Budgeting: Resuscitate and Regain Control
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A look at Optimizing existing pandemic relief The importance of coordinating the strategic budget process with rolling forecasts Synchronizing planning with continually fluctuating volumes.
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Budgeting: Resuscitate and Regain Control
- 1. www.oihealth.com Budgeting: Resuscitate and Re-gain Control Budget Objectives Coordinate future activities Set realistic goals Review estimates v actual Accountability
- 3. www.oihealth.com Easy to implement Offers strong insight into operations Helps hospitals to control costs and assist with spending decisions Static Budget Difficult to forecast new lines of business Not relevant during times of volume variability Lack of flexibility
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- 12. www.oihealth.com Accounts for actual volumes levels Accurately reflects the state of finances Enables hospitals to pursue new opportunities/mitigate risks Flexible Budget Less accountability to adhere to original budget Requires true understanding of fix/variable components Inability to plan in areas with budget changes Time consuming - more rules
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- 19. www.oihealth.com Rolling Forecasts Increased control over finances Continually fine tune financial plans and strategy Better understand the factors that drive results Improve accuracy of forecasts Time and resource consuming process Harder to implement Can quickly become complex Limits comparative analysis Burn-Out! Pros Cons
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- 21. www.oihealth.com Case-Based Budgets Comprehensive forecasting and planning tool Can be reconciled to a high- level strategic plan for GLB Detailed modeling capability: cases/department/product Business development projects can be analyzed for incremental effect Time and resource consuming process Harder to implement Can quickly become complex Limits comparative analysis Burn-Out! Pros Cons
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- 28. www.oihealth.com Variance Analysis • Pros: • Responsibility reporting improves communication and collaboration across all departments • Highlights accounting issues • Enhances accountability • Improved data integrity for budgeting and cost accounting purposes • Cons: • Frustration for unresolved issue identification
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Editor's Notes
- Introduce myself Jeff Lambert – COO & Founder of Oi - 30+ healthcare finance – mostly in DSS Oi – Comprehensive Decision Support with modules for Financial management reporting, labor productivity, budgeting – operating and strategic, cost accounting and patient profitability reporting. For those hospitals beginning to stabilize there is a refocus on budgeting After workplace transitions – compliance reporting – extreme volume fluctuations With hospital environments mostly starting to stabilize – senior mgmt. wants a forward looking plan During this process they can reestablish realistic operating level goals A key function of the Budget process is to monitor – review estimates v actuals and try to understand variances – volumes levels, efficiency to accounting errors A final key objective is to assign accountability to the appropriate level of decision-making
- As our clients reintroduce budgeting into their financial management reporting – we see that each organization takes on this challenge uniquely – mostly depending on the resources, data and technology utilized for this endeavor. Mostly all clients begin their process with a static budget, others incorporate volume estimations to produce a flexible budget. Others extend the timframes by incorporating a rolling forecast – by dropping off the last completed month or quarter with the next. Others extend their forecasting periods from one year to two years. More sophisticated clients employ a case based budget – modeling the number of discharges/visits by service line/payor/locations combos to estimate departmental volume levels. Virtually all client employ a process to review budget projections. Responsibility reporting allows all levels of management to dissect material variances – thus improving communication and collaboration throughout the hospital. As with any process – there are advantages and disadvantages with each approach = let’s take a look.
- For those implementing a static budget – The following advantages: >> They are easy to use and understand – the easiest to implement. >> Static budgets do not require any regular updates during the year – once completed and approved the budget is complete for that period. >> Allows managers to quickly understand and analyze over and under estimates for volumes, revenues and expenses. Of course there are some major disadvantages: >> The budget will not fluctuate to ANY volume changes – it’s key assumption is that it will remain accurate throughout the relevant range >> It tends to be more focused on current data – not necessarily forecasted data. >> May be difficult to forecast new type of services since historical data is not present.
- Static budget is a starting point - Key feature is to have an integrated system – one where all the data flows Metrics/financial/labor data flow directly into the budgeting tool. Separate systems require extensive data moving – maintaining the latest data – reconciling – what’s in – what’s out – differences, etc etc Budget analysts spend more time compiling data than analyzing data.
- Everyone budgets - they each employ different budget methodologies – and they budget differently year from year. Budget tool needs to be flexible to design the best budgeting tools Wizards can configure the budget module – accounting for data sources and timeframes – labor modeling – incorporating metrics and other features – such as calculated accounts.
