Strategic Budgeting: A Case for Utilizing Encounter & Cost Data to Develop a Guideline Budget. By Steve Imus, MBA

Transcription

1 Strategic Budgeting: A Case for Utilizing Encounter & Cost Data to Develop a Guideline Budget By Steve Imus, MBA A strategic budget bridges the annual strategic plan and operating budget by utilizing a single comprehensive dataset based on historical encounter utilization and unit cost data. Typically hospital organizations develop an annual strategic plan that includes input from the various stakeholders such as business development, marketing, senior leadership, the Board of Directors and finance. Once the strategic plan is quantified and finalized, the next step is to incorporate the high level assumptions and financial projections in the strategic plan into the forthcoming annual operating budget. Assumptions at the strategic plan level can be difficult to extrapolate down to individual department budgets organized around general ledger (GL) accounts and sub accounts. The strategic plan is typically expressed around services and or market/performance related initiatives that impact several if not all departments to one degree or another. Furthermore, distilling the strategic plan assumptions down to individual job codes and sub accounts is an even greater challenge. A typical approach is to provide department managers with enterprise wide volume and inflation projections from the strategic plan. Projections on service levels, inflation, rate increases and information on specific initiatives are provided in one form or another. Department managers are then required to incorporate these assumptions into their departmental budget(s). Oftentimes department budgets are

2 based on a Unit of Service (UOS) driver. Essentially a total or a composite count of services provided. The projected UOS is utilized to drive projected revenue and variable expenses. This averaging approach does not take into account price and mix variations of the services provided. In other words, each UOS is given the same weight as the next and assumes the same amount of resources is required for each unit delivered. Overall this approach often results in a significant disconnect between the strategic plan and the operating budget, especially at the department and sub account and job code levels. Developing an operating budget in this fashion results in a less than optimal budget because the high level assumptions and initiatives are rarely translated down to the detail in the operating budget. Scarce resources spend time and effort addressing variances and attempting corrective action due to a less than reliable budget. Essentially the organization spends time and energy on being reactive as a result of a flawed budgeting approach. A strategic budgeting approach on the other hand unifies the annual strategic planning and operating budget development process by utilizing a comprehensive dataset. The makeup of this dataset is key and this approach does require an application based solution considering its level of sophistication and large quantity of data. However the results and capabilities are far superior to the alternative approach discussed. The following graphic illustrates the overall process sequence. It begins with modeling the strategic plan assumptions and building a strategic model in collaboration with service line managers. Next the finalized strategic model is pushed down to the GL structure to create department and account level

3 budgets. The result is a guide line budget for managers to work from and incorporate specific department level adjustments not addressed in the strategic plan. This saves significant time and effort and most importantly unifies the individual department budgets with the organization s strategic plan since both were developed from the same encounter based and unit cost dataset. The process begins with a base of historical encounter utilization and key demographic data along with unit cost data at the charge level. A rollup structure is defined which will allow for the various strategic plan assumptions to be applied at each point in the rollup. For example, a typical rollup structure might start with inpatients

4 and outpatients at the top level, followed by financial class, then followed by service lines and finally MSDRGs. The lowest level in the rollup structure is the service codes from the Charge and Description Master (CDM). At this lowest level, an average quantity per case (QPC) is calculated at each point in the rollup structure. The QPCs are manipulated by the various strategic plan assumptions and drive the revenue and expense projections. This base model is the sandbox where the strategic plan assumptions are tested and modeled to achieve the desired results. Assumptions can be applied at any point in the rollup structure. Some examples of the types of assumptions include: ALOS improvements Expanding, adding or reducing services Staffing optimization such as changing staffing mix or reductions in staffing levels Supply or product standardization Adding physicians or physician groups Physician utilization opportunities Changing reimbursement terms Evolving payor or case mix Service Line managers typically provide input during strategic model development, making adjustments to specific service line case volumes and case mix based on their specific insight. Once the strategic plan is modeled and finalized, the model is pushed down to the GL account/sub account and job code levels. The methodology applies every possible impact of the strategic plan across the organization down to each department, account and sub account and job codes. It is this coordination and use of a single encounter based and unit cost dataset that unifies the strategic plan and operating budget.

5 Department managers then start their budgeting process with this guide line budget, which significantly streamlines the process by having them focus on exceptions only. In conclusion, this approach not only unifies the strategic planning and operating budget, but also reduces cycle time, management s effort, and significantly strengthens the quality of the operating budget by improving budget values at the lowest level. Lastly, the quality of the operating budget, or lack thereof, impacts an organization for the next twelve months. This approach is technology dependent due to the quantity and complexity of the data and functionality required. If you would like to discuss this approach or learn more about strategic budgeting please contact Steve Imus at simus@oihealth.com. Steve is SVP & Co Founder at Organizational Intelligence. Visit Organizational Intelligence at or contact William Wall, Sales Manager, Southeast Region, at bwall@oihealth.com or Ext. 10

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