Moving Beyond the Static Budget

June 11, 2015

Sticking with what you know best describes the current state of affairs in healthcare budgeting. The traditional annual exercise of creating detailed, departmental budgets — remarkably widespread in the industry — is a process which can span half the year or longer, involves hundreds of people, and produces static targets whose relevancy is dubious almost upon publication.

Our own client base at Strata Decision Technology reflects that. Some 60 percent of our clients engage in a static annual budget process, while another 30-35 percent makes some intra-year adjustments to their annual budget but don’t necessarily change the overall bottom line.

A few attempt what is known as a “rolling budget,” an approach in which the annual budget is revised, perhaps quarterly and perhaps with revised financial targets. That can turn the “tax season” of the annual budget approach into a year-long event.

Our clients, however, know that the days of traditional budget process are numbered. Despite the fact that the static budget ignores environmental changes that occur during the year, it does offer a safety net feeling: this is what we know.

But our clients at providers across the country also understand the perils of complacency in today’s market. Every week, I field half a dozen or more calls from leaders looking to revamp budgetary practices—and mindsets. They are looking to overhaul their organization’s approach to managing both clinical and financial performance—it is why they have deployed an integrated financial planning system in the first place.

Changes in the marketplace—namely the shift to outcomes-based reimbursement—call for new approaches to financial management. Moving “beyond the budget” becomes paramount.

Continuous improvement

About 5 percent of our client organizations have already moved beyond the budget and embraced the idea of continuous improvement. Within a year, that number should easily double or triple—and continue to expand.

No longer are department managers held accountable to meeting a yearly target. Instead, they are held accountable for continuous improvement in select metrics. These metrics, such as staffing hours per patient volume, often directly impact the bottom line. Some organizations not only include financial metrics, but also include non-financial elements, such as quality indicators and patient satisfaction scores.

With this new approach, there is still a “target,” and managers are still responsible for meeting their departmental targets. In the new model, managers spend more time monitoring the big picture forest and less time in the departmental detail trees. They are no longer fixated, say, on allocating nursing paid time off. Rather they assure staffing levels make sense as the year unfolds.

Staffing hours are more likely linked to patient volume benchmarks than the static targets of the fixed budget. Managers adjust according to staff-to-volume ratios, not simply tend to a pre-fixed (and easily-gamed) number.

Moving beyond traditional budgeting does require careful planning. Executive consensus is a must before any effort begins. Your senior leaders need to believe in the philosophy of continuous improvement and sell that vision broadly.
I’ve seen plenty of examples of success. In a large delivery system, a small pilot, perhaps at one hospital, is prudent. First, a core group needs to devise a handful of key metrics to track. Typically considered metrics include staffing levels and expense categories on a per volume basis.

Technology plays a supporting, but critical role. By consolidating multiple data feeds, an integrated financial management platform enables consistent planning and reporting across functions, even providing a cross-sectional service line view that moving beyond the budget to outcomes-based reimbursement requires.

In place of the traditional department level budget, many organizations move towards a higher level financial plan organized by service line, as opposed to the departmental silos of the past. For example, if you recruit a new orthopedic group practice anticipating boosted volume, your data analytics capacity should enable you to assess how that volume reverberates across the organization—and how it plays into your bottom line.

Not only do the new surgeons drive activity in the professional setting and operating room, they also affect your imaging, lab and clinical testing departments. Monitoring these metrics in a horizontal view lets managers fine-tune their operational adjustments on an ongoing basis.

The key to moving beyond the static budget lies here: you no longer focus on the silo of the orthopedic group or the imaging department, but rather on the relationship between the two. Remember, your patients don’t categorize your departments into distinct entities—even though the traditional budget does.

Moving beyond the budget is challenging, with more of your hurdles based on culture, rather than technology. But with a prudent mix of select metrics, easily manipulated data and transparent reporting, a new mind-set among your managers can take hold, sometimes surprisingly fast.

That’s a blessing in today’s environment. A changing payer mix might be beyond your control. But your response need not be.

Frank Stevens is vice president of financial planning at Strata Decision Technology.