- Non-financial clinical manager appreciate an integrated system because the budgeting tool has the same look and feel to how they are vetting their actual data for financials / labor productivity and utilization metrics. The single source of truth concept is widely accepted as the best format – a key factor to any report, let alone financial, is that the users of the data TRUST the data. They will be more attentive to their management reports when they simply understand them better – as opposed to having to figure out all the reporting nuances – is contract/agency labor in or out of the module? Do the numbers include our new expansion project? etc
- The tool also has to be easy to use for the budgeteers. This is best accomplished by providing all the information necessary to make projections and edits. A sample setup can include a couple of years of actual data – the prior year budget, actual annualized data – including projected data. Selecting the natural class will allow budgeteers drill into specific subaccounts. Point and click maneuverability enhances the user experience. This can be an appealing process compared to the learning curve required to complete an Excel modeling process.
- Since labor accounts for 55-65% of total operating expenses – hospital organizations will want to focus the manager’s time on getting the skill mix modeled correctly. The ability to look at the same data through different slices is key. Departmental – Position – Job Code – Employee views are key – further subtotaled by Productive – non-productive – total Ftes
- Subtotals by REG – OT – VSH – Prem pay down to the earning code reporting will improve modeling. The tool must have the ability to allow the hospital to model to the level they want – either at a very high level such as Prod/Non-Prod or to a very detailed level. In this example the REGULAR pay bucket is further modeled by regular pay, orientation, continuing education, meetings, etc. It is up to the end user as to how precise they would like to configure the budget.
- Transparency is one of the key goals during budget season. Documentation is required for all budget changes – who, when, revised amounts as well as the reasoning behind the change. Edits are required for all changes, either by departmental management or finance or senior management. Budget changes can be tied to ininatives – Line items details can be captured – maybe modeling the subaccount by vendor, location, or project Ability to capture all pertinent information in one location – eliminates the need to maintain a budget folder – saves important time during the budget season.
- The ability to quickly see all the budget edit is informative for all levels of management. They can easily monitor all changes from all modelers in one place.
- The next progression in static budgeting is to begin incorporating metrics into the modeling process. This allows actual volumes to be incorporated into modeling forecasts. The flexible budget tends to be recognized as accurately reflecting current operation levels. This methodology can more quickly identify opportunities as well as mitigate risk associated with poorly performing departments. Managers my tune out the original budget entirely and try to understand how best to manipulate the flex – which can be detrimental to the overall goal. This methodology requires hospitals to truly understand the causal relationships between their accounts and fluctuating volumes. Whenever additional “moving parts” are introduced to the budget process – it can include complex rules for one-off situations. We flex on volumes – except for these departments or these subaccounts – for this unique situation, etc. Thus making the process more time consuming.
- No secret hospitals collect a massive amount of utilization data. Data resides everywhere – gls/ data warehouses / shadow systems / manual clipboards in someone’s office Needs to collected and stored in a single database for universal review – complete understanding of: >> data source >> data timing >> any caveats to the data >> calculations
- Metrics and KPIs need to be analyzed routinely – preferably on a daily basis. Heads Up Displays and/or Dashboards can be easily designed for review. This puts the data in the forefront of financial management reporting. Thresholds can be set to evaluate if the metric is operating in the green-yellow-or red. Drill down capabilities are available for more detailed investigation. Views can be designed by individual user – senior management may be looking at different metrics than maybe department managers. An observation – easier to capture the 200 metrics captured by department then to truly analyze the 3-5 that drive the business drivers. Hopefully reports like this assist with this transition.
- With a flex budget – volumes will be incorporated into the modeling process. Hospitals can allow/disallow managers the ability change volume levels within their departments – up to management. Multiple stats can be included in the modeling process – not just one.
- Aside from capturing actual utilization – I feel the most important configuration for flexible budgeting is identifying the causal relationship between volumes and accounts. Mappings should be easily configured for iterative analysis. Rigid dimensions mappings do not allow iterative reviews which will disincentivize management. Specific mappings should be able to override default mappings. Multiple stats can be utilized by each dept – not just one.
- Again – the ability to map variability for each individual subaccount is critical. Drugs may be variable for once cost center – or fixed for a different department.
- While utilizing UOS modeling – the focus shifts from modeling whole dollars to now modeling changes on the ratio of dollars per metric. Two modeling changes will affect the total dollars for each subaccount – >> either a change is the anticipated volume levels, and/or >> a change in the efficiency of the ratio – more or less labor/supply is required for each unit produced.
