White paper                                        Agile Planning™ for                                       Healthcare Pr...
Agile Planning for Healthcare ProvidersRay Wolfe, CFO of Pitts-                               ance review process with a r...
Agile Planning for Healthcare ProvidersThe unit/rate/amount structure of the planning application lets the finance staff a...
Agile Planning for Healthcare ProvidersHealthcare, an Industry Under PressureForces old and new are buffeting healthcare p...
Agile Planning for Healthcare ProvidersRequirements for Agile PlanningThe above trends in healthcare are pressuring fi-   ...
Agile Planning for Healthcare Providers    By contrast again Agile Planning, which is             asking how they can deli...
Agile Planning for Healthcare ProvidersRobust Scenario AnalysisBudgeting is about managing versions, not scenar-        Th...
Agile Planning for Healthcare Providers    Why the Variance?    Alight lets you compare scenarios at any level of detail i...
Agile Planning for Healthcare ProvidersDriver-Based ModelingBudgeting focuses on gathering static inputs from       In our...
Agile Planning for Healthcare ProvidersIntegrating ActualsVirtually all budgeting applications support im-                ...
Agile Planning for Healthcare ProvidersAs the examples illustrate, actuals data frequently       Finally, for robust agile...
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Agile Planning for Healthcare Providers


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Anticipating change and developing an effective organizational strategy to adapt is perhaps the greatest challenge healthcare executives face. With the multitude of factors affecting business operations, payment, and market dynamics in the post-reform era, traditional budget methods are no longer sufficient.

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  1. 1. White paper Agile Planning™ for Healthcare Providers by Rand Heer and Tom Hartman Forces old and new are buffeting healthcare providers. Medicaid, accounting for 17% of state budgets, is being cut. America is get-“The old way of thinking ting grayer, and living longer. The reality for healthcare provid- ers is that the average Joe and Jane will need more services than— you run the facility before and will use those services for longer than any prior gen-through the once a year eration. The Affordable Care Act will bring some 32 million peo- ple into ranks of the insured with unclear impacts on providerbudget process — is on capacities, payer mix, hospital-physician alignment and many other variables.the way out in favor of These and other socio-economic trends are pressuring healthcarenew concepts and system provider finance teams to make planning systems more immediate and responsive. The old way of thinking — you run the facilityapproaches characterized through the once a year budget process — is on the way out inby more forecasting and favor of new concepts and system approaches characterized by more forecasting and incorporation of “agile planning” tech-incorporation of “agile niques into the forecasting and planning processes.planning” techniques This white paper explores the concepts and practices of agile planning for healthcare providers with a focus on defining soft-into the forecasting and ware application requirements for scenario analysis, driver- based modeling and integrating actuals — the three foundationsplanning processes.” of an agile planning system where the goals are insight, options for action, and decisions, rather than budgetary control.
