Reforecast: The end of the budget
Rolling forecasts may be a better choice for healthcare facilities than annual budgeting
It’s one of the most frustrating, time-consuming and labor-intensive tasks within the Office of Finance, and particularly within the healthcare sector. The “It” is the budget, and it has come to the point where some institutions are simply saying enough is enough.
Among them is Susquehanna Health, which made the bold decision to eliminate its annual budgeting exercise in October 2012. “The timeframe of a budget is too long and the expectations presented are unrealistic,” explained Charles Santangelo, executive vice president and CFO at the four-hospital integrated health system based in Williamsport, Penn. “You cannot adequately predict what you expect the upcoming 12 months to be like, much less 15 months, since you’re actually taking a full quarter to prepare the next year’s budget.”
While eliminating a traditional management exercise as old as the budget seems risky, many well-known businesses have done just that, including Norton Lilly, Unilever and American Century Investments. All had determined that using a 19th century tool to manage a 21st century organization made little sense, if for no other reason that the budget often was past the expiration date the minute it was completed.
Such woes are shared by an increasing number of healthcare entities. The Beyond Budgeting Round Table, an organization promoting alternative ways of managing companies, puts the industry front and center among sectors abandoning the budget. The healthcare industry’s complex structure from an accounts receivables and payables standpoint is a factor in the migration away from the budget, as is the near-constant implementation of healthcare reforms and regulations altering the profit picture. Ongoing advancements in medical technologies that require unplanned investments is another reason.
Aside from Susquehanna Health, Park Nicollet Health Services in Minneapolis and MD Anderson Cancer Center at the University of Texas in Houston are either in the process of abandoning the budget or have eliminated it. In its stead is the use of rolling forecasts, in which projections are made on expected revenue, expenses and profit each quarter on the ensuing 12 or 18 months based on the previous quarter’s actual performance.
Why is this a better system? “Because things change quickly,” Santangelo said. “Reality unfolds over the course of the year. This requires a more refined process, where you can re-measure where you stand now compared to your original forecast at the beginning of the fiscal year. Then, you can make appropriate adjustments to operations to achieve what you need to achieve, profit-wise.”
A Better Way?
Critics lambast the customary budgeting exercise for wasting time and energy that can be better expended elsewhere. Managing to a plan drawn up 12 months to 15 months earlier also is not a very agile or dynamic way to seize opportunities. Worst of all, the numbers rarely add up as expected.
These detriments were clear to Santangelo for some time, but were in sharper focus as Susquehanna Health finished a $250 million master facilities construction project in 2012, which included a new hospital tower. The budget had assumed an increase in patient volume requiring additional staff once the doors opened. Unfortunately, these assumptions proved wrong. “We experienced pretty substantial and clearly unexpected budget variances,” he acknowledged.
This was the final straw. The CFO put together a plan to replace the annual budgeting exercise with a 12-month rolling forecast, and presented it to the board of directors, which gave it the thumbs up. The organization’s last budget expired in June 2013. “We’re just at the outset of the rolling forecast, and are still in the process of adjusting our internal reporting,” Santangelo said. “But, the financial statement no longer compares to the budget; it now compares to the prior period’s performance.”
Has the new process proved better? “Clearly for the administrators and myself, we are more comfortable living with this decision, but frankly some department managers are still struggling,” he concedes. “We need more leadership and discussion about how to analyze results to date, and have a series of meetings coming up in the next few months (in this regard). When you get used to something like a budget for so long, change does not come easy.”
Not that Santangelo regrets the decision. “There will never be unanimity on whether the move to a rolling forecast was the right decision,” he said. “There will be mixed opinions for some time. I’m confident in the long run our experience will prove we did the right thing.”
