COVID-19 Bulldozed Budgets and Now Hospitals Are Shifting From a Budget-Based to a Performance-Based Culture

September 22, 2020

The initial impact of COVID-19 on hospitals was devastating with patient and procedure volume dropping by over 50 percent, coupled with incremental expenses for PPE.

On the clinical side, many hospitals rapidly accelerated their deployment and utilization of virtual visits.

However, the shift that’s taken place on the financial side of hospitals may even be more profound. Almost all were forced to throw out their budgets, with many looking to make that change permanent.

For decades, hospitals have used a static annual budget to map out their finances. However, an annual budget often takes four to five months of leaders’ time to create, plus tens of thousands of dollars in resources. By the time they’re implemented, most budgets are outdated and inaccurate, according to Dan Michelson, CEO of Strata Decision Technology.

“Budgets are really a wish list where departments throw in items knowing that they won’t necessarily get what they asked for,” Mr. Michelson said during an interview with Becker’s. “It’s incredibly inefficient and inaccurate. The budget process is fundamentally broken, and it needs to be fixed. COVID-19 provided an inflection point where everyone was forced at the same time to find a better way. “

Below, Mr. Michelson discusses why hospitals are moving from a budget-based culture to a performance-based culture and how COVID-19 is accelerating this transition.

Note: Responses have been edited for length and clarity.

Question: What is driving the move from a budget-based culture to a performance-based culture? Why now? Is it only COVID-19, or is it more?

Dan Michelson: The realization that performance-based budgets are more agile and useful than annual budgets isn’t new. We always knew that a rolling forecast was a better way to budget because it’s more efficient and allows organizations to be more agile in a dynamic market. But the pandemic sped up the transition to this approach because hospitals didn’t have any other choice. When hospitals saw a 50 percent drop in revenue in April in May, they had to throw out their budgets and move to a driver-based rolling forecast that could be updated frequently and quickly with the latest assumptions and initiatives that they set in motion.

In the same way that telemedicine makes sense during the COVID-19 pandemic, hospitals need new financial strategies because their former budget processes are no longer relevant. Organizations simply can’t wait four to six months to create next year’s plan, and budget targets are too rigid.

Q: What will change operationally and technically as organizations move to a performance-based culture?

DM: Essentially, hospitals are moving away from a time-consuming process that takes months to a data-driven one that could take hours. That type of change will require new ways of operating as well as new technology.

Operationally, administrators will need to look at making decisions based on driving improvement versus managing to what may be an outdated budget. They need to understand both where they stand and their trajectory, as they consider where they spend that next dollar. In these instances, data — not department politics or proposed cuts to make the budget neutral — will drive decision-making. Finance teams will also need to partner with operations to ensure that their metrics, targets, and process support a mindset of financial accountability.

From a technical perspective, a performance-based culture functions best with tools that automate time-consuming processes. For example, our StrataJazz application uses rolling planning, cost data, and automation to create a financial planning process that’s more accurate and flexible. Our technology allows hospitals to update a 12- to 24-month plan on a monthly, quarterly, or as-needed basis.

This is not just theoretical; it’s absolutely happening. A customer of ours, a large multi-hospital health system in the Midwest, used to spend at least eight to ten weeks every year on their annual budget cycle. Each year, the process was stressful and time-consuming. They decided to partner with us to design and implement a more dynamic planning approach. And through this, they decreased their planning cycle from eight weeks to two. Leaders throughout the organization were given thousands of hours back, the equivalent of $1 million or ten full-time employees. And most importantly, these leaders repurposed their time to focus on truly improving performance and continuing to drive efficiency and cost improvement.

Q: How should organizations think about and plan for this change? Where should they start?

DM: Three things drive change, in this order: mindset, toolset, skillset. The idea of change and creating the case for it is the hardest part. First, to transition to a performance-based culture, you need to lean in on the financial stewardship mindset, across your organization and leadership teams. Second, your toolset needs to include automation technology, to free up resources to drive change. Last is skillset. That includes training your team to think and operate differently. Since change is difficult, pushback will come if people feel that they are either uninformed about the new approach or that they do not have support to be successful. Addressing that through process design and robust communications will drive buy-in and adoption. Most importantly, executive support is critical to initiate change from the top-down and encourage buy-in.

Q: What will success look like for finance teams in this new performance-based world?

DM: There’s two kinds of finance teams — in the past, most have been on defense, waiting for others to come to them. But increasingly we are seeing many finance teams shift to offense where they are integrated with operators and clinicians and focused on making progress as a collective team.

Success is looking at finance not as a source of friction, but of collaboration. Organizations in a performance-based world move from managing an obsolete budget to improving performance every day. The fact is, CFOs and COOs don’t want a budget-based culture, yet most still operate in one. That will change dramatically in the next five years as many CFOs have already started to shift their organization towards performance-based processes. The exciting part is that we’re now in the middle of what may be the most seismic change in how healthcare finance teams operate.