  2. 2. Agile Planning for Healthcare ProvidersRay Wolfe, CFO of Pitts- ance review process with a real-time understand-burgh Mercy, strode into ing of how their own groups’ results impact overallthe conference room. results and a clarification of short term priorities.Everyone was seated and Then, back to the basics of running the clinics.ready to roll for the fore-cast review—Shelley and It wasn’t always so smooth. Just two years earlierDave from finance, five when Ray was appointed CFO, the organization washeads of community in trouble. After a painful disposition of an under-treatment centers, the performing inpatient facility, the remaining organi-service coordinator, and heads of acute case man- zation—60 outpatient facilities providing mentalagement and emergency care—including Ray, health, retardation, drug/alcohol rehab and home-eleven persons total. less services—was “operationally challenged”: ser- vice demands were increasing at a 20% annual rate;Who attended this particular session of the review budgeting was spreadsheet-based with all the at-was carefully coordinated, though Ray often shuf- tendant problems—linking and formula errors, toofled forecasting group membership based on com- much wasted time consolidating the pieces; and noparability of underlying data and key measures, and efficient way to import actuals and compare re-the corporate reporting hierarchy. From the finance sults. In addition, budgeting was a ritual withoutside, Dave was the planning administrator who ran meaning—full year totals with no seasonality, nothe planning application in real time during the operational integration, no P&L visibility for theforecast review session. The seven line managers hundreds of revenue/cost centers, and worst of all,were a subset of 100+ managers in the organization no real manager buy-in.with revenue and cost management responsibilityacross 25 treatment programs. Now, a year and a half later, the forecast review meetings are working with remarkable results.Ray choreographs the  Ray choreographs the agenda and participa- tion which is based on relevancy and congru-agenda and participation in ent interests. Groups and participation dynam-forecast sessions based on ics are reshuffled regularly to optimize sharing of common experiences.relevancy and shared inter-  Data is presented with an overhead projectorests... The planning tool is in real time. The planning tool is also the pres-also the presentation tool. entation tool. Forecast assumption changes, such as forecasting collection rates based on latest averages, immediately ripple through theEach quarter Ray conducts fifteen such planning financial statements and cash flow.sessions. Each session includes the same financeteam and combinations of line managers whose  The presented data, both historical actuals andresponsibilities are functionally similar or overlap forecast, incorporate operational activity driv-in service requirements. The agenda kicks off with ers such as number of outpatient transactions,Ray updating the room on global trends, overrid- payer types, and collection rates. The availabil-ing budget issues and community dynamics. Then ity of operational information integrated withthe fun begins: a review of prior meeting commit- financial results forms the basis of the linements including a focus on what worked and what manager dialog for understanding and sharingdidn’t; an open exchange of information with a of best practices.focus on best and worst practices; and a real-time  Fundamental to the process is multiple scenar-update of commitments and financial plans. ios. The team learning experience and forecastFor the most part, the process works. In just a few commitment process is based on creating andhours each quarter, mental health practitioners comparing working scenarios in real time.without business or finance training have the op-portunity to participate in a planning and perform-2
  3. 3. Agile Planning for Healthcare ProvidersThe unit/rate/amount structure of the planning application lets the finance staff and community treatment team membersunderstand underlying driver relationships and project forward based on historical rates and visible trends. For examplein the screenshot, the average year to date actual Revenue and Allowance rates for each Treatment Team are the basis forforecasting forward into May and later timeframes. These rates are automatically computed from the underlying units andgeneral ledger amounts.Since abandoning spreadsheets for a database plan- ing forecast process described here. When budgetning application, Ray and Pittsburgh Mercy have presentations are made to the Board, Ray reportssuccessfully renovated its planning processes and on the latest and most credible forecast. With aculture by implementing Agile PlanningTM: line forecast accuracy of 2%, nobody cares or questionsmanagers have a renewed sense of participation that the process is not more structured and doesand energy; $600,000 in revenue enhancements and not go to the lowest level of detail in the chart ofcost efficiency improvements have been redirected accounts.to improve services; and forecast accuracy at thebottom line is now 2% quarter to quarter. As Ray says, “We have a whole new culture for planning and analysis. It’s agile and truly real-timePittsburgh Mercy no longer budgets. All planning collaboration.”and decision making derive from the two year roll- 3
