Budgeting in Healthcare: How Hospitals Can Link Budget to Strategy

Linking budget to strategy allows an organization to use resources efficiently to further its mission. Closer alignment between strategy and budget also ensures an organization’s longevity through trying times. For healthcare providers, linking budget to strategy streamlines decision making in both routine planning and critical crisis response.

In today’s world, hospitals and health systems face increasingly challenging circumstances. Healthcare leaders are not only transforming their business models, but also responding to a pandemic requiring more resources and ongoing adaptation to evolving constraints.

Better alignment between budget and strategy allows healthcare organizations to identify opportunities for growth while keeping resource constraints in mind. We’ll introduce some of the key changes specific to the healthcare industry that make strategy increasingly complex before discussing how aligning strategy and budget aids in planning despite these constraints.

We’ll also discuss how three healthcare organizations across the United States—Jefferson Health in Pennsylvania, Carilion Clinic in Virginia, and San Juan Regional Medical Center in New Mexico—align strategy and budget within their own organizations to inform critical decision making.

COVID-19 undeniably reshaped healthcare strategy in 2020. The final section of this paper delves into its impact on strategy and budget for all healthcare organizations for the years to come.

4 Trends Shaping Healthcare Strategy

Changing Hospital Financial Dynamics

Among the challenges health systems are navigating is the industry’s constantly fluctuating financial dynamics. First, health systems are navigating an era of consolidations and mergers. Research shows consolidation is taking place at an increasing rate, and while this helps systems with cost savings and increased care coordination, it introduces new strategic challenges to the organizations involved and requires alignment across common goals.

Moreover, many health systems are deciding to co-opt specialist physicians as employees or independent contractors to benefit from referrals and keep patients in their system.

Finally, elective surgery and end-of-life care are the highest revenue services in the industry. As a result, many healthcare organizations strategically position these departments for success to support the organization’s longevity. This proved particularly difficult in 2020 as elective surgery was paused in many areas, severely affecting most hospitals’ bottom line.

One revenue enhancing approach some health systems use is to expand surgery hours in their hospitals. Studies show that many patients are willing to have surgery at 9:00 P.M. if there is a discounted price associated with it. This is one of the many creative ways healthcare organizations can adapt to ensure high utilization of doctors, rooms, and equipment.

A Drive Towards Efficiency

All industries perpetually search for ways to increase efficiency, but the healthcare industry’s unique duty to further public health despite limited resources makes this drive urgent and essential.

One major efficiency upgrade across the industry in recent decades is the transition to electronic medical records (EMR).  One study involving emergency departments showed that emergency rooms with fully functional EMR had an average stay 22.4% lower than emergency rooms without them, and a 13.1% lower diagnostic time. A separate study showed EMR can reduce nursing documentation time by up to 30%.

Efficiency is also important to allow for adaptation to new regulations and requirements. Government standards continue to evolve, forcing health systems to rearrange processes and systems to meet the new requirements. This continuous upheaval can also negatively impact efficiency if the changes are not managed properly.

The Shifting Payer Landscape

In addition to financial and operational shake-ups, health systems must closely monitor and react to the shifting payer landscape. Many insurance and Medicare payers now pay for outcomes rather than specific activities, which often results in hospitals feeling squeezed by both groups.

To avoid this and instead increase revenue, health systems must improve price transparency and patient billing processes. For example, giving price estimates before the point-of-service, offering convenient payment options, and automating medical billing helps providers collect quickly from patients.

Technologies that link providers to payers without multiple phone calls and website searches can enable real-time cost estimates, allowing staff to engage in more meaningful patient collection discussions before medical bills turn into provider bad debt.

And finally, linking back to the importance of efficiency, health systems must automate wisely. The Council for Affordable Quality Healthcare (CAQH) found that providers could save $8.5 billion annually by automating key claims management workflows, such as prior authorizations, claim submissions, and claim payments.

Service Delivery Transformation

The world is changing, and so is the way people access healthcare. In-patient care is more costly now than ever before for health systems. As nurse practitioners can treat most minor illnesses, lower cost urgent care and express clinics continue to expand rapidly via these providers.

Telehealth and virtual care options are also becoming more popular. Analysts at Forrester Research predict there will be 1 billion logged virtual healthcare interactions just in 2020, up 43% from 2019. As people became more comfortable with the idea of telehealth during the COVID-19 pandemic, it is normal for patients to consider a virtual appointment. Drive-through diagnostic testing and vaccination programs might stick around as well.

