Healthcare Financial Planning Using Rolling Forecast

By Alan Newberg and Jay Sutton
| 2/23/2016
Healthcare Financial Planning Using Rolling Forecast


Considering the dizzying pace of change that marks the world of healthcare since the passage of the Affordable Care Act, now might be the time for hospitals and health systems to consider adopting a more dynamic, responsive approach to financial planning that could facilitate smarter, timelier projections and increase time for other decision-making analytics. A rolling forecast meets these guidelines and can be a worthy alternative for the annual budget.


Annual budgets are no longer useful for several reasons:

  • Data is stale. A typical healthcare organization begins developing volume assumptions three months or longer prior to year-end. Once the budget is completed, it is locked for the year, regardless of any changes in the marketplace.
  • The process is resource-intense. Though the specifics vary from hospital to hospital, many finance teams spend close to 100 percent of their time three months each year on preparing the annual budget. A finance department with four specialists assigned to the annual budget, for example, dedicates a full-time equivalent exclusively to this activity.
  • Substitute performance measures exist. For financial performance analysis and expense control, prior-year data (month, quarter to date, or year to date) usually provides comparative information that is as good as, or better than, the annual budget. In fact, nearly every organization compares current performance to both budget and prior-year data.

CEOs and CFOs want their financial professionals to spend less time on commodity transactions and routine activities and more time on decision support. Executives need a continuous source of business intelligence to deal with the plethora of complex decisions they face on everything from bundled payments and accountable care organizations (ACOs) to population health management and managed care contracts. Yet, with internal and external pressures to cut costs, most healthcare organizations have elected not to add financial resources.

Benefits of a Rolling Forecast

A rolling forecast continuously updates a financial plan by adding an accounting period (typically a quarter) when an earlier accounting period elapses. Most rolling forecasts project financial performance for 12 or 18 months. In addition, they model expected performance at the entity or service-line level rather than the department level, and they focus on revenue and expense categories (labor, supplies, etc.) rather than individual accounts. The approach allows organizations to build and modify a financial plan around current performance expectations (based on operating and strategic initiatives) and real-time results.

Another benefit of a rolling forecast is that it offers a particularly cost-effective and pragmatic alternative for healthcare providers with limited staff and resources by freeing up the significant time and talent usually spent on annual budget preparation and reallocating this time and expertise for value-added analyses instead. Typically, updating a rolling forecast each quarter may take less than half the effort of preparing an annual budget, depending on the efficiency of the hospital’s annual budgeting process and the detail of the rolling forecast’s assumptions and analyses. A rolling forecast also allows providers to focus expertise and effort on entity or service-line issues rather than routine areas of operation, update assumptions quarterly to maintain rolling assumptions, and reduce involvement in politics and time-consuming negotiations with department leadership.

Of course, the shift from an annual budget to a rolling forecast must come from the top down and have the support of senior leadership. Winning that support involves educating leaders, and to help with that, the benefits of the new approach can quickly be made apparent by demonstrating the greater value within the context of an actual strategic decision. When an opportunity presents itself, the finance team should devote extra time to an analysis of a decision and add extra scenarios to financial models – or evaluate and modify service costs – before developing margin analysis. The added analysis should help senior leadership feel more comfortable with its decision and serve as an example of the advantages of a rolling forecast.

Deciding to Transition to a Rolling Forecast

The first step in deciding whether to make the transition to a rolling forecast is to assess the return on financial resource investment. How much time is your organization devoting to annual budget preparation? Even more important, is the current budgeting process helping the organization move forward, or is it holding back the organization? Have strategic decisions been made without sufficient financial analysis due to a lack of resources? With added resources, would the decision and outcome have been different?

The second step is to conduct a risk assessment. Start by identifying the risks related to eliminating the annual budget – for example, less control over departmental expenses or loss of an annual financial target. Next, estimate the impact and ramifications if the risk occurred and the likelihood of the risk occurring. Rank the impact and likelihood for each identified risk as high, moderate, or low. Based on the scores, determine if the risk is worth the reward.

Transitioning from a static annual budget based on data that is several months old to a more dynamic method of financial planning makes sense in the current environment of rapid change and uncertainty. 

 



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