  4. 4. Agile Planning for Healthcare ProvidersHealthcare, an Industry Under PressureForces old and new are buffeting healthcare pro- insured, and significant change is happening in theviders. General economic malaise, state financial industry with uncertain results for each provider.disorders, demands for lower charges concurrentwith higher quality—the list goes on. One aspect of The Act is a reduction in government payments for medical care. Offsetting this, to someAt the state level, budgets are strained; cuts of dis-turbing proportion are being made across allspending areas. Medicaid, accounting for 17% of Can you say “Baby Boomer”?state budgets, will surely be a victim of some cost The reality for healthcarecutting. In 2010 states received some relief throughRecovery Act (Stimulus) funds to make ends meet. providers is that the averageThat federal buffer will not be there in the future. Joe and Jane will need moreTo compound the situation, the faltering economyof 2008 and 2009 moved many formerly employed services than before, and willpersons with commercial health insurance into the use those services for longerranks of the unemployed enrolled in Medicaid.While there are signs that the economy is rebound- than any prior generation.ing, unemployment remains at stubbornly highlevels. State tax receipts should be on the rise with extent, will be a reduction in uncompensated care,the economic recovery, but will it be enough? as the 32 million shift to insured status in 2014. Healthcare Insurance Exchanges also lead to uncer-Can you say “Baby Boomer”? America is getting tainty, as they will be open and available even tograyer, and living longer. While that may be a those currently insured.good omen for the country (increased wisdomcomes with increased age, right?), the reality for The concept of Accountable Care Organizationshealthcare providers is that the average Joe and (ACO’s), coupled with the mandate for value-Jane will need more services than before, and will based reimbursement for evidence-based qualityuse those services for longer than any prior genera- service, will certainly lead to hospital-physiciantion. The irony here is that advances in healthcare alignment. The ACO concept will likely lead toare the primary cause of the increased longevity. greater affiliation between acute care hospitals and community hospitals as well.Numerous challenges and opportunities springfrom the historic Affordable Care Act (The Act). It will be critical for healthcare providers to analyzeThe interpretation of purported benefits from The shifts in the Payer Mix (or erosion of the mix, as someAct differ depending on whether you are Democrat have labeled it) to government programs, primarilyor Republican, young or old, currently insured or Medicaid. Also key will be analyzing reductions inuninsured, healthcare provider or healthcare in- payments. As always, providers will need to con-surer, government entity or private industry. stantly monitor their cost efficiency efforts in bothWhere there is general consensus: some 32 million staffing and supplies, and keep a strong focus on theirpeople are likely to be added to the ranks of the Revenue Cycle improvements.4
  5. 5. Agile Planning for Healthcare ProvidersRequirements for Agile PlanningThe above trends in healthcare are pressuring fi- agile planning in terms of basic goals, process areasnance teams in provider organizations to make and common features:planning systems more immediate and responsive.The old way of thinking—that you run the facility  Goals—Basic resource management is an im-through the budget process—is on the way out in portant goal of all planning processes. Forfavor of alternate approaches such as Agile Plan- budgeting and forecasting there is the addedningTM as practiced by Ray Wolfe and the Pitts- “control” element of setting standards forburgh Mercy organization. measuring performance which is presumably achieved through precision of the data inHistorically, budgeting has been the command and budgets and monitoring the accuracy of projec-control foundation for managing organizations— tions in the forecasting process. In contrast tothat once-a-year Uber-process that produces every- budgeting and forecasting, however, the goalsthing you need for reporting and control: revenue of Agile Planning are to achieve higher leveltargets, headcount and spending details, capital management effectiveness by gaining insightsbudgets, and more. The budgets may or may not into the current business situation resulting inbe supplemented monthly or quarterly by a fore- greater clarity about what actions can be taken,cast process whereby managers theoretically have including the financial impacts of each, andthe opportunity to re-allocate