Are You Running Scared From Financial Forecasting?

There are more than a few ways to create a financial forecast, and more than a few hospital CFOs who opt not to do it. Why? I suspect it's because you're afraid to see a lousy future. I liken the rationale to that of someone running on the treadmill. I often see people at the gym with a towel draped over the little picture of the digital track on the treadmill. If you ask any of these folks why they cover that up, they'll tell you that it makes it feel easier to them. After all, when your head is down and you're running, you don't really want to know what's up ahead—especially if it's a big hill.

I suspect that those folks who "throw over the towel" are the same financial leaders who don't do financial forecasting. They are so focused on today and the coming year that they don't want to see the whole picture—it might be too scary. Now, I for one want to know exactly how much further I have to go to reach my goals—no matter how painful. Yes, I want to know if there are any hills ahead and furthermore, I want to know if there is another better piece of equipment coming to the gym that can do more for me and get me off that godforsaken treadmill.

The last couple of weeks I've been telling you about some of the results from our HealthLeaders 2010 survey. Interestingly, what CFOs are most worried about is the future. What will happen with reform? What will happen with Medicare reimbursements? It seems to me that uncertainty is what people fear most, yet the tool that could help CFOs feel at least a little more certain about these financial times is the one tool in which many of them fail to invest—a financial forecast.

Fear can be paralyzing to a business, but when it comes to finance it can bring ruin. The only defense is to prepare and plan ahead--far ahead--try five to 10 years ahead, not one year. To provide a little perspective on this notion, I spoke with Mark Bogen, vice president of finance at South Nassau Communities Hospital in Oceanside, NY. A 435-bed facility located in Nassau County, South Nassau is just 19 miles east of New York City and has a population of 32,733.

After 30 years in healthcare finance, Bogen, who prior to joining South Nassau was a director at a nationally recognized healthcare financial consulting firm and also worked for 10 years with two national CPA firms, believes in the power of the financial forecast. With over half of his facility's payer mix coming from the government (Medicare and Medicaid), a private insured and a growing uninsured population, there have been few years that he hasn't had to be concerned about the future of reimbursement.

"With the economic downturn across the country and here locally on Long Island, and with people's COBRA benefits running out we are paying even attention to the growing uninsured and underinsured population. Historically our collections have been good, but we made an additional provision in our 2009 budget for this [more uninsured], so we could be prepared," he explains.

Financial forecasting for South Nassau begins with a traditional annual budget cycle in July. They review previous year's revenues and expenses as well as short-term and long-term capital needs for the future. They look to their physician leaders to help them determine what the patient volume may be in the coming years, and to key clinical staff to determine how volume increases will be assigned.

They establish goals for physicians and track their results to determine why they may not be hitting the numbers. They also look at the government's potential impact and try to project where rates may go up or reimbursements may go down. Once they unveil the budget in January they revisit it six months later and compare where they are to where they had projected to be. In short, they do what most other facilities do.

However, in 2008 when they began this process for 2009, the rapid changes that they were experiencing in the market coupled with some of the financial results they were seeing caused them to make some major course corrections.

"We had a significant portfolio which is unusual for any hospital in this day and age, because we made an investment decision to borrow 10 years earlier when we needed to make a significant capital investment in our hospital," he explains. "[In 2008] from an operational standpoint we slowed down the new hires we had budgeted for, and we ratcheted down capital spending plans. We brought capital spending down by 25-50% and we basically stopped our plans for another major modernization project. We reacted quickly as a result of looking at our own financial situation in a rapidly declining market."

Many other hospital financial leaders stopped at that point. They reigned in their costs and then covered their heads and sat tight. South Nassau looked at trends. Realizing that they still needed to grow market share in order to survive, they also needed to forecast. However, they also recognized that predicting market share based on historical and current admissions data wouldn't provide them with enough data to weather and overtake the storm.

"We said if this trend continues with our investments and the entire economy in decline, then governmental payment reductions may soon trip us up even more," Bogen says.

They didn't go high-tech to gather the trend data—I point that out for all the naysayers who claim that financial forecasting has to be expensive—instead they used their Excel spreadsheets and created monthly dashboards for areas they needed to track. They also turned to product line forecasting. They used overall assumptions and created budgets with P&L contributions on a margin basis for all the larger programs. They started using these tools to help them look at their programs on a quarterly basis so they could correct their course quickly.

"All our department managers have this information and we recognize by looking at trends that some of our product likes are physician-driven; others are inpatient driven, and even if we aren't numerically correct down to the dollar, the forecast helps us focus in on where we potentially are making money or not making money," Bogen explains.

"We're not proponents of updating our budget every month, you do these dashboards to help you compare actual results to the budget," he says. "If you don't take the combination of the budget and a forecast into consideration you'll run aground or miss opportunity. The forecast is another tool, but it's not an exact science."

South Nassau didn't save millions of dollars by forecasting, but they also didn't lose millions—that's the point. It isn't the largest facility in the United States, nor is South Nassau the busiest hospital, but that's what makes it such a great example. All facilities should be using financial forecasting to look much further down the road than the next year. If your facility can afford to purchase a high-tech program that offers you hundreds of best- and worst-case scenarios for your financial concerns, that's great. If not, it's important to recognize the value of good old-fashioned spreadsheets and getting the help of your entire hospital team, not just the finance division.

More than a few financial leaders remark to me that they are just too small or they don't have the funds or the staff to pursue financial forecasting. To them I say, that's just an excuse. Take the "towel" off your "treadmill" and embrace the future that lay ahead—better yet, plan for it.