With an overwhelming number of vectors and variables to consider, planning a hospital budget may now be considered in the same league as rocket science. At least there are probably a few beleaguered CFOs who feel that way.
Yet budget planning doesn’t have to be so complicated, financial experts say. Taking a different view and changing conventional methodologies can help bring the process in line with the new realities of healthcare and the economy.
“The days of planning your budget six months before the year begins is over,” said Sherrie Simmons, owner of the SIMS Corporation. “The changes we’re seeing in the economy are so fluent and coming up throughout the year that CFOs and their teams need to react as they happen. So they have to be able to come up with solutions to change their tool set and processes so they can look at their plan and flex throughout the year.”
While not everything in the budget warrants such close scrutiny, Simmons points to commercial health plans as a critical area for constant vigilance.
“Because contracts are typically based on patient volume assured by the payer, providers should review the plan each quarter to verify whether that number is being realized,” she said. “If the number is lower than promised, they should re-negotiate the terms.”
Identifying excess costs is always a challenge, yet Simmons contends “there is always fat to be trimmed.” She suggests taking a fresh perspective when looking at the organization.
“CFOs and their teams work very hard at examining their operation, but they tend to have a ‘siloed’ view of the landscape,” Simmons said. “They need to take an end view of the services they deliver and determine which ones are profitable and which ones aren’t. For instance, are oncology services profitable? If so, why, or if not, why not? It comes down to information and going beyond the traditional benchmarks – look across service lines and the landscape instead of the buckets.”
Ed Maher, senior consulting manager for Chadds Ford, Pa.-based IMA Consulting, agreed that a number of external factors are rendering traditional budget planning methods obsolete.
“Hospitals are creatures of habit in that they typically look at what happened in the last year to predict where to go in the future,” he said. “It is difficult to forecast what will happen in the next year, let alone the next three and five years.”
There are some specifics CFOs can address, Maher says, such as gauging potential demand for services.
“If you start on the demand side, look at utilization rates,” he said. “If you have a busy emergency room, what does it do for demand if most of the population gets some type of coverage with healthcare reform?”