resources based on more timely decision making as a result.changing conditions and new information. Fore-casting, though, more often turns into a politically  Key Process Areas—In their quest for preci-charged exercise for testing target achievement— sion and accountability, all line managers par-focusing on the sensitive question “will individual ticipate in budgeting if they have any level oforganizations make their top and/or bottom line revenue or spending responsibility regardlessfinancial objectives for the fiscal year”? How and of materiality. The process is one of meticulouswhen individual organizational units answer the submission and approval of versions whichquestion, of course, is the foundation for many po- causes budget development to span manylitical games. months; thank goodness it’s done only once a year. By contrast, forecasts must be put to bedThe table below lays out a comparison of tradi- within days or just a couple of weeks becausetional budgeting and forecasting processes com- of the month/quarter end reporting cycle.pared to Agile Planning as illustrated by the Ray Thus, forecasting tends to be more finance-Wolfe/Pittsburgh Mercy case study. Here are the driven with a less formal, more ad hoc partici-highlights comparing budgeting, forecasting and pation of line management. 5
  6. 6. Agile Planning for Healthcare Providers By contrast again Agile Planning, which is asking how they can deliver more immediate and more often driven by business events (e.g. responsive financial plans including incorporating shifting payer mix) or strategic initiatives (e.g. a agile planning elements into forecasting processes. major capital equipment purchase), is a real- time collaborative activity or series of activities The accompanying challenge for finance is to find requiring the relevant managers, meaning those ways to make forecasting less political. In health- who are players, either information providers care, the evolution to agile planning has been or decision makers, in the business event or slower, principally due to the lack of flexible plan- strategic initiative. Unlike budgeting and fore- ning tools. casting, the cycle time for planning sessions In the materials that follow, we walk through three and decision making is typically hours, or at software feature/function areas that are central to most, days. all planning applications, but especially critical for Common features—Both budgeting and fore- moving up in planning maturity to achieve the Ag- casting are financial-data driven at the lowest ile Planning goal of real-time insights leading to level of detail of natural class accounts (e.g. all actionable knowledge with financial impacts Travel sub-accounts rather than Travel in total) which, in turn, lead to faster, better decisions. and departments. This level of focus results  Robust Scenario Analysis—the issue is not from the passionate need to produce variance whether an application supports versions and reports and analyses—actual versus budget scenarios; they all do. The issue is maintaining and forecast to forecast—which is presumed the scenarios, visibility into the underlying ac- not possible if the lowest level GL structure is tivity drivers of each scenario, and response not adhered to. The result of this low-level fi- times. nancial focus is that for budgeting and fore- casting, there are a lot of input cells that need  Driver Based Modeling—the issue is not to be filled in. The focus is data entry with whether an application includes modeling minimal modeling of interrelationships. By tools; all of them do. The issues are how flexi- contrast, Agile Planning is frequently done at a ble are the tools for building complex driver- higher level of detail than budgeting and fore- based models and how easy is it for the super casting—e.g. a summary level of accounts such user to build and maintain the models. as Travel rather than Travel Sub-accounts.  Integrating Actuals—the issue is not whetherDespite the problems, few healthcare finance or- an application can import actuals data; all ofganizations are ready to dump budgets per se. them do. The issue is how well imported actu-However, many are looking critically at their als can be integrated into the financial plan.spreadsheets or canned budgeting applications6
  7. 7. Agile Planning for Healthcare ProvidersRobust Scenario AnalysisBudgeting is about managing versions, not scenar- The functionality you need for effective scenarioios. As the budget is developed, finance keeps analysis goes beyond simple budget versioning.track of versions to understand who changed what Here are our criteria:and to make sure the right amounts are approved.Once a version is superseded, there is rarely a need  Real time feedback. Whether you’re a finan-to look back at the old numbers or change them. cial analyst working through the numbers late at night or the CFO answering questions live inBy contrast, rolling forecasts and agile planning an operations review, scenario analysis shouldshould be about scenarios, lots of them. If you can’t be delivered