In order to adapt to the ever-changing Healthcare landscape, it is important that we periodically review and assess the applicability of your organizational approach to capturing and analyzing the critical insights needed to guide your financial and clinical decision making.

In this article, we will focus on the measures that Healthcare providers are taking to ensure that the budgeting and financial planning processes are aligned with their organization’s critical priorities, while providing the mechanisms to anticipate and adjust according to the evolving circumstances and impacting conditions of Healthcare world today. Specifically, we will explore how Service Line budgeting can help solve for these contrasting and often conflicting drivers.

In an article in Harvard Busines Review by Haas, Jellinek and Kaplan states that much of the blame for slow adopters to innovation “can be attributed to misaligned budgeting and incentive systems.” Most budgeting processes focus on the collection of department centric information, or as Lisa Miller states for Vie Healthcare Consulting, “disconnected units”. It includes statistics for items like equipment usage, supplies and labor hours that focus on department level activity. Financial metrics will be based on general ledger account codes and may also include gross revenue values based on charge code activities. This is useful information for managing day-to-day activity. But, what about the overall mission of your organization and market conditions that impact the quality and financial results of your clinical activities?

Strategic planning and management of an organization often focuses on items that are very different than the details of the budgeting process. Short term acute care hospitals, for example, will delineate between inpatient and outpatient populations with a focus on service lines and payer mix. Results of analytic exercises at this level will heavily influence decision making. So, wouldn’t it make more sense to plan the way you manage? What if you could create a financial plan that aligns perfectly with the way your healthcare organization measures, monitors and manages your operations to support decision making? And yes, you can, but how?

Benefits of Service Line Budgeting

To accomplish an alignment of planning and managing, your budget needs to be based on the same definition of metrics and classification of activities as your management reporting and analysis. One example that demonstrates how to accomplish this is to build department metrics based on service line impact. For example, “Cardiology” as an inpatient service line and the Medicare portion of the payer mix. An overall Medicare payer mix value of 40.9% (industry average based on Becker’s and Definitive datasets) is useful for financial analysis but not for operational planning. If we isolate Inpatient cardiology as a service line, the Medicare payer mix for this population can measure 74.2% for a large acute care organization. This material difference will have a major impact on your forecasting results and is a critical detail to accurately forecasting net revenues for a service line.

But what about maintaining the matching principle of revenue to expenses? This is where the service line definitions require department level information. Department level expenses of the Coronary Care Unit (CCU) will be responsible for a major part of the resources used to support a Cardiology service line. Correlating information between these two perspectives (level of detail) will establish a strong connection between the organization’s mission and the day-to-day clinical operations that will accomplish that mission. However, there is more to consider with this process.

Create a Comprehensive Plan Using External Sources

Are you building your plans in a bubble? In your strategic planning, do you include the current demographics of the population you serve? Do you include population health strategies as part of your budgeting process?

Consider a mid-sized community hospital that serves a specific geographic region or neighborhood. They can easily gather information about the community they serve; census data is one example. Using a list of zip codes from historical patient activity is one way to define the geographic area to analyze. If the majority of your population is between age 55 and 65, you can project 3, 5 and 10 years of data regarding payer mix with a focus on Medicare. This data can be refined by applying mortality rates. Then, include in your analysis clinical statistics related to coronary health. Compare this with an analysis of the same metrics for your cardiology inpatient population history.

With these insights you can confidently calculate volume projections for the cardiology service line that will include Medicare payer mix analysis. The final piece is to use this information to set values and establish forecasts for the CCU department. The result will be properly matched revenue and expense values that will provide accurate forecasts that can be integrated with strategic planning and clinical operations management, which will in turn support decisions that maintain high quality standards, positive clinical outcomes, elevated patient satisfaction scores, and favorable financial results.

What is it worth to your organization to accurately predict what will happen in the future?

How important is it to avoid decisions that negatively impact your profitability?

What is the value of identifying service lines with the greatest financial impact your organization?

How much risk are you willing to assume with projections based on stale information?

Harris Affinity’s Budgeting and Planning Reimagined delivers financial plans that support your unique strategies and management processes. Please join us on October 13, 2021 for an event where we will explore the details and value of having this information as a guide to maintaining high quality standards and a health financial position for your organization.

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