How Health Systems Are Improving Their Annual Budgeting Process
February 16, 2023
Today’s rapidly changing market has influenced numerous health systems to transition away from a traditional budgeting process. It is no secret that a traditional annual budgeting cycle takes a very long time to create and once complete, it quickly becomes obsolete. This is not fruitful in a volatile environment. Having a traditional budgeting cycle is not only extremely labor intensive, but it also provides little to no value to healthcare systems.
Although time-consuming, inaccurate and inefficient, a traditional healthcare budget process is loved because of its familiarity – most executives have been using this system for their entire careers. Even though hospital leadership knows the shortcomings of the traditional budget, they feel tied to it simply because shifting the organization’s mindset can feel like too daunting a task.
Moving Away from a Traditional Annual Budget Cycle
Many leading healthcare systems have begun adopting a more agile approach to budgeting such as dynamic planning using StrataJazz®. Dynamic planning is a process that embodies a set of leadership and management principles that allow organizations to maximize their responsiveness to ever-changing market conditions. A successful transition to dynamic planning involves healthcare systems adopting a continuous improvement mindset where financial ownership is passed on to frontline managers, those who control most of the costs at organizations. When organizations decentralize financial stewardship, it empowers managers across the organizations to maximize the efficiency and quality of every financial decision being made. This results in long-term, smaller opportunities being found every day that ensure organizations year-over-year cost reductions.
OSF Healthcare’s Transition Away from Traditional Budgeting
OSF Healthcare, like many other leading healthcare organizations, used to follow a traditional budget cycle. The organization devoted thousands of hours to building its annual budget cycle, yet saw it became outdated within the first quarter. After continuous frustration with its traditional form of budgeting, the organization decided it was time to move toward a more agile form of budgeting that would improve its budget cycle. partnered with Strata Decision Technology to design and implement a dynamic planning approach using StrataJazz.
This leading healthcare organization followed 3 steps in adopting dynamic planning:
- Replace the Traditional Line-Item Budget with a Baseline Forecast
Most healthcare systems, including follow a line-item budget which presents information such as expenses for a specific period. These financial statements are then grouped into categories and displayed in close proximity for comparison purposes. This is time consuming and tends to become outdated after only a couple of weeks.
OSF Healthcare moved to a baseline forecast that allows the organization to spend less time on planning and provides flexibility when it comes to unprecedented financial decisions. A baseline forecast is an innovative way to create a budget by looking at an estimate amount of future demand based on historical demand resulting in a baseline budget that is flexible to a volatile environment. - Establish Quarterly Forecasts Based on Performance and Shifting Assumptions
Once a quarter, leaders within the organization come together to quantify the trajectory of their business and identify course corrections and monthly performance management. The team then evaluates department-level financial stewardship and performance to protect against cost growth. - Create Monthly or Quarterly Re-Forecasts
Once a month or quarter, leaders evaluate the trajectory of their business unit and identify course corrections.
“We look at entity-level performance and then map out the trajectory based on the work we’re doing or just the current circumstances. We forecast the current year and the next year. To move toward organizational performance, we can use it to determine if we’re on track. We use that as our toolset to help drive that conversation,” said Jennifer Ulrich, OSF’s director of financial planning and management reporting.
Paired with a rigorous monthly accountability process, managers began focusing on how to improve financial and operational performance, not just track their budget. The healthcare organization now has a consistent source of truth and well-defined metrics for performance management.
OSF Healthcare’s Results
After adopting Dynamic Planning, OSF Healthcare has seen a significant and measurable impact. The organization was able to free up to 20,000 hours of leaders’ time as well as decrease its planning cycle by six weeks. Leaders throughout the organization were given thousands of hours back, the equivalent of $1 million or 10 full-time employees. These leaders repurposed their time to focus on improving operations and continuing to drive efficiency and cost improvement.
“It’s focused on higher-value financial planning efforts,” said Kirsten Largent, senior vice president of financial operations at OSF Healthcare. “We’re seeing positive response throughout all our organizations. What we’re seeing is the acceptance and appreciation of this process and folks understanding this is what will carry us into the future. I feel the tide of the industry is moving in this way.”
Addressing Culture Challenges When Adopting Dynamic Planning
The adoption process of dynamic planning can be seen as a daunting task, yet OSF Healthcare saw few to no challenges. The organization’s only challenge was guiding its staff to feel comfortable adopting a new way of doing things. Having a plan set in place to educate staff on changing processes is crucial to helping them feel comfortable doing something new. Naturally, change is uncomfortable, but luckily, this discomfort does not last long. Quarterly forecasts and overall budget agility gave staff a sense of security they didn’t have previously.
By adopting advanced planning methods like rolling forecasting, organizations can more quickly, accurately and efficiently model and analyze new opportunities and risks in their financial planning.