by the planning tool in real time.predict the future, the next best thing is to set up That is, when you change a value, all elementsscenarios that let you explore how you might be- of the financial model—the statement of activi-have (or decide) if things are better or worse or just ties, balance sheet, cash flow, financial ratios,different. Unlike budgeting where you care about performance metrics—should update in sec-who changed what number, scenario analysis is onds, not minutes or hours. In short, scenarioabout understanding what’s behind the numbers— analysis must satisfy the need for speed we’rethe most critical assumptions, volume and rate im- used to with Excel. Scenario analysis must bepacts, and especially what’s driving material an interactive process responsive to questionschanges to the Statement of Activities and Cash and testing of assumptions on-the-fly. AgileFlow. planning needs tight feedback loops on the numbers.The goals of agile planning— a) insights about thebusiness; b) actionable knowledge and c) decisionmaking—are achieved through scenario analysis:by analyzing a specific scenario and comparing itto a baseline case or other scenarios, the manage-ment team is better able to understand what’s go-ing on and then evaluate best courses of action.Where there is an immediacy to the issues—e.g. toproceed with a capital project or change suppli-ers—the deliverable is decision making. Because itis decision and action focused, robust scenarioanalysis is the most critical underpinning of agileplanning. Unlike budgeting applications, in Alight you can change values of line items across multiple scenar- ios. Clicking the Scenario button lets you choose which Scenarios you want to apply the new values to. Updates to financials are immediate 7
  8. 8. Agile Planning for Healthcare Providers Why the Variance? Alight lets you compare scenarios at any level of detail including analysis of underlying units, rates and amounts. Below is a Variance Analysis comparing the Affordable Care Act Impact to the Base Case Scenario. Unlike standard variance reports that show only dollar amounts, this Volume-Rate Variance report automatically computes the volume and rate components by line item — that is, the unfavorable impacts of a payer mix shift to Medicaid and a declining rate of government payments. The con- clusion is obvious: the shift to Medicaid is the primary contributor to the Variance. Maintenance across scenarios. Budget ver-  Robust comparison at the line item level. sions don’t require ongoing maintenance be- Budgeting and to a considerable extent, rolling cause old versions are superseded by new forecasts focus on amounts in accounts. Agile ones. Scenarios do. The planning application planning is about in-depth comparison of sce- should support adding, modifying and delet- narios and differences in values at any level of ing line items across selected scenarios in a sin- detail, especially at the line item level where gle operation. Calculation and update of finan- the most significant driver inputs and model- cials after structure changes should take only a ing occur. minute or two, at most.8
  9. 9. Agile Planning for Healthcare ProvidersDriver-Based ModelingBudgeting focuses on gathering static inputs from In our experience, there are two make-or-breakusers, principally for headcount and expenses. Lit- functionalities in the modeling interface needed totle modeling is involved— typically just calculation make driver-based planning work:of payroll taxes and benefits.  Visibility into driver relationships. This re-Such a process is not workable for agile planning. quires object based linking where the modelerThe cycle time for completing a forecast after establishes data relationships based on themonth-end close is too tight to accommodate broad names of things—e.g. Patients Days are linked-based user involvement on the scale done for to Admissions and the Average Length of Stay—budgeting. As well, user-based planning involves versus cell-based linking in Excel with formu-high volumes of static inputs in order to achieve las like = Stats! C45 * $L$15. Object-based link-precision. By contrast, forecasting that incorporates ing makes auditing and visibility into activityagile planning reduces the volumes of data, focus- driver relationships significantly easier toing instead on fewer but truly material forecast track, thus eliminating many errors, speedingelements. up development and reducing maintenance time.The objective of reducing data volume is achievedin substantial part through “driver-based plan-ning”, a type of financial modeling where the mostmaterial items in a financial plan are linked to op-erational drivers or quantifiable activities of thebusiness —e.g. volume measures such as patientadmissions, length of stay, patient days, number ofprocedures, number of tests, and the like.Such driver-based modeling has three focuses: 1)revenue forecasting based on the volume measuresand driver relationships between revenue areas—e.g. contractual rates by payer type, 2) variable and Alight’s modeling