May 29, 2015
More on Strategic Planning
New complexities require a new approach to budgeting and forecasting
Committing fully to a service line planning approach is imperative to truly achieve high performance.
Healthcare finance leaders are under more pressure than ever to support their organizations by managing uncertainty, volatility, and risk. As a result, financial planning is more complex than ever, evolving from a function-focused activity into integrated financial and operational planning that touches the entire organization.
As both payment and strategic planning shift to become more service- and population-centric, financial planning methodologies are shifting as well. Increasingly, financial planning uses driver-based approaches to help organizations model the impact of possible changes in volume and mix of patient populations (often referred to as clinical service lines) on revenue and expenses.
These projections can also be used to determine departmental targets, adjusting workload drivers to project the relative impact across various components of care.
The importance of the service line perspective
For many organizations, planning based on service lines is a departure from current functional views of their business. There are several advantages to moving to a service line approach.
Service lines are the most comprehensive way to understand operating results, and therefore they should form the basis for strategic planning, capital planning, annual budgeting and forecasting, and performance analyses. Only by using a service-line view can all activities within a hospital or health system be appropriately aligned and performance outcomes better understood.
A look at the budgeting and forecasting process confirms this perspective. In the absence of a service line approach, each department decides on its volumes independently based on intuition or historical trends. What is missing is a connection to the patients, and thus the services, the hospital is currently offering, planning to focus on, or building for the future.
For example, if a hospital is developing a strategic plan to increase cancer services and eliminate pediatrics, the budget and forecast should reflect that change. In the absence of a service line approach, the departments would not adjust their forecasts appropriately, and resources would be ineffectively allocated based on historical data.
Putting the service line perspective into action
The hospital’s planning process, both long and short term, is greatly enhanced by being viewed through the lens of effective service lines. The diagram below represents a service-line-based process that can be used for long-term strategic planning and for annual budgeting; the only difference is the time element. Case volumes are the starting point, driving net revenue based on payers and driving departmental budgets based on utilization.
The strategic plan is the centerpiece of the process and should generate significant portions of the capital plan and annual budget. It should also be a major source of data for understanding operating performance.
Diagram: Service line-based planning
Strategic and capital plans integrated at the service line level should then be meshed with the annual operating budget and forecast. Patient-driven supplies and staffing are variable and should reflect the anticipated volumes in the strategic plan. As noted earlier, departments will budget based on historical trends if there is no data suggesting changes in case volumes or mix.
The annual budget should derive its variable expenses directly from the strategic plan for the following reasons:
Department volumes are driven by service line and can vary significantly with a major change in case types or volumes.
Productivity planning as part of the budget process is best analyzed at a lower level, such as the product (or charge master code) level. If orthopedics volume is declining but cardiology increasing, for example, that change could strain the resources of some nursing units and underutilize others. It could also result in shifts in product mix in ancillary departments that require very different supplies and time.
Major supply expense is driven directly by the volumes of specific case types. If demographics suggest the market catchment area is getting younger, for example, there could be a dramatic decline in orthopedic hip implants. Variable supplies should be derived directly from projections of cases by service line.
Overcoming barriers
Even hospitals that use the service-line perspective in their planning frequently do not incorporate it fully. The most often cited barrier is a lack of data to support accountability.
A system must be in place that provides the tools necessary to project assumptions and integrate the various plans. That requires a robust data store with significant capabilities for what-if modeling and plan consolidation.
Having a reliable solution to facilitate integrated planning and analytics is critical to success in today’s environment. Competitive pressures, payer demands, and the emergence of value-based payment all require that successful organizations access timely and robust performance data and convert that data in actionable information to support efficient performance and high-quality outcomes.
Although the transition to service-line planning may seem daunting, committing fully to that approach is imperative to truly achieve high performance.
Jay Spence is vice president of solutions marketing with Kaufman Hall's Software Division.
