Zen and the art of hospital budget planning
THE BRITANNICA CONCISE ENCYCLOPEDIA describes the Zen philosophy as one that believes “enlightenment is inherent in everyone but lies dormant because of ignorance. It is best awakened by breaking through the boundaries of mundane logical thought.”
Can this spiritual principle actually be applied to a concrete process like budget planning?
Steven Berger thinks it can, and he’s made it a central focus for his hospital budget training class. As a continuing professional education instructor for the Healthcare Financial Management Association, he recently conducted his first two-day Zen Budgeting class and plans to hold four or five more over the next year.
The president of Libertyville, Ill.-based Healthcare Insights says he chose the Zen theme to raise the level of enlightenment and decrease the level of stress among his peers.
“Almost everyone, from the CEO down to the operating manager, believes that budgeting is a grind that each hospital has to go through year after year,” Berger said. “I propose that budgeting does not have to be a ‘grind.’”
“I was personally responsible for the hospital budgets of four different hospitals and health systems over the course of 20 years,” he continued. “In that time as a budget manager, as a hospital CFO and subsequently as president of a company that has developed better budgeting and monitoring software for the hospital industry, it became clear that the way we develop budgets is not natural or effective. Simplicity could and would work – hence the Zen theme.”
Berger’s approach also has a holistic angle, as he advises planners to develop the entire budget, from volumes through gross and net revenues to labor and non-labor expenses. The course, designed for the finance and budget team as well as operating managers, also includes short sections on capital and cash budgeting.
While there are myriad traditional hospital budgeting practices, Berger’s Zen approach uses a flexible, or “volume variable” method. Flexible budgeting involves deploying software that enables hospitals to prepare their budgets using revenues and expenses per unit of service.
Class surveys that Berger has conducted suggest that more than half of all hospitals do not use flexible budget preparation, more than likely because they do not realize it exists. Most hospitals don’t use benchmarks for determining their revenue and expenses, either, he said.
“Zen budgeting stresses use of better tools and techniques to make the budget easier to do for administration, finance and department managers,” he said. “It can really become much less of a grind if many of these organizations change their budget paradigms.”
Predicting volumes is easily the hospital’s biggest budget challenge, Berger said, because volumes drive three of the four major financial elements – gross revenues, net revenues and variable expenses. Only fixed expenses are not affected by volume, he said.
Another challenge is the lack of accountability attached to budget outcomes, he said.
“It is really a simple concept,” he said. “Why spend so much time and effort developing a budget if it will not be enforced with outcomes that include positive and negative consequences?”
Healthcare financial managers are getting outflanked on three sides – from reimbursement, labor expenses and the physician side, in terms of recruiting from other hospitals, says Catherine Kleinmuntz, president and CEO of Champaign, Ill.-based Strata Decision Technology.
“This pressure on margin creates the need for a very serious approach to budget profitability,” she said. “It means acquiring a greater understanding of long-term financial plans and capital plans – using an integrated planning approach.”
Moreover, budgeting has become more than a once-a-year process. It’s an all-year, multi-year cycle, says Vince Panozzo, Strata’s assistant vice president of consulting services.
“Budget planners not only need to look at the next year, but the next five years,” he said. “From an operations and marketing perspective, there needs to be tight integration of all types of planning.”
Invariably, the budget should be tied to the strategic plan to ensure that there is synergy between department-level goals and the organization’s overall goals, he said.
“When it is viewed as a strategic process, people need to get more details,” said Frank Stevens, Strata’s manager of consulting services. “Collect supporting information and justification to make the budget more of a strategic planning exercise than a spreadsheet analysis.”
Simplifying the budget process – through a Zen philosophy or not – requires harmony among all parties, says Russ Anderson, senior vice president of marketing and development for Skokie, Ill.-based Kaufman, Hall and Associates.
“Process and organizational change is a key stumbling block,” he said. “In general, the annual budgeting process lasts too long, consumes too many resources and is too political.”
Anderson recommends that budget planners focus on directing resources that are consistent with the organization’s long-term strategic and financial plan.
“From there, effective communication and education of these plans throughout the organization should include feedback loops and appropriate incentives to ensure that resources are directed towards the common goals and objectives as they have been outlined in the long-range plan,” he said.