- A more advanced budgeting approach is to implement rolling forecasts. Static and UOS budgets rely on set periods, fiscal periods or a fiscal year, and create a fixed forecast for that period. Rolling forecasts, as an extension to financial budgeting, support periodic updating of budget assumptions, and extend the time period out beyond the end of the fiscal year. By continuously forecasting out additional quarters, you can avoid the “fiscal year cliff” and give you organization a head start on next year’s budget. The future is uncertain, but rolling forecasts will keep your hospital on the road to success. Rolling forecasts are extremely beneficial, especially for those hospitals that have to perpetually alter their budgets and plans to adapt to new trends. Major advantages of rolling forecasts are that hospitals can continually adapt future forecasts to reflect volume volatility – which in turn will allow them to allocate resources more optimally. The ability to tweak assumptions will allow hospital’s to react more quickly. Driver-based planning focus forecasting efforts on the more material factors. Time sensitive decisions are more accurately reported in a rolling forecast compared to a static budgeting approach. Unfortunately – rolling forecasts can make the finance team feel like they have a never-ending budget season. Very quickly high level assumptions can become complex – thus requiring more effort from finance. And finally due to the many changing levers – it will become very difficult to perform comparative analysis. Management has to be aware of burn-out when deploying this approach – both from finance staff and operation managers.
- When deploying a rolling forecast – technology is key. You need a system that can quickly and efficiently display iterations and their incremental impact. Many organizations find that the most difficult challenge to implementing a rolling forecasting initiative is gaining organizational acceptance. Finance professionals should engage in thoughtful discussions with senior leadership for executive level buy-in, as well as departmental-level acceptance. Rolling forecasting can be an effective approach for financial modeling and is flexible enough to meet a myriad of organizational structures. Rolling forecasting can increase accountability and encourages efficiency and process improvements to make organizations more cost effective. As reimbursement sources become more fixed, it is imperative that healthcare organizations use KPI metrics to monitor the impact of cost-efficiency improvements. The cultural implications of using rolling forecasting need to be thoroughly understood and embraced by the executive leadership team, and the rollout of a rolling forecasting model needs to be methodically executed in order to be successful throughout the organization
- Our most advanced methodology for forecasting include clients that utilize case-based budgeting. Estimating the number of discharges or visits based on a user defined rollup structure will allow users to understand the impact on all departments within a hospital for volume changes. Hospitals need to have implemented a comprehensive decision support/cost accounting tool to complete this type of budgeting. This also transforms the budget process from a cost center/subaccount review to a more patient centric tool. Based on historical departmental / charge item utilization consumption – the new case estimates will back into volume totals by department – by charge item. The cost standards developed at the product level for both variable and fixed cost behaviors will allow budgeters to develop pro forma statements. Volume changes and performance improvement changes can also be incorporated into the model. Changes in gross revenue – net revenue – and inflation factors can also be modeled.
- The starting point is to define the rollup levels that you can apply model changes to. Inpatient and Outpatient is the starting level – from there users can select different rollup structures for each – -- for example Service Lines / locations / payors etc It is best when coordinated with a Strategic Plan – which is usually modeled with very high level assumptions One of the main goals of DS and cost accounting is to transform financial management reporting from a historical cost center/subaccount view to a patient centric view. Service Line Reporting Allows clinicians and finance to work side-by-side to analyze estimates of: The costs of caring for groups of patients with similar conditions The actionable cost savings from process improvement The benefits from better utilization of capacity Service line management can tie the cost to patient-outcome measures, which will enable it to design a system that improves the quality of outcomes, motivates efficiency and improved capacity utilization, reduces costs, and assures patients and providers that any cost improvements will not reduce the quality of care delivered.
- Users can select which node in the module they would like to forecast cases / visits. Historical utilization ratios can also be modeled at the department level.
- Once the modeling has been completed – it is very easy to understand the incremental differences between various models. Here we can ascertain the differences between a High v Low model. Differences can be understood at any level in the rollup structure – one can see which level on the node has the most impact to either case loads, expense and profitability.
- Another view of the same model comparison is at the department level. This identifies the two models impact at the department level.
- Drill down capability can show incremental changes at the cost behavior level – changes in VDL – VDS – VDO cost types – as well as fixed categories. The bottom – line goal is to base the budget on standards. With many instances there are situations where the bottom line results are many millions from the target – the budget process evolves into who is the best negotiator – as opposed to this case based approach.
- Once the case-based budget is finalized and approved – these high level models can be easily converted into a cost center / subaccount version. Hospitals utilizing this method have reported reduced budget development cycle times. Managers are making minor revisions – as opposed to wholesale reductions throughout.
- The key to any successful budget process is to monitor actual results to the anticipated amounts. This process allows all levels of management to share insight as to why variances are material. Accounting issues and misappropriations can be highlighted and corrected. This process meets one of the objectives of budgeting that we discussed at the beginning: Accountability. It assigns responsibility to the correct level of management to address and take action on. It is key that identified issues be corrected as soon as feasible – the frustration level can increase if no action is taken on previous findings.
- System administrators can select all accounts to be reviewed – or maybe just controllable expenses – or just a select number of accounts if there has been a recent spike that needs to be analyzed.
- A communication tool is necessary for all parties to share ideas – both focused on an understanding on what is happening – as well as the path to correct. This completes the budget cycle monitoring function – hopefully insights gained and improve the process for the next iterations.