A riddle: What's the one document that costs an organization millions of dollars to create, takes months to complete, and is usually out of sync with financial reality from the moment it's approved by the board? Naturally, it's your annual budget. Could healthcare CFOs go budget-free? ThedaCare, an integrated community health system based in Appleton, WI, with five hospitals, 27 clinics, and 6,200 employees, switched to a rolling forecast, and it's making a difference.
ThedaCare CFO Tim A. Olson, BBA, MBA, and Brian Burmeister, PT, MPA, senior vice president of physician services, presented their budget-free approach for financial operations at the American Medical Group Association annual conference in San Diego earlier this month. Olson says the sheer size and inflexibility of the budget process made the document less useful as the organization grew over the years, so in January 2011 he eliminated the traditional annual budget.
"The budget didn't connect tightly to our priorities," he says. "Plus it had an inaccuracy rate of anywhere from 2% to 169%."
Moreover, like most budgets, ThedaCare's was extremely labor-intensive. Creating the budget took 10,000 hours, required 88,000 data points, and cost $500,000, Olson says. Then the monthly management of the document took another 10,000 hours and another $500,000. Despite this effort, the budget wasn't connected to daily management, and as an annual batch process, it did not adjust for varying levels of demand.
"This document took a lot of work, but we didn't necessarily see any value in it. So we set a course to see if there was a better model," Olson says.
ThedaCare has long used the Lean methodology in its approach to process improvement, so it was only natural for the organization to review its budget process with this approach. Olson's goal was to create a document from which ThedaCare could get the information it needed quickly while achieving period-over-period improvement. He also wanted a financial forecast that was connected to strategy and daily operations.
Starting in the fall of 2010, Olson's team set targets in two areas. To look ahead with financial planning, they wanted:
- 24 months of history
- 18 months of forecast
- Divisional key metrics
- 13 four-week periods
- Dialog among system and divisional leaders
To help with day-to-day financial management, the goals were:
- Improved performance over time
- Daily tracking of metrics
- Daily identification for continuous improvement
- Daily huddles to discuss business
- Monthly scorecard review of drivers
With these priorities in mind, last year the organization began using quarterly rolling forecasts, doing run-rate forecasting, and making minor adjustments to the budget based on issues like cost of living. The new quarterly process uses established targets that the board approves annually, monthly monitoring of metrics to catch fluctuations early, and plans that describe what the organization intends to do to alter the forecast to attain the targets.
However, Olson says one of the biggest differences between the previous budget process and the new one is the reduction in line items. The previous budget had nearly 7,000 lines and was extremely detailed, whereas the current one focuses on a select few, significant items.
The quarterly approach is an upgrade over annual budgeting, Olson explains, because it allows the organization to be "nimble and focused." Moreover, he says, it spurs quarterly discussions and course corrections. The 20,000 annual hours used to create the original budget are now put into daily management and quarterly forecasting.
ThedaCare also improved accountability for adhering to budget by switching from a silo view to a system view so that everyone is aware of the priorities. Burmeister says this change has created "a more collaborative experience because everyone has an understanding of how everyone else is doing quarter over quarter. So if there are cost drivers, they can address it and help. For instance, if we gain or lose payers or physicians, those things can impact [the budget] quickly, and now we can address them immediately."
Divisional leaders also now use scorecards to track key cost drivers. If numbers stray from the monthly projection for two months, it's a trigger for the group to discuss it and create an action plan. To ensure nothing slips through the cracks, each metric on the scorecard has a sponsor, who compiles monthly and year-to-date results and develops plans for each initiative as appropriate.
The new process has helped managers and supervisors get a better understanding of ThedaCare's patient demand, allowing them to adjust capacity as appropriate.
"There are no surprises at the end of the month. And we're able to do a better job load-leveling our hours worked with the demand," Burmeister explains.
After a fairly smooth transition from the traditional budget to the quarterly process, ThedaCare continues to refine its approach. Although the rolling forecast is (and will always be) a work in progress, Burmeister and Olson agree that the change has proven successful for the organization. Among the positive results, the rolling forecast is accurate to less than 2% (plus or minus), and the organization has redeployed 20,000 hours of finance staff time to other projects and discussions.
"We absolutely would not go back [to the previous budget process]. This approach is more proactive than reactive… and the results just keep getting better," says Olson.
Going budget-free isn't for every hospital or health system. But it could be worth considering if your organization is bogged down in the details, yet the numbers still come up inaccurate at the end of the year.
Karen Minich-Pourshadi is a Senior Editor with HealthLeaders Media.
