The basic tenets of financial planning by hospital and care system leaders remain the same, but the status quo is no longer the baseline. Evolving reimbursement models, physician alignment, exposure to health insurance exchanges, emerging retail initiatives — all of these developments, and more on the horizon, necessitate a continuous strategic financial planning process that is integrated, disciplined and supported by analytics.

The American Hospital Association’s Hospitals in Pursuit of Excellence team collaborated with Kaufman, Hall & Associates to provide step-by-step advice on the financial planning process and how it can help hospitals and care systems to plan for value-based care and payment. “Navigating the Gap Between Volume and Value: Assessing the Financial Impact of Proposed Health Care Initiatives and Reform-related Changes” was written by Jason H. Sussman, managing director, Kaufman Hall, and Brian R. Kelly, executive vice president and chief financial officer, Excela Health. According to Sussman, “What’s important now is building financial projections that reflect reality — that are not aspirational but operational.”

It is important to follow a time-honored, fundamental financial planning principle: Cash flow must be sufficient to meet the strategic capital needs of the organization, within an acceptable risk tolerance. To provide high-value care, an organization must (1) establish parameters of financial performance, (2) balance sources and uses of capital, (3) estimate a future financial trajectory, and (4) assess how changes to key assumptions will affect its financial position.

Sound projections are integral to developing a realistic financial outlook, including setting goals and performance targets to keep the organization within its “corridor of control” — that is, balancing its strategic requirements and capital capabilities, while protecting its long-term financial integrity. This balance drives financial support for the organization’s strategic direction.

Baseline projections typically reveal sizable performance gaps relative to an organization’s strategic capital requirements, according to Sussman and Kelly. Working from a realistic baseline plan, leaders must incrementally test the impact of major strategies or changes on the organization’s ability to bridge the gap between projected results and targeted performance goals. Strategic cost-management, focused on achieving efficiency, historically has been a mainstay of operational efforts. Sussman advises that hospital and care system leaders move beyond strategic cost-management toward strategic cost-transformation. Trustees and senior executives should ask: Are we doing the right things? Providing the right services? Are we using the right venues and the right providers? Can we sustain these over the long haul?

To continue meeting community health care needs, leaders can focus on a potential solution set that includes traditional cost-management initiatives, facilities planning and information technology initiatives, business/service line rationalization and potential partnership synergies.

Robust and disciplined financial planning is critical to providing high-quality, high-value care to patients. Traditional financial and capital planning still make sense in a changing business model, but hospitals and care systems today must be more focused on strategy, Sussman notes. Trustees and senior executives need to be proactive and adjust the organization’s strategies for ongoing success. Sussman urges leaders to be far more aware of the external environment and its changes, and then translate that knowledge internally, applying the analytics and planning, to create a portfolio of initiatives that define the organization’s road map for success. T

To access “Navigating the Gap Between Volume and Value,” go to www.hpoe.org/volume-value-gap.

Cynthia Hedges Greising (cgreising@aha.org) is a communications specialist for the Health Research & Educational Trust, Chicago.