Issue link: https://beckershealthcare.uberflip.com/i/1169964
76 Executive Briefing For variable expenses, forecasting using variable relationships leverages the flexible budget model and allows the forecasting entity to focus the forecasting methodologies on the volume forecasts that drive the variable expenses. For expenses with a direct causal link to the chosen volumes, the resultant expense forecast will be as statistically valid as forecasting the expenses directly from history. In addition, the application of advanced forecasting techniques to volumes allows the forecasting entity to test the statistical validity of the volume indicators chosen to flex the budget. Additional volume indicators can be tested and improve the volume indicators chosen to drive the variable budget. The accuracy of the financial forecasting approach can be measured and compared against what the traditional budget process projects. Studies are underway at several acute care healthcare facilities nationwide to test the accuracy of advanced financial forecasting techniques. Preliminary results are encouraging and show that the real-world application of these techniques is at least as accurate, and in many cases more accurate, than the traditional budget approaches. The future of budgeting in healthcare Traditional healthcare budgeting process trends and directions suggest an evolution toward a hybrid approach that improves future forecasting accuracy. For some healthcare providers, a combined approach using advanced statistical forecasting techniques in conjunction with a rolling budget process provides the optimum balance between traditional budgeting techniques and future forecasting methodologies. Incorporating advanced statistical forecasting techniques into traditional budgeting processes can follow a traditional maturity model approach: • Background preparation lays the groundwork for forecasting techniques and provides a foundation for its implementation and success. • A flexible budget model focuses the forecasting on volumes, driving the variable budget and isolating the fixed expenses that are favorable to advanced statistical forecasting techniques. • Implementation of a rolling update to the budget, adding continuous forward-looking periods updated each month, provides an ongoing framework for the forecasting exercise for the institution. This framework institutionalizes the workflow throughout the year and smooths the workload for both forecasters and reviewers of the results. It provides the most fertile environment for the successful implementation of advanced statistical forecasting techniques. Advanced statistical forecasting techniques within this framework will update the new forward-looking periods with improved accuracy and trending. Each month, an updated forecast can be distributed to department managers containing the updated forecast, providing an opportunity to add additional planning variables and projections relating to new services and care delivery evolution. This provides the appropriate feedback loop and introduction point for strategic planning initiatives that are outside of the purview of the statistical forecast bases. It also creates a junction for inclusion of important planning objectives into the rolling forecast workflow. To maximize decisionmakers' interest in the forecast, it will be important to emphasize the importance of the forecast as a key factor in the planning and budgeting process. This means incorporating a long-term perspective for the budget, emphasizing financially sustainable decisions, and including long-range forecasting into the process. A 12-month horizon in isolation limits the purview of the forecast, culling longer-term trends and directions from the results. Only by including a long- term horizon into the planning process can trends be validated and understood, and the near-term plans confirmed to drive the organization toward the longer-term objectives and goals. A hybrid framework can provide the best mix of tools and techniques for providers. It will leverage the recent advancements in forecasting techniques while maintaining flexibility in adapting the results to the specific organizational needs. Advantages of the hybrid approach can be distilled into the following categories. Improved forecasting accuracy. The traditional approach to budgeting, whether top-down, bottom-up, zero-based or flexible- budget driven, is inadequate to deliver accurate forecasts in most cases. Incorporating advanced statistical forecasting techniques will enrich the budget forecast by improving the accuracy of the results. Time savings. Transforming the budget process from a painful annual exercise into a streamlined forecasting approach, spread throughout the year utilizing a rolling forecast, provides relief from the annual process. It improves the efficiency of the forecasting process and reduces the annual training expenses associated with the traditional budget approach. Improved buy-in to projections. Distributing the rolling forecasts to departments, while simultaneously gathering the additions from the long-term or strategic plans, is the best approach to gain department manager confidence and ensure that the plan is adhered to and financial objectives achieved. The continued budgeting evolution for healthcare organizations can build upon and leverage manufacturing and service industry techniques that incorporate advanced statistical forecasting techniques. As healthcare budgeting tools incorporate advanced statistical techniques, we expect the budgeting process to evolve and address the challenges experienced by today's healthcare organizations. n EPSi is the industry leader in integrated financial decision analytics, budgeting, and planning solutions for the healthcare industry. More than 900 hospitals in the U.S., including nine of the top 10 rated hospitals, 128 IDN systems, and 40 global academic facilities rely on EPSi for data-driven insight into managing costs and improving their long-range financial performance. Our new cloud-based software on the RealCost™ platform integrates with EPSi software so you can finally integrate cost accounting, ser- vice line analysis, contract modeling, budgeting, rolling forecast, long range planning, productivity, and analytics with one partner. See further at epsi.io