Today, incremental change is a distant speck in the rearview mirror, and annual budgeting has become inadequate to support management decision-making in the upheaval hospitals see through their windshield. In these circumstances, hospitals can benefit from budgeting based on rolling forecasts.
At one time, incrementalism was the watchword in hospital strategic and financial planning. To be sure, hospitals needed to track and plan for short-term and long-term changes, but on a year-over-year basis, they typically would make only incremental changes to areas such as elective volume, supply expenses and receivables collection. Annual forecasting and budgeting seemed adequate to keep the organization fiscally and strategically on track.
With downward pressure on revenue, rising expenses and increasing market volatility, hospitals have begun to implement quarterly forecasting techniques adopted from Fortune 500 companies. These forecasts incorporate historic and current operating conditions and performance, along with adjustments for one-time events, to generate more frequently updated projections for the next six to 12 quarters. This process has given many hospitals a more refined picture of current and likely future performance and has allowed them to make more timely course corrections as necessary.
Forecasting and budgeting disruption
The COVID-19 pandemic has presented hospitals with the most tumultuous forecasting and budgeting situation imaginable. Planners are left trying to predict the unpredictable. When will the surge arrive? How many people will be affected? What level of spending will be necessary for supplies such as ventilators and personal protective equipment? When will non-urgent, elective cases return to the hospital, and how will volumes be affected by the economy? How much relief will come from the government? How much will commercial insurers pay for COVID-19 patients? What will be the short-term and long-term effects on profitability, liquidity and capital structure?
Most organizations that are currently trying to approve their fiscal year 2021 operating budgets have minimal information about the effects of COVID-19 on which to base those budgets. Organizations with a calendar-year budget may have more time to develop information about the immediate effects of COVID-19, but no organization has a handle on the full effects of the virus or the economic recession coming out of the virus.
A few key factors related to volume, revenue, expense and cashflow projections show how COVID-19 is disrupting traditional forecasting assumptions.
Volume and revenue factors
Key factors related to volume and revenue include the following:
- Nonurgent cases. Anecdotally, some health systems are predicting a 75% or greater decline in these cases until at least the end of May or June. Even over time, volumes may not return to pre-COVID levels.
- COVID-19 cases. Demand and duration will vary by region and market.
- Service mix shifts. Medical case volumes will increase while surgical cases decline in the short term; whether surgical cases will return and, if so, how quickly are difficult to predict.
- Payer mix shifts. Payer mix will shift toward Medicare; assuming a recession follows the COVID-19 pandemic, hospitals can assume a shift toward Medicaid payment.
- Government support. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) includes a $100 billion funding pool to support hospitals, which is now being distributed by the U.S. Department of Health & Human Services.
Two primary expense areas may be subject to disruption:
- Workforce. Near-term volatility could include workforce increases to meet spikes in need to care for COVID-19 patients. Other necessary responses may include premium pay, additional staff sick leave and temporary reduction of benefits where necessary.
- Supply chain. Near-term issues include supply shortages and a spike in supply costs. Medium-term and longer-term effects could include higher inventory requirements.
Cash flow factors
Organizations also may experience disruption in two key areas affecting cashflow:
- Collections. Near-term issues include slower processing of claims and reduced volume of point-of-service collections. Moving forward, organizations may face increases in governmental receivables and increases in bad debt from commercial patient
- Accounts payable. Hospitals may need to extend payment terms.
Today, incremental change is a distant speck in the rearview mirror, and annual budgeting has become inadequate to support management decision-making in the upheaval hospitals see through their windshield. Only a more flexible method of rolling forecasting can track and budget for the unknown and constantly changing road ahead.
Rolling forecasting in the COVID-19 environment
Tracking the immediate needs of the crisis and forecasting the post-COVID-19 environment requires timely data, sophisticated analysis and methodologies that provide sufficient flexibility to adjust to highly unpredictable and complex near-term and long-term effects.
Annual budgeting by itself simply does not provide the frequency or flexibility to meet the demands of the current planning environment. Hospitals require a process such as rolling forecasting that provides efficient and timely updates that enable management to assess changes frequently and adjust quickly to a volatile environment.
This approach to forecasting and budgeting may represent both a cultural and a process shift for many organizations. In a rolling forecasting process, participants come together for short blocks of time throughout the fiscal year to both assess and update the organization’s financial performance. The entire process rests on answering the question, “How have the previous 30 days changed our view of the present and future?” In the COVID-19 pandemic, the answer to this question will frequently change, requiring managerial course corrections and adjustments to position the organization for success.
In addition to providing short-term managerial guidance, rolling forecasting is integrated seamlessly into the larger integrated decision-making process which includes strategic planning, financial planning, budgeting/forecasting, capital allocation, capital budgeting and outcomes measurement. Biweekly or more frequent productivity reporting rolls up into monthly performance reporting, which informs rolling forecast updates on a monthly or quarterly basis. In turn, these rolling forecasts are used to update strategic planning and associated initiatives, financial plans, and capital allocation and management. In this way, actual performance — and a better understanding of future conditions — can influence strategic decisions, organizational initiatives, future plans and expenditures.
While the financial plan continues to drive the long-term balance of sources and uses of capital, rolling forecasts can be used to guide course corrections that will be necessary as the effects of COVID-19 and a likely recession cascade through healthcare organizations and their communities. Long-term profitability, capital availability, major strategic investments and capital structure decisions are all driven by the long-range financial plan, informed by an understanding of how near-term performance trends and changing near-term models affect key performance indicators. During the COVID-19 crisis and the likely post-COVID recession, key indicators for rolling forecasting will focus on service mix, revenue, supply costs, average pay and average worked hours. Rolling forecasts for those key indicators, in turn, will enable the organization’s management to implement near-term plans and manage through longer-term implications.
Technology is the foundation for successful rolling forecasting. Forecasts must be linked to both financial and patient-centric data sources to promote accurate planning across volume, payment and expense plans. The technology needs to incorporate input from multiple individuals, teams and departments, with an audit trail of inputs. Finally, the technology needs to ensure a workflow in which all inputs are systematically collected, incorporated and approved by appropriate individuals.
The task at hand
It is difficult to overestimate the task at hand. Rarely, if ever, have hospitals been required to manage through clinical and financial disruption on the level of that created by COVID-19 — disruption that could last for months or years. The coronavirus has rendered most existing assumptions about short-term and long-term performance irrelevant. Answers to basic questions — e.g., How many patients will seek care in our organization this month? How much revenue will we capture this month? How will we be able to finance new initiatives? — appear to be anybody’s guess.
Despite the inherent confusion of the current situation, organizations do not need to grapple in the dark. They can identify the salient factors, draw on available data and create alternative operational and financial scenarios. Then, by understanding the effect these scenarios have on strategy, they can design appropriate actions.
To thoughtfully assess this climate of chaos, hospitals need a structured, carefully orchestrated process of rolling forecasting that draws on the best available information on a frequent and consistent basis. They also need a new framework for planning — a framework that replaces an assumption of incremental change with systematic analysis and response at a pace and to a degree never required in healthcare.