Forecasts aren’t just important for the finance team’s internal customers, like the executive group that uses the targets to make business decisions. There’s also the external rating agencies that rely upon the data.
“One of my goals is making sure our forecasts take into account that we are a AA-rated hospital and that our target ratios are on track with what a double AA-rated hospital should be,” says Marc Cadieux, director of financial services at Children’s Hospital and Health System in Milwaukee. Being a AA-rated hospital means having a debt-to-capital ratio of less than 30 percent as well as having more than 200 days cash on hand.
At most hospitals, there’s at least one department head who still requests 15 FTEs when she only needs 2. Such thinking harkens back to the time when hospitals were budget-focused and not forecast-focused. As Children’s Hospital plans to open a new patient tower in 2009, financial leaders have had to confront this thinking during their first round of financial forecasts. “We in finance need to help the department directors understand the key revenue drivers and performance measures that help us keep our AA rating. Some still view budgeting and forecasting as a wish list. They don’t realize that rating agencies are always looking at us and that what happens in their unit affects the entire health system. The challenge is trying to change that culture,” Cadieux says.
Adjusting that mindset means putting finance people “on the streets”—or rather, having a finance rep at operations meetings so hospital leaders can understand how projects will affect forecasts and vice versa. “I try to go to every meeting with projections in my portfolio,” Cadieux says.
Besides the buy-in challenges, another issue is uncertainty in the capital markets since the auction-rate bond market “disappeared” last May. Organizations must grow their capital capacity each year to fund new programs, reinvest in services, and keep a healthy financial reserve. “We are trying to figure out what interest cost and cost of capital to use in our five-year projections. We have an idea, but no one knows for sure what the capital market will do.”