interface is based on object-basedsemi-variable headcount and expenses driven by linking where you create data relationships by linkingthe volume measures or identified underlying ac- to the names of other line items or totals, e.g. drugtivity levels—e.g. admissions, patient days, etc.; expense for ICU is based on average drug cost perand 3) for cash planning, balance sheet items such stat X ICU stat (patient days)as accounts receivable and accounts payable, eachbased on their respective income and expense driv-  Modeling across dimensions. Planning appli-ers at a relevant level of detail. cations should support custom dimensions— e.g. department, payer, stat, facility, job type,Healthcare organizations moving to an agile plan- grade level, etc. The modeling environmentning discipline should closely evaluate the model- should then allow tapping into the custom di-ing environment of the planning application they mensions for building specialized activity-are buying into. Modeling and model maintenance driver models—for example, aggregating in-should be fast, flexible, and (unlike Excel) provide patient and out-patient data across depart-clear visibility into linking relationships. ments and payers. Applications without mod- eling based on dimensions do not have the flexibility required for driver-based planning. 9
  10. 10. Agile Planning for Healthcare ProvidersIntegrating ActualsVirtually all budgeting applications support im- For actuals, however, the data is typically amountporting actuals from the general ledger, typically and units. Therefore, for an apples-to-apples com-based on rigid chart of accounts structures. As parison, the actuals data must be modeled to back-well, you can usually import headcount and sala- calculate the reimbursement rate:ries from the HR system. Once imported, budgetapplications also support comparing actuals to Gross Revenuebudget based on levels in the chart of accounts / Patient Dayswith computation of amount and percentage vari-ances. = Reimbursement RateOutside the safety of the accounting structures, $250,000 / 250 = $1000however, lining up actual and plan data in a con-sistent format for a rolling forecast is typically azoo, principally because it is difficult to get actualsdata apples-to-apples with plan data at the lineitem level.For example, for basic revenue planning: Patient Days * Reimbursement Rate = Gross Revenue 250 * $1000 = $250,000 Alight includes a section for Key Measures with custom dashboards for displaying actual and plan measures of the organization such as admissions, patient days, denial and collections rates, payer mix, headcount analysis, balance sheet ratios and more.10
  11. 11. Agile Planning for Healthcare ProvidersAs the examples illustrate, actuals data frequently Finally, for robust agile planning, you must haveneed modeling different from plan data to get valid the capability of truly integrating actuals into thecomparisons and trends. For maximum flexibility, financial plan. That means: 1) being able to modelthe planning application should allow modeling of actuals as an activity driver and 2) spreading actu-actuals with algorithms and linking separate from als data into plan time periods—e.g. the historicalmodeling of plan data. average cost per stat into future months, and fur- ther, being able to modify those costs going for- ward to reflect, for example, inflation or cost con- trol initiatives. Summary Agile planning requires special features that extend beyond the capabilities of spreadsheets and many budget applications. Scenario analysis should be real time with maintenance across scenarios. Mod- eling tools must be robust and provide transpar- ency into underlying activity drivers. Actuals data must be available for driving forecast values. In an agile planning environment, the return on Alight includes separate tabs for modeling actuals investment is not from reducing time spent on and plan at the line item level. In the example, plan units * rate = amount. For actuals, amount / units = planning. The ROI comes from better financial per- rate. formance as a result of a more responsive planning environment and improved decision making.In addition, actuals data need to be imported from Agile Planning is a pending trademark of Alight, LLC.any source at any level of detail, not just the generalledger. The actual revenue amount is importedfrom the general ledger, but units for back-calculating average charge rate are typically im-ported from a data warehouse or an ERP or EMRsystem. Rand Heer is CEO of Alight and the creative force behind Alight Planning. He was also the founder of Pillar and designer of Hyperion Pillar, the first enterprise software for budgets and forecasting. Tom Hartman, a twenty year veteran of the planning software space, is Director of Sales at Alight, driving the company’s Healthcare sales and marketing programs. Web: AlightPlanning.com Tel: (530) 622-5485. Special Thanks to Ray Wolfe, CFO of Pitts- burgh Mercy Health System , Don Koenes, VP of Services at Alight and Linda Hull, Director of Sales Support at Alight. 11