide visibility as well as promote accountability. 5

Promote feedback loop with management and executives via reporting

Effective financial performance reporting should have the following characteristics:

Be Role-Based – Dashboards provide Executives with effective high-level indicators of performance, and more detailed information for managers.

Incorporate Alerts and Notifications – Notifications related to report readiness or outlier variances should proactively notify users by pushing notifications to inboxes or phones.

Improve the Feedback Loop – Ideally, explanations and commentary are part of the reporting process. Managers must understand “what” outliers exist and then offer commentary around “why.”

www.kaufmanhall.com

5 APPROACHES TO EFFECTIVE BUDGETING AND FORECASTING IN HEALTHCARE / 15

Executives Higher Level KPIs and Dashboards

Directors/VP Consolidated

Results, Outliers, and Explanations

Managers Detailed Reporting and Drill Through

Analysis

5 Promote feedback loop with management and executives via reporting

KAUFMAN HALL’S UNIFIED PERFORMANCE MANAGEMENT SOLUTIONS

www.kaufmanhall.com

Delivering an Integrated Financial Planning and Decision Support Platform for Healthcare

Your organization now can align business realities and financial plans through one, unified performance management platform. Designed for healthcare organizations, Kaufman Hall delivers sophisticated planning, reporting, and decision support functions in a single solution.