R o l l i n g F o r e c a s t i n g :

R o l l i n g F o r e c a s t i n g : A S t r a t e g y f o r E f f e c t i v e F i n a n c i a l M a n a g e m e n t Debra Miller Client Services Executive May 18, 2017 2017 Kaufman, Hall & Associates, LLC. All rights reserved. 1

Discussion Topics Overview of Rolling Forecast process Cultural considerations Key elements of the process Monitoring performance Client Case studies 2017 Kaufman, Hall & Associates, LLC. All rights reserved. 2

Overview 3

Clarification of Terms Long-Range Financial Plan (LRFP) Annual planning process to forecast financial trajectory for next 5-10 years. Rolling Forecasting Process of reviewing and projecting financial trajectory for next 6-12 quarters (2-3 years), using existing budget + forecast techniques 4

Clarification of Terms Current Year Forecast Monthly forecast of remaining months of current fiscal year starting with YTD actual. Variety of projection methods Rolling Trend Rate per unit Percent of Budget to Actual Variance Remaining Budget Annualization Key Performance Indicator (KPI) Rate per unit metric such as cost per unit used to monitor process effectiveness 5

Industry Context Top financial planning initiatives organizations are looking to improve in 2017 : 1 2 3 4 Operational Reporting to Cost # # # # budgeting & forecasting support strategic decision making containment & efficiency Capital planning & tracking 6

Industry Context From initial roll-out to board presentation, how long does your budgeting process take? 3 months or less 22% 78% More than 3 months 7

Budget-It s Not A Four Letter Word! Spend way too much time and resources on this process Spend time putting in what we want only to have it taken back out anyway Assumptions have changed so much from the time we started the process, that the results are now completely inaccurate Ownership-Who should own the budget results and be accountable for variances? It does not have to be this way! Here is why 8

Rolling Forecasting Defined Resulting gap analyzed to identify the changes in operations needed to move forecast to more closely match financial plan 10

Advantages of Rolling Forecasting Ongoing process to capture major changes in organization in a more timely manner vs annual budget process Able to react and plan for new opportunities\challenges as they present themselves Less time-consuming since done at a more summary level of detail High threshold for adjustments Nimble, quick and efficient Focus on Rate per Unit improvement vs Dollar amounts 11

X Where does Rolling Forecasting fit? Long-Range Financial Planning ROLLING FORECASTING Monthly Variance Reporting JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC Biweekly Reporting Operational Budgeting 12

Four Features for improved Forecasting 1. Back Testing for Improved Forecasting Accuracy 2. Ability to remove one time Adjustments 3. Initiatives Modeling 4. Scenario Analysis 2017 Kaufman, Hall & Associates, LLC. All rights reserved. 13

Four Features for improved Forecasting Back Testing Improve predictive accuracy Compare prior forecasts to identify trends Identifies volatility in volume driven variable expenses and\or patient mix forecast groups Identify areas consistently missing targets to develop additional reporting Initiatives For Mergers or Acquisitions For future Capital Projects For Organizational Cost Savings Initiatives One-Time Adjustments Identify seasonality vs. a one-off (i.e.. snow storm, acquisitions, etc.) in historical data to remove the explainable variance Add in future adjustments that you want to include in the base forecast Scenario Modeling Retain the initial fiscal forecast (the Budget ) for Board and Debt Covenant reporting Reforecast the forecast to compare Corporate Initiatives (merit, contract modeling rate increases, purchasing initiatives) Used as a Sniff Test for the Long Range Financial Plan 2017 Kaufman, Hall & Associates, LLC. All rights reserved. 14

Waterfall Analysis Measuring the effectiveness of your forecast 15

Cultural Considerations 16

Rolling Forecast Cultural Considerations Organizational change in approach and philosophy Requires cultural readiness for the process Not for everyone Culture of accountability Team approach Collaborative efforts Is there executive support for rolling forecasting? Do you have an extremely detailed budget process? 2017 Kaufman, Hall & Associates, LLC. All rights reserved. 17

Rolling Forecast Cultural Considerations (cont.) Have you discussed what it means for the organization not to have a detailed monthly budget? Impact on biweekly\daily productivity Budget requirement for an annual budget First year from your annual financial plan Sum of 4 quarters from rolling forecast Debt covenant or other requirements Have you embarked upon a process improvement journey using such techniques as Total Quality Management, Lean Accounting, Kaizen or Deming approaches? 2017 Kaufman, Hall & Associates, LLC. All rights reserved. 18

Steps to transition from budget to rolling forecasting Does management staff understand the concepts of rate per unit as well as fixed and variable cost? Flexible budget is a great tool to increase Financial IQ Budget Rate per Unit times Actual Volume Fixed vs Variable Are you interested in a monthly forecast to the end of the current fiscal year or a quarterly forecast over a 6-12 quarter horizon? CY forecast is a good first step to organizational readiness for rolling forecasting. 2017 Kaufman, Hall & Associates, LLC. All rights reserved. 19

