Because CHRISTUS is on a July 1 to June 30 fiscal year, January is the beginning of our formal budgeting process. As I reflected on this process for FY 09 (July ’08 – June ’09), our 10th anniversary year, I felt the need to compare our old methodologies of budgeting to our new processes, which require an intense focus on business development in order to create business literacy.
In a lecture last week to a large audience of health care administrators and financial officers, I recalled the metrics I used over 20 years ago to make sure that operations were sound. I indicated to them that although I used traditional data and measurements for the budgeting process and for evaluating our monthly financial performance, in reality, I depended on two daily measurements which included, 1. how many cars were in the parking lot, and 2. how much aspirin was sold in our outpatient pharmacy.
These measurements were truly the best indicators for our volume of outpatient and inpatient traffic, which paralleled our growth in revenue and--because of our cost reimbursement--drove our bottom line. This bottom line, then, of course, determined our variance to budget which in those times of cost reimbursement was usually positive.
Of course, managed care reimbursement and DRGs were the two major reasons why these measurements were no longer useful and, in fact, could give you a false sense of security. Both payments for managed care patients and DRG reimbursements incentivized hospitals to get patients out quickly, and therefore a packed parking lot and high aspirin sales began to become the indicators for less positive financial performance.
This, then, was the stimulus to really cause the financial planning model to move from traditional budgeting to intense business planning. What, then, are the differences?
Budgeting, in the traditional sense, is mainly driven by past history. Based on, for instance, the last five years of history for the rise in inpatient volume, the following year is predicted, and generally incorporates an average increase based on the prior five years’ performance. Traditional budgeting also utilizes prior revenue statistics, i.e., the revenue for an ambulatory visit or the revenue for occupied bed and then multiplies this revenue by the increased volume that is projected and gives you a sense of the growth in revenue that you might expect. However, because of the changes outlined above, and based on our experience over the last five years, it is clear that past history is no predictor of future performance. And consequently, these traditional formulas no longer work.
This was never clearer to us than looking at our FY 07 financial performance when, in fact, our actual volumes were approximately 5 percent below our budgeted volumes. It was quite clear that this would result in a much lower bottom line than was projected. This was made even worse by the fact that expenses often rise parallel to revenue growth, and when the latter does not occur, the first will even cause a greater deterioration in one’s bottom line, which was our exact experience.
To prevent this, then, business development and business planning have to be the new methods of predicting financial performance. Business development requires us to be disciplined sufficiently to do a service-line analysis which takes into consideration the evolving technologies which we have described on prior blog posts as being the major motivation to move many of our inpatient services into the ambulatory care setting. Business development requires us to stay extremely current, and even futuristic, in predicting what governmental reimbursement and reimbursement from private insurers will do to these various service lines over at least the next budget year, but hopefully over several forthcoming years.
In addition, business development requires one to trend environmental changes, economic changes and utilization changes, all of which will be significant predictors of how health care will be utilized and paid for by future patients.
Business development also requires us to do careful analysis of revenue and expenses, both in the current year and several years forthcoming, in order to determine the ultimate return on investment of both our operational and capital expenses.
And finally, business development entices you to take a long-term look at your capital and operational budgets as far out as 10 years--particularly when one invests in facilities and large pieces of capital, which often depreciate over a seven-to10-year period and therefore must create value for this period of time if they are expected to enhance one’s business literacy.
Yes, we can pine for the “good ol’ days” of using the parking lot and aspirin sales to predict our future. They have served us well, but if utilized today in a traditional budgeting process, they will only continue to give us a false sense of security. The traditional methods of budgeting must be replaced with the new, more focused and data-driven analytical processes embraced in business development.