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Putting Your Resources Where Your Priorities Are

Francine Machisko and Scott Clay, for HealthLeaders Media, October 13, 2008

It is probably safe to say that healthcare delivery planning has never been easy. Still, it is equally safe to assume that it has never been more demanding than it is today. So far in 2008 we have endured turmoil in the credit markets, a sea change in regulations and payments affecting physician-hospital relations, and dare we mention the "R" word? If yours is not one of the growing number of healthcare organizations that has formally integrated its strategic and financial planning processes, now is the time. Beyond arguing for the necessity for integrating strategic and financial planning, we have come up with a practical approach for achieving the necessary integration.

Why integrate?

Historically, most providers have actively engaged in two critically important, but often separate, processes: strategic planning and financial planning. Strategic planning processes typically are visionary and involve a wide breadth of constituents—hospital management, the board of trustees, physician leadership, and sometimes the public. The strategic plan takes an all-encompassing view of the hospital and its market and seeks to set a vision and course of action for the mid- or long-term.

By contrast, the financial plan is traditionally developed by the hospital's "number crunchers" with little input from these other constituencies and tends to focus on short-term demands rather than long-term or anticipated needs. More significantly, the two plans are often developed in isolation—with strategic priorities set with insufficient knowledge of their financial impact and financial plans developed with limited knowledge of the hospital's strategic vision. As a result of the disconnect between the strategic and financial plans, hospitals often find themselves short on the capital capacity to invest in strategic priorities. To ensure long-term success, strategic and financial planning must be integrated.

What is an integrated strategic financial plan?

An integrated strategic financial plan includes the following core characteristics:

  1. The process is inclusive. Key financial data and projections are shared with the broader strategic planning group, and preliminary strategic rationale and priorities are understood by mid-level financial managers.
  2. The strategic and financial components of the plan build on each other in a step-by-step manner. For example, the strategic environmental assessment informs the financial projections, and the financial capability assessment is a factor in framing key strategic issues.
  3. The strategic priorities resulting from the plan are demonstrably affordable and are likely to improve the long-term financial viability of the organization. Likewise, the long-term capital plan represents an allocation of financial resources that best supports the strategic direction.

How can strategic and capital planning be effectively integrated?

The answer to this simple question is for the hospital to create a strategic financial plan that aligns and coordinates the strategic goals of the organization with its available resources. The two plans, in essence, become one.

The following provides an outline of what a typical integrated strategic planning process might look like.

Step 1: An environmental assessment is conducted that examines both the hospital's internal trends and external market.

Step 2: Baseline financial projections are prepared that outline the hospital's utilization, financial performance, and economic position based on the findings from Step 1.

Step 3: The hospital's current and future financial capability is determined. Specifically, the hospital seeks to answer the question, "What funds are now and will be available for investment in strategic initiatives?" This step includes an assessment of internally-generated funds, as well as an assessment of untapped debt capacity and philanthropy. At this point, it is wise to determine how much capital will be allocated for strategic initiatives versus the hospital's other needs (e.g., replacement or maintenance capital, mission capital, and safety stock or capital reserves).

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