Forecasting Made Simple
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Well, maybe not simple. But automated data management tools can make estimating revenue a little easier for CFOs.
Rich Silveria would love to run a sales report at the end of the day and go home knowing how much money his hospital system, Boston's Partners Healthcare, took in for the day. Similarly, he would like the relative peace of adding up those daily sales reports to get revenue numbers for the week, the month, the quarter or the year.
But in healthcare, it's not that simple.
"Unfortunately, we're not like a retail merchant where you can run a sales slip and you'll know what you're going to get paid right away," he says.
The multiple payers, payment streams and contracts that complicate when and how much the system gets paid for what service are enough to intimidate all but the most unflappable finance chiefs. At one time, Silveria, the corporate director of revenue and finance at Partners, relied on a combination of labor-intensive audits and educated guesses. Like most in his field, Silveria knew the aggregate charges for a given period of time. He sort of knew, in the aggregate, how much Partners had already been paid and how much it was supposed to be paid. And he kind of knew, based on experience, how much it was actually going to be paid in the end compared to the hospital's charges. The difference is the reserve, in financial parlance.
"Essentially you're trying to predict based on past experience what your losses are going to be for certain things like bad debt or charity or denials from managed care payers because you didn't follow some rule properly," he says. "Whatever you don't get paid in cash needs to be reserved somewhere."
Silveria fancies himself a pretty good estimator of reserves. But he wished for a more precise tool that would help smooth out his financial forecasting so Partners could count on his numbers to be able to make sound decisions. The ripple effect of having a more precise tool could be substantial, he thought.
Such is the current state of affairs for most hospital CFOs or directors of finance who must constantly use their skills of educated guessing to draw conclusions about how much money the organization should be taking in and how much it actually takes in--all to be reconciled at the end of the year through exhaustive auditing. When he hears others lament the complexity of healthcare in the United States, Silveria smiles. He's right in the thick of it.
The law of large numbers
Some hospitals or even smaller systems can still manage their reserves with the old-fashioned estimate-and-audit method, says Silveria. But that becomes more difficult to do and more problematic to forecast the larger the system. For a huge system like Partners, with hospitals, physician practices and other business entities that combine to form the largest employer in the state of Massachusetts and rake in $6 billion in revenue each year, "the law of large numbers means that if you're off a fraction of a percent, that's a lot of money," Silveria says.
On a granular level, patients have highly variable revenue profiles. For instance, Silveria says, some patients might have a deductible or large copay. "You have to assume there will be a certain amount of default on that. Based upon experience, how much of that will be expensed as a bad debt?"
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