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December 2018
Spotlight: The “Goldilocks Zone” of Budgeting
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The annual budgeting process is as old as the hospital system itself. Incorporating hundreds of data elements, including volume, expense, revenue, and profitability projections, budgets serve as an organization’s best estimate of a health system’s anticipated performance. Budgets then are used as a “path” to measure the financial success of the organization throughout the year. While every hospital experiences unforeseen circumstances, budgets generally are viewed as stable projections of performance. However, this report would like to challenge the long-held notion that budgets are accurate predictors of performance, and that measuring against budget truly deems successful—or unsuccessful—performance.
From January 2017 to November 2018, Kaufman Hall’s National Hospital Flash Report data indicate that just 37.1 percent of hospitals’ and health systems’ profitability metric(s) are within 3 percent of budget when evaluated on a month-to-month basis. Below is a breakdown of performance to budget relative to the financial measures seen throughout past issues:
Overview
Figure 1
Data Source: Kaufman Hall Axiom Data Date Range: January 2017 to November 2018 YTD
Budget Accuracy
Final Considerations
Overview
Final Considerations
Organizations that routinely perform within 3-5 percent of their budgets—what Kaufman Hall refers to as the “Goldilocks Zone,” where performance is “just right”—receive little fanfare, and little is made of their ability to accurately predict performance. These are the organizations that can best plan for long-term changes in the healthcare landscape. Accurate budgeting allows leadership teams to focus on existing and emerging competitors, strategic investments in key service lines, and Capital and Labor resources needed to maintain a competitive edge.
Next month’s Spotlight report will describe the drivers of budget accuracy and introduce best practices to improve “Goldilocks Zone” budgeting. These drivers may be accurate in volume prediction, expense prediction, and so forth. The report will weigh which of these drivers are the heaviest coefficients for accurate prediction, and which are the lightest coefficients. Some questions to be discussed include:
  • Do hospitals with rolling forecasting better predict performance versus those organizations that complete annual budgeting?
  • What are the potential drivers of inaccurate budgeting?

  • - Intentional (e.g. conservative budgeting)?
    - Unintentional/unforeseen but internal (e.g. increases in LOS)?
    - Unintentional/unforeseen but external (e.g. loss of a payer contract)?
  • What are the operational characteristics of hospitals in the budgeting Goldilocks Zone?

Happy Holidays, and we look forward to next month’s budgeting discussion.
Budget Accuracy
Many organizations view performance favorable to budget as a positive, and performance unfavorable to budget as a negative. After all, performing favorable to budget means there are “extra” resources available to the organization that were not anticipated, and performing unfavorably suggests that hospital operators did not manage the business as planned. While there are kernels of truth in these beliefs, Kaufman Hall’s point of view is that budget accuracy is preferred more than measures of over- or under-performance.
The consequences of inaccurate budgeting are manifold. Organizations creating budgets that are too aggressive over-estimate performance, and leadership is perpetually trying to catch up to planned performance. This can put management in tough situations when reporting to hospital boards and outside rating agencies. Health systems creating budgets that are too conservative may appear to have management teams that are able to “over deliver” on key success measures, but these organizations are missing out on important opportunities. For example, organizations that routinely outperform their budgets may not be adequately planning for strategic, capital, and resource investment. Lack of an accurate strategic growth plan can create stagnation.
The tables below describe the accuracy of a hospital budget, using Profitability by Region and by Bed Size:
Figure 2: Profitability Budget Accuracy by Region
Data Source: Kaufman Hall Axiom Data Date Range: January 2017 to November 2018 YTD
Figure 3: Profitability Budget Accuracy by Bed Size
Data Source: Kaufman Hall Axiom Data Date Range: January 2017 to November 2018 YTD
Budget Accuracy
Final Considerations
Overview
©2018 Kaufman, Hall & Associates, LLC
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