Forecasting Made Simple

A CFO might historically be able to estimate bad debt and denial experience--a certain percentage of money that won't actually be paid. "You might get 30 cents or 40 cents on the dollar, which is not atypical in healthcare." In smaller institutions, a CFO can conduct a 100 percent review of all accounts and come up with a pretty good estimate of how much revenue the hospital is likely to recognize in the end from a batch of accounts.

But with the large numbers that Partners deals with, it's very difficult to do that, Silveria says. When Silveria came to Partners nine years ago, his department had at any given time between 200 and 300 people in accounts receivable and more than a million accounts. "Eighty-five percent are under $500," he says. "So how do you sample that?" Not very effectively, it turns out. "If you have a margin of around 1 percent to 2 percent and you're off on your reserves by even a small amount, all of a sudden the CEOs don't have the margin to pay for staffing or capital expenditures, and that can cost people their jobs," Silveria says.

Help in automation Not to mention what being a half a percent off in reserves management can do to a CFO's job security. So Silveria went hunting for a finance data management system tailored for large hospitals and systems that would allow the data, which was residing all over Partners' information systems, to be collected and collated from various sources to run accurate reports whose genesis would rely more on science than art--allowing the CFO to provide a clearer picture of earnings quality for the CEO and board.

"If you had a good year, the board wants to know: Did you skimp on your reserves? Did you take prior year reserves into income because you ended up not needing them?" says Silveria. If so, that means unnecessary cuts may have been made--or that money was spent that the system really couldn't afford and wouldn't have spent had it had a clearer picture of its previous year's earnings.

Silveria spent years looking for a system that could do this work and eventually settled on MedeFinance, software from Emeryville, CA-based Mede that would allow Partners to make decisions based on real-time data rather than on estimates that wouldn't be confirmed until an end-of-year audit.

Partners' big motivation was to be able to determine a reserve number that was not overstated, not understated, but just right, says Brian Robertson, Mede's chief operating officer. "In the past, they were unnecessarily leaving income on the table and not pulling it through the profit-and-loss statement because they had uncertainty about their reserves."

The MedeFinance tool allows Silveria and others in the finance department to look forward instead of backward--and allows other leadership team members to make decisions based on the money the hospital is actually collecting. "We can also roll forward our bad debt calculations and make predictions about the future," Silveria says. "I can know whether I've stated my income statement properly. Was I covered or was I short, and am I actually having to provide more reserve this year to cover last year? When you're dealing with large numbers, you need this kind of automation."

Human nature causes people to over-reserve. But there is an appropriate balance, and the more a CFO is able to draw from real-time data, the more confident he can be that he's "just right." Tools like MedeFinance allow Silveria to constantly evaluate his balance sheet model and make sure that if he's improved operations, he can reevaluate and change the reserve rate nearly immediately.

"You don't want to end up without enough reserve," says Silveria. "That would mean you're telling your CEO you're making money when in fact you're not. It's an ugly surprise and usually a 'career-limiting event,' as they say."

Philip Betbeze is finance editor with HealthLeaders magazine. He can be reached at pbetbeze@healthleadersmedia.com.