Challenges are everywhere in budget planning

John Andrews, Contributor

PUTTING TOGETHER A BUDGET has never been at the top of any executive’s “fun list,” but today’s dire economic climate makes the process more strenuous than ever.

Budget planners have to make difficult choices everywhere they look and the onus of responsibility is weighing heavily on decision-makers from the CEO on down.

A protracted economic recession, healthcare reform uncertainty, Medicare and Medicaid reimbursement declines and consumer-driven demand are all factors affecting how hospitals approach their budgets, financial experts say.

“The situation is very tough, resulting in two major challenges,” said Bob DeLuca, partner with Chadds Ford, Pa.-based IMA Consulting. “The first is ‘how can hospitals remain competitive in a consumer-focused environment with the restrictions coming from Medicare and Medicaid?’ They need to generate margins to keep pace with technology, which they are behind the curve on as it is. They can’t squeeze any more blood from this stone. The second is the consumer-driven segment, in which less than 25 percent of our clients have a formal program to handle. They need to get it in gear on this.”

Jason Sussman, partner with Skokie, Il.-based Kaufman Hall, agrees that there are various external and internal pressures influencing the budget process.

“The biggest challenges relate to all the things you read about – the circumstances that have led to lower revenues and patient volume,” he said. “It is having a cascading effect where there is less volume, but the need exists to maintain a level of quality clinical service for this lower volume.”

More than anything, what senior executives need to keep in mind, Sussman says, is to not lose sight of the big picture.

“The biggest challenge is being able to integrate operating and capital budget plans with the larger strategic vision as opposed to getting wrapped up with balancing the budget and losing the broader focus,” he said.

Spreading the pain

While ultimately the budget buck still stops at the C-suite, tough decisions are being made at various levels throughout the hospital, analysts say.

“The CEO and CFO are still making the tough calls and providing the analysis,” DeLuca said, “but if you look behind it, the middle managers and ancillary managers in lab, radiology and surgery are being put in situations where they have to come up with 20 percent expense reductions and have to choose whether it comes from supplies or labor. That is a tough spot to be in because these managers have recruited their people and now have to write names on a layoff list and heap extra responsibilities on the rest. To me, they’re the real heroes in this.”

Sussman adds that the logistics of budgeting are still owned by finance because that’s where the data is kept.

“Finance is still managing the process, but one big difference is that establishing the budget targets has broadened,” he said. “CFOs have traditionally done that, but now we’re seeing broader input from the senior management team – the CEO, COO, chief nursing officer and Human Resources officer because benefits are such a big piece. HR definitely is more involved because pension funds are way down, expenses are way up and the economy is influencing salaries and benefits. It again comes back to developing a budget that supports the overall strategy of the organization.”

Strategic budgeting

Perspective counts for a lot in getting control of finances and keeping the hospital on a steady course, Sussman and DeLuca say. There are no easy cuts to make and they recommend organization leaders question every line item for its importance instead of implementing wholesale reductions everywhere.

“It’s a holistic look at getting the proper balance,” Sussman said. “Instead of saying ‘We’ll cut 10 percent across the board,’ take a look at whole service areas and determine whether you need to provide it at all.”

The optimal formula, he says, should include combining productivity, efficiency and quality – and being able to create the metrics to track them.

To be sure, having a mechanism in place to quantify performance is essential in a consumer-centric healthcare environment, DeLuca said.

“Maintaining market share means doing things like following up with patients after discharge to find out what you could have done better,” he said. “Patients are increasingly choosing their healthcare providers and they want a facility that welcomes them, has a high quality of care and follows up to get feedback about their experience.”

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