Key Elements of the Process 20

ROLLING FORECAST Design Considerations IMPLEMENTATION QUESTIONS What is the desired time horizon? Projections performed monthly/quarterly? CONFIGURABLE DESIGN OPTIONS Configure as a quarterly forecast Option to configure by month & quarter Project out 36 periods What level of detail is appropriate? How do I roll-up my financial data for planning purposes? Who will be my planning contributors? All Managers? Senior Level Executive? Finance Staff? Map Departments into defined Forecast Groups Map Accounts into summary Forecast Categories Work flow helps structure participation E-mail notifications guide users into system 2017 Kaufman, Hall & Associates, LLC. All rights reserved. 21

Key Elements of the Process 1. Define Forecast Groups Forecast Group = grouping of functional departments that define a hospital service Surgical Services would include Operating Room Anesthesiology Recovery Room Any other departments that contribute to provision of surgical services at the hospital 22

Key Elements of the Process 1. Define Forecast Groups (cont.) Normally 20-25 forecast groups defined per facility Rolling forecast done at this level rather than individual department or cost center level Input for rolling forecast done by forecast group director with input from managers within the forecast group team Process should be flexible to accommodate modeling at multiple levels Forecast Group Entity Department 23

Key Elements of the Process 2. Define Key Statistic Identify the common statistic that defines the services provided for the forecast group Operating Room Minutes Anesthesiology Cases Recovery Room Patients Forecast Group: Surgical Services IP\OP Cases Consider using acuity adjusted statistics, if available Key statistic used to create relationship to organization-level volume drivers Patient Days Outpatient Visits Physician Clinic Visits 24

Key Elements of the Process 2. Define Key Statistic (cont.) Used for KPI (Key Performance Indicator) monitoring as divisor in rate per unit measures such as: Total cost per unit Salary cost per unit Supply cost per unit Hours per unit Average hourly rate Revenue per unit 25

Key Elements of the Process 3. Define Level of Account Detail Salaries normally forecast at the Job Class level (Management, RN, Clerical, etc.) FTE inputs hours x hourly rate + increase assumptions Productivity improvements should be factored into calculation May need utilities available to summarize payroll data for salaries and hours to job class categories 26

Key Elements of the Process 3. Define Level of Account Detail (cont.) Forecasting can be done at the General Ledger level of detail or more aggregate level of detail For expense categories where significant change is not expected over time, forecast at a more aggregate level Summarize all medical supply accounts to one category (as opposed to forecasting for medical supplies, sutures, gloves, etc.) Other supplies can be summarized together 27

Key Elements of the Process 3. Define Level of Account Detail (cont.) Expense categories with different inflationary assumptions or that have different cost behaviors can be carved out separately Medical Supplies Implants Blood Products Other Expenses Utilities 28

Monitoring Performance 29

Monitoring Performance Traditional budget variance reporting is replaced by metrics comparisons Monitoring at KPI (Key Performance Indicator) level Total Cost per unit Salary Cost per unit Supply Cost per unit Paid Hours per unit Focus on improvement in trends 3 month, 6 month, annual average Quarter over quarter Same quarter last year 2017 Kaufman, Hall & Associates, LLC. All rights reserved. 30

CLIENT CASE STUDIES 35

CASE STUDY: Catholic Health Initiatives (CHI) The nation s second-largest non-profit health system, Englewood, Colorado-based CHI operates in 18 states and comprises 104 hospitals, including four academic health centers and major teaching hospitals as well as 30 critical-access facilities; community health-services organizations; accredited nursing colleges; homehealth agencies; living communities; and other facilities and services that span the continuum of care. Forecast structure within each market is comprised of hospital(s), physician group and all other OBJECTIVES and CHALLENGES Lack of time sensitive visibility into financial performance at the Market level Lack of visibility into capital commitments and post-approval spend at the Market level Confidence in the forecast results from the Sr. Management to Market level Alignment of Rolling Forecast with LRFP (Long Range Financial Plan) structure RESULTS Rolling forecast is updated monthly around the 6 th workday Analytics based narrative report prepared shortly after reforecast and widely distributed to senior leadership Used to identify, track and address performance gaps and risks Forecast results are primarily futureoriented data and inform capital spend and days cash on hand projections Results feed the first year of the LRFP 2017 Kaufman, Hall & Associates, LLC. All rights reserved. 36

CASE STUDY: RWJ Barnabas Health RWJ Barnabas Health is New Jersey s largest integrated health care delivery system, providing treatment and services to more than three million patients each year, receiving widespread recognition for clinical excellence and patient safety. RWJ Barnabas Health s network includes eleven acute care hospitals, three children s hospitals, a pediatric rehabilitation hospital, a behavioral health center, ambulatory care centers, 5 fitness and wellness centers, physician practices and medical groups. OBJECTIVES and CHALLENGES Initial organizational buy in which required more support from local site finance to drive the change to address KPIs instead of budget variances Creating a quasi budget for FY2016 using the initial Rolling Forecast showed the forecast was more accurate than budget Corporate decision to confirm what KPIs should be used at a forecast group level; decided on Cost per Adjusted Admission RESULTS Improved reporting at all levels Manager Director VP Entity with focus on KPIs instead of dollar amounts Enhanced executive reporting with timely, comprehensive views of financial performance Have replaced annual budgeting with rolling forecasting for the past 2 years Continue to use Daily and Biweekly productivity reporting to monitor FTE metrics and cost management in place of budget 2017 Kaufman, Hall & Associates, LLC. All rights reserved. 37

Questions? 38

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