Building strong financial projections

One key to putting together strong financial projections for healthcare projects is taking time at the outset to consider the design.
“Before you start modeling, there are a lot of decisions you have to make,” said Judith Belt, corporate director of strategic planning at Emory Healthcare, the Atlanta hospital system with $2.6 billion in annual net revenues. The initial considerations should include the projection’s time frame, the level of detail and the stakeholders involved.
The amount of detail depends on the project, Belt said, with smaller projects requiring less. “If it’s a major, major expenditure, like should we buy this hospital, it probably needs to be more detailed, because the risk is higher,” she said.

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Ensuring the model can handle the sensitivity analyses that decision makers will want to see is another factor in determining the level of detail. “What if your payer mix changes or salary costs increase at a higher level than we thought?” Belt said. “You need to build the financial model to be sure you can do that sensitivity analysis.”
Financial models involve “a whole series of assumptions” about such elements as volume, payer mix and salaries, she noted. While a healthcare system may have historical data to work from, Belt said putting together projections for a new line of business, one for which there are no historical data, is more difficult.
There’s also the possibility a project’s champions will push to use more optimistic assumptions in a model, she warned. “As an objective party, you can’t necessarily justify those,” Belt said.
Once the model is complete, it’s time to do a reality check. Belt cited as an example a model that suggests a project could grab 25 percent of market share. “That’s not an easy thing to do,” she said. “At the end, you just need to take a step back and make sure that things are reasonable.”

Benchmarking
The biggest challenge in putting together financial projections for hospitals is the lack of good benchmarking data, said John Bodine, managing director and head of the financial advisory practice at Huron Consulting.
“You can get benchmarking data for the hospital in total, but it’s real difficult to drill down to the service line or the department level, and that’s really where those decisions need to be made,” Bodine said.
While it’s usually possible to track revenue by department, the data on costs is obscured by overhead, he said. “They’re just dumping [the overhead] down on these departments.” And the way overhead is allocated isn’t consistent from hospital to hospital, which makes benchmarking difficult, Bodine said.

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Healthcare reform has created more issues when it comes to financial projections. “It’s hard to estimate the impact of the ACA,” Bodine said. “We don’t know where the payer mix is going to stabilize.”
The uncertainty underscores the need for healthcare systems to have contingency plans or build cushions into their projections, he said. “You don’t want to be in a process where you need to hit every dollar on that forecast in order to continue functioning as a hospital.”
Belt warned against including too much detail in financial presentations to the board. “If you do that, you lose the board members,” she said.