In Financial Forecasting, Time to Plan for the Worst

Robert Shapiro, senior vice president and CFO at North Shore–Long Island Jewish Health System in Great Neck, NY, is vexed by some recent data. In his more than three decades in healthcare finance, it’s the first time that patient volume has been flat. Moreover, it’s also the first time Shapiro has had to do a financial forecast for the $6 billion–plus organization in which he is predicting zero Medicare and Medicaid increases. The double whammy is “very unusual, and it will greatly affect us,” he says. 

It’s nearly the same story in Frederick, MD, where Michelle Mahan, senior vice president and CFO at the 295-bed Frederick Memorial Regional Health System, is tracking flat patient volume and declines in Medicare and Medicaid reimbursements. She’s scouring the hospital’s operating data for clues about why patient volume has dropped off, where patient increases might be found, and how it all affects her upcoming financial forecast.

Flat or declining patient volumes are to be expected – five years from now. The reduction of inpatient hospital care is a goal of healthcare reform; better quality outpatient care should result in less inpatient volume. However, it’s far too early for any readmission reduction projects or medical home pilot to be bearing fruit. So, where have all the patients gone? My guess is that they may be at home searching job listings and holding off on spending, medical and otherwise. 

The monthly Bureau of Labor Statistics data released last Friday may offer some clues about why patient volume is flat for some healthcare organizations. In September, the number of jobs in the U.S. grew by a paltry 103,000. It was enough of an uptick to keep pace with population growth, but alas not enough to reduce the national unemployment rate of 9.1%.

Additionally, the duration of unemployment has grown since the beginning of the recession. Back in 2007, it took job seekers an average of 15 weeks to find a job, whereas it now takes nearly 40 weeks, according to the BLS report. To compound matters, COBRA and unemployment benefits—which were extended for some for up to two years—are starting to peter out.

“When you look at the job loss, the numbers are so high. That relates to the ability to fuel the economy with purchases or to get healthcare,” says James Dregney, CPA, CFO at Lakewood Health System in rural Staples, MN. Minnesota’s employment rate is 2% lower than the national average, but the state’s average duration of unemployment is still 40 weeks.

The jobs picture varies regionally based on industries and the local demographics. “We’re losing population in our area, and our market is shrinking,” says Mary Ann Freas, senior vice president and CFO at the 354-bed Southwest General Health Center in Middleburg Heights, OH, a suburb of Cleveland. “We’re not counting on growth to take [our hospital] anywhere. Our balance sheets are very strong, but at some point that’s at the sacrifice of some really big investments that we need to make.”

As unemployment benefits run out and money gets tighter, it makes sense that people are deferring healthcare treatment for as long as possible. So for CFOs in the throes of financial forecasting, you may want to heed the actions of several of your peers I spoke with at HealthLeaders Media’s CFO Exchange three weeks ago. Create a five- and 10-year financial forecast, and then overlay worst-case scenario projections.

Here are a few negatives to consider including in your projections:

• Even deeper cuts to Medicare and Medicaid
• Shifts in your payer mix, including payer consolidations
• Mergers and acquisitions affecting market share
• Large business closures or bankruptcies
• “Black Swan” events

With so much uncertainty on the economy and on Capitol Hill, creating a viable financial forecast to guide your organization is more complex than ever.

“The one thing that persists for CFOs today is the inability to plan,” laments Mahan. “It’s a never-ending, changing environment, and it makes our ability to forecast very challenging.”