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Uncertainty is the new norm in health care, forcing hospitals and systems to be more nimble and data-driven. By using sophisticated analytics to identify and forecast trends, hospital financial teams can play a more strategic advisory role with the board and senior leaders. Boards should push the finance department to adopt more sophisticated planning and monitoring tools to ensure healthy financial, operational and clinical outcomes.

Robust Planning

Hospitals and systems that develop strategic plans across the organization should conduct multiyear planning, and analyze and model multiple potential scenarios.

Efficient multiyear planning. Given current industry dynamics, defining a multiyear financial plan must be an integrated process involving both financial and operational leaders. Multiyear forecasting and planning requires insight and visibility not only into financial trends, but also the impact of existing or proposed initiatives on the business. More progressive organizations have adopted statistically driven methodologies to streamline financial modeling multiple years in the future. A multiyear forecasting framework enables the finance department to model the impact of various potential changes to volume, for example, in inpatient admissions and outpatient visits, and rates (such as labor cost per adjusted patient day) and evaluate the impact on the hospital bottom line as well as across key performance indicators. 

Rolling forecasts. Hospital finance teams are embracing rolling forecasts as a way to monitor and track performance against established financial targets, and their organizations are benefitting. Actual and monthly projections for 18 months can provide a trended view of performance, often reported at an entity level. These models help to assess current performance against planned performance and can influence multiyear projections and detailed operational plans. Rolling forecasts often uncover where established planning assumptions may be inaccurate, giving boards and executive leaders the insight to proactively correct action plans or even reforecast, if needed. 

"What-if" modeling and scenario analysis. All too often, hospitals and systems budget or forecast with one economic scenario in mind. Leaders feel a great sense of accomplishment in completing the budget or the forecast without realizing that all the attention is focused on one potential scenario. With so many external and internal factors shaping providers, financial teams can use "what-if" modeling and scenario analysis to examine alternative views of the future.

This modeling involves layering the financial effects of including or excluding strategic initiatives (such as launching new service lines or expanding facilities) and the impact of fluctuations in key internal drivers (service costs or labor rates) or external drivers (admissions or reimbursement rates) on the organization's income statement, balance sheet, cash flow and key ratios. Using this approach, each discrete initiative can be modeled in detail so the potential impact is clear. Scenarios can help to determine the right mix of activities to support business and financial goals. Modeling the uncertain future has become a competitive advantage for some hospitals by allowing them to prepare for potential changes and respond more nimbly when changes do occur.

Monitoring Performance

To manage established strategies and financial plans, boards and executives should direct the finance department to continuously monitor performance results. Finance professionals should be able to answer the following questions to determine the organization's success: Are we achieving the results we hoped? Do we have visibility into where outliers exist and why? Hospital finance teams can use several techniques to better understand the organization's success in executing a defined strategy, including scorecards, key performance indicator monitoring and decision support.

Scorecards and key performance indicator monitoring. Hospital leaders often create balanced scorecards to provide a comprehensive and holistic view of performance across the organization. This monitoring tool also has become a mechanism that forces organizational leaders to clearly define strategic objectives, goals and measures across various perspectives including financial health, clinical effectiveness, employee retention and growth.

Decision support. The goal of any performance monitoring function is to provide insight to drive decisions. Having clear visibility across management levels into outliers is critical in this process. Reporting is often a point-in-time snapshot of financial and operational statistics that don't provide insight or highlight what is going wrong or right. It rarely offers a feedback loop to board members and senior leaders as to the "why" behind this performance. Hospitals and systems are beginning to leverage alerts to highlight where variances exist, incorporate notifications to push information to stakeholders, and provide a method to collect comments and action plans on specified outliers. This creates a stronger, closed-loop reporting cycle across management levels within the organization.

The work of hospital and system boards has never been more complex. But by incorporating more sophisticated financial planning and monitoring in the larger strategic planning process, trustees and senior leaders can make sound, informed business decisions to ensure profitability and both short- and long-term organizational success.

Jay Spence (jspence@axiomepm.com) is vice president of product and industry solutions, Axiom EPM, Portland, Ore.