Why these 4 health systems abandoned traditional budgeting

As markets become increasingly volatile, some hospital systems are ditching static annual budgets for more dynamic alternatives.

Traditional budgets rely on meticulous line item details to plan business expenses and anticipated revenue during the coming 12-month period. Organizations in industries outside of healthcare started ditching static annual budgets years ago in favor of a more proactive option — the rolling budget. 

A rolling budget is a fiscal management approach that uses rolling forecasts, relative performance targets and increased management accountability to create a culture of continuous improvement. Due to a focus on real-time comparison, organizations update rolling budgets throughout the fiscal year.

To establish a rolling budget, financial leaders set performance targets that represent marginal improvements over last year's actual results. Staff then run a rate forecast, or an extrapolation of current financial trends based on last year's achieved results, and compare the results to their target goals. This determines how much hospital operations must improve at any point to meet target performance goals by year's end.

Switching from a structured budget to a loose financial plan can make any CFO uneasy. But representatives from four health systems spread across the U.S. explained how and why their organization abandoned traditional budgeting models.

Here are four thoughts on the advantages of fluid budgets from Mary Jo Brummel, director of finance at Nebraska Medicine in Omaha, Neb., Greg Wright, director of finance at Southern Illinois Healthcare in Carbondale, Larry Hill, vice president of finance at Mission Health in Asheville, N.C., and B.J. Miller, senior director of performance and planning at Park Nicollet Health Services in Saint Louis Park, Minn.

1. Allows for a more strategic investment of resources. Despite the amount of effort, time and resources hospitals invest in traditional budgeting processes, the end product often produces less than desirable results. Mr. Hill said Mission Health used to dedicate four or five months — and millions of dollars in personnel and resources — to its budgeting process, only to find the budget sometimes lost its relevance after just one quarter. Nebraska Medicine accountants and finance employees utilize the costs from the first six months of the fiscal year discharged patients, when they begin the financial planning process for the following year, said Ms. Brummel. 

Since Mission Health implemented a rolling budget, the system has strategically reinvested its former budgeting resources to expand and develop its operational footprint.

2. Makes an enterprise financially nimble. Due to today's market volatility, the ability to review performance results in real-time and course correct throughout the year is attractive to many healthcare organizations, said Mr. Wright. By their nature, hospitals systems are often slow to execute change due to their administrative structure and cumbersome size. A rolling budget decentralizes financial management and instead enhances regional management accountability across the enterprise. As a result, each hospital site has the ability to monitor its own performance in real-time and make adjustments necessary to meet changing business conditions and achieve their unique goals.

3. Cultivates an environment of continuous improvement. The rolling budget approach is founded on the Japanese notion of Kaizen, said Ms. Brummel, which signifies continuous improvement through efficiency and the elimination of waste. All four hospital administrators agreed this approach enabled each organization to focus on long-term goals rather than short-term, annual results.

Mr. Hill said Mission Health shifted its mindset from "meeting the budget" to demonstrating improvement year-over-year. "Our numbers and targets are different every quarter," he said. This roving target allows the system to work proactively to achieve its goals. "If we're doing great we can celebrate or make plans to push that greatness forward. If we're off target, hopefully it gives us more time to react," he said. Mission Health measures and compares key operating and productivity metrics, such as total expense over unit of service and hours worked over unit of service, from the previous year.

4. Emphasizes performance management and accountability. A culture of continuous improvement increases visibility into department and management performance. Managers know their department's performance must improve compared to last year's actual results, which holds managers accountable to maintain their margins. "The performance data is available to everyone across the system," Mr. Miller said. "This slight peer pressure drives everyone to achieve their goals."

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