Finally, the cost of direct treatment for chronic diseases in the U.S. in 2016 was equal to $1.1 trillion dollars, and costs have only continued to rise. As a result, preventive medicine is moving to the forefront of the industry, helping providers save money in the long-run and keep communities healthier. Investing in preventive care can save organizations considerable money in the long run.

Budgeting Approaches

As your organization reacts and responds to these strategy challenges, it is crucial to have a budgeting method in place. Listed below are a few examples of popular approaches, sometimes combined, that help with budgeting and forecasting for the future.

Rolling Forecast

A rolling forecast budgeting approach enables organizations to continuously plan over a set time horizon. For example, if your organization produces a plan for the calendar year 2021, a rolling forecast re-forecasts the next twelve months at the end of each quarter.

This approach is especially helpful during unpredictable times or crises as it allows for adaptations as circumstances change. Be aware that it requires a lot of meeting and analysis to update budget and change course, but ultimately, it is good practice to meet regularly to evaluate recent information and adjust accordingly.

Baseline Budgeting

This approach uses current spending levels as the "baseline" for establishing future funding requirements and assumes future budgets will equal the current budget times the inflation rate times the population growth rate.

Future budget = Current budget x Inflation rate x Population growth rate

This approach is best used during times of relative stability, with no expected rises in costs or expenses or unexpected crises affecting the industry at large.

Initiative/Priority Based Budgeting

This approach prioritizes the impact different strategic initiatives may have on your budget and allocates budget to specific initiatives or priorities. Different initiatives may increase or decrease revenue and reimbursements, raise or lower volumes, and drive the cost of delivering care up or down. Healthcare organizations should identify the key drivers associated with each proposed initiative and then model the financial and operational impacts of the initiative over time.

Initiative-based budgeting is most effective for translating high-level strategy down into actionable operational plans. Not only does this approach benefit your financial state, it also helps your organization strategically succeed in a rapidly changing environment.

Innovative Approaches

You can adapt and fine-tune these approaches to support your main budgeting system.

What-if Modeling

This approach relies heavily on data and statistics to predict budget needs in the event of certain scenarios. It is useful for studying and experimenting with complex scenarios without the cost of implementation. You can use data to make assumptions about different variables like global volumes, reimbursement rates, and labor rates and then use what-if modeling to see what impact a program might have on your budget.

Service Line Analytics

This approach consists of analyzing performance drivers for a specific healthcare service line to benchmark areas of high and low potential within a market. It uses patient-centric data and is most helpful when your organization is seeking to define a system-wide strategy to identify investment opportunities and improve resource allocation.

StratEx Budget

A StratEx (or strategic expenditure) budget is a separate part of the bigger budget that is cross-departmental in nature. When using a StratEx budget, leaders decide what strategic projects are necessary to achieve the priorities or outcomes of the organization’s strategic plan. Appropriate funding is then allocated to these initiatives and projects.

With a StratEx line item in your budget, you can start allocating that budget to different areas of your strategy, sometimes called themes. Imagine having a $5M strategy budget allocated 40% to state-of-the-art facilities, 30% to a well-trained workforce, and 30% to cutting-edge research. In this scenario, you would have $2M allocated to creating or upkeeping your state-of-the-art facilities. You could then look at all your initiatives or projects that align with improving facilities, prioritize them and spend your $2M wisely.

With the StratEx budget, it means that you can have a process to make sure that you are focused on your priorities, while still making sure you spend an additional $1.5M each on the training and research aspects of your strategy.

By the way, this StratEx budget is usually cross departmental, and still means that you have normal departments like Surgery and Rehabilitation with their own budgets. The StratEx would be above the normal budget. StratEx was first written about in Norton and Kaplan’s book, The Execution Premium.

Linking Budget and Strategy

Having a sound budget process in place is important, but the key to success is to link that budget process to your organization's strategic plan. How exactly do you link them together?

1. Make sure you use a strong framework for your strategic planning. Every organization manages differently, so choose the framework that works best for you.
2. Communicate your strategy and budget across the organization. If all of your teammates don't know about both, it will be hard to link them together.
3. Manage your strategy and your budget on a regular cadence. Report each month or quarter to ensure you're on track to meet your goals and your budget.