Putting Your Resources Where Your Priorities Are

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).

Step 4: The outcomes of Steps 1 through 3 are used as a backdrop for identifying strategic issues and implications; setting mission, vision, and value statements; and developing enterprise-wide goals and metrics.

Step 5: Utilizing the goals and metrics developed in Step 4, investment criteria and tools for ranking and selecting potential strategies are developed. Criteria should include not only the traditional financial metrics, but also strategic and mission criteria such as market and community impacts. This is a critical and iterative process that requires continuous input and communication between all constituencies to the strategic financial plan.

Step 6: Preliminary strategies are developed, revised, and prioritized based on the criteria developed in Step 5.

Step 7: Updated financial projections that incorporate the prioritized strategic initiatives are developed to ensure acceptable financial outcomes. Sensitivities are developed to assess the risks of key assumptions and formulate contingencies.

Step 8: Tactical plans are developed to guide the broad-based implementation of strategic initiatives.

Step 9: An integrated strategic financial plan is created that incorporates the strategic vision and initiatives typically associated with a strategic plan with the financial implications and requirements of a financial plan.

It is important to note that, unlike a strategic plan that is often created or modified every three to five years, the strategic financial plan requires annual maintenance. This does not mean that the entire plan needs to be reworked each year, but rather that "tweaks" may be necessary to ensure that fundamental assumptions related to the environment and financial outcomes are on target.

Lessons learned

For most hospitals, developing a strategic financial plan represents a departure from current processes and, as such, may hit a few snags along the way. In an effort to minimize the number and severity of these snags, we offer the following lessons we have learned.

1. The integrated strategic financial planning team should include representatives from all of the major constituencies of the hospital—the board of trustees, hospital management, finance, and physicians.
2. The hospital must allow adequate time for the integrated process. Our experience is that an effective planning process may require nine or more months to complete.
3. The process should be "data-driven" enough to facilitate a common understanding of the current situation and support assumptions about the future, but not so detailed as to create "analysis paralysis."
4. The team must be willing to make the hard decisions and remember that this is not a popularity contest.
5. It is critical that the team understand its capital availability upfront. Capital availability provides the foundation for all of the decisions that follow. Further, the team must ensure that there is consensus on how capital should be allocated between mission, replacement, safety stock, and strategic initiatives.
6. The process outlined should be followed sequentially. There really is a method to this madness!
7. The hospital must recognize that the integrated strategic financial plan is a "living" plan that needs to be followed, updated, and refined on an ongoing basis. This is not an academic exercise.
8. Monitoring the plan may be as important as developing it. The hospital should design metrics and dashboards to monitor progress against the plan and actively use them to ensure success.

The creation and implementation of a strategic financial plan can be an exhausting but invigorating exercise. The extra steps to integrate strategic and financial planning may seem cumbersome at first, but should pay significant dividends in both the short- and long-run.