How to allocate limited capital resources is perhaps one of the most difficult decisions hospital executives have to make. Demands for new equipment, renovations and maintenance and the need for new service lines and facilities all come with some merit. The trick is determining which request will generate the best return for the organization.
Integrating strategic and financial planning is the best way for health care organizations to ensure that they are spending money wisely. Too often, projects get approved only to be shelved because the money isn't available. And, hospitals need an accurate vision of their community and the needs and wants of their customers before embarking on costly expansions and new services.
It is a dynamic process: Just as budgets must be updated yearly, strategic plans must be reassessed to ensure that the organization's assumptions and projections are on track. It is important that plans remain up-to-date or the organization risks costly, unnecessary expenditures or may miss out on a good opportunity.
A thorough planning process incorporates strategic planning, financial and operational planning and capital allocation. "A financial plan without strategy isn't much of a plan," says Blaine O'Connell, chief financial officer at Froedert Hospital in Milwaukee. "A strategic plan without financial backing isn't much of a strategy."
This gatefold looks at the process of integrating strategic and financial planning and provides steps that will help hospitals combine these practices.
The traditional role of strategic and financial planning must be incorporated
into a combined process.
The traditional goals of the Strategic Planning Process
The traditional goals of the Financial Planning Process
Integrating strategic and financial planning processes creates the essential link between organizational priorities and the deployment of resources. This overview is a consolidation and distillation of this process from a variety of sources. It is intended to guide organizations through the major steps in the integration process. The process typically varies from organization to organization but includes these major components.
COLOR KEY:Strategic planning stepsFinancial planning stepsSource: Financing the Future: Core Competencies in Capital Planning, Healthcare Financial Management Association and GE Healthcare Financial Services, July 2004; True Integration of Strategic and Financial Planning, Kaufman, Hall & Associates; Strategic Planning in Health Care: A Guide for Board Members by Ellen Goldman and Kevin Nolan, AHA Press; Strategic Planning for Nonprofit Organizations by Michael Allison and Jude Kaye, John Wiley & Sons.
The market analysis provides an understanding of an organization's financial strengths and weaknesses by providing local and national data for comparison. It helps the organization predict market changes that will impact its strategic goals.
The internal analysis outlines an organization's current performance and status of its workforce and patient population. When combined with the market analysis, organizations can compare the hospital's services with the needs of the community and determine the hospital's ability to grow.
Building upon empirical data, the hospital develops a broad set of assumptions about the future. Operational assumptions include projections about clinical needs within the service area, the ability to attract and retain physicians and nurses, as well as the impact of future clinical practices and technologies on the organization.
The financial assumptions serve as the financial framework for the operating budget and capital plan. At the project level, assumptions focus on the specific initiative. At the organizational level, assumptions are based on both external factors, such as interest rates and Medicare and Medicaid reimbursements, as well as internal factors, such as bad debt, collections, days-cash-on-hand and working capital.
Data from the internal and external analysis is combined with the assumptions to create a picture of current and future needs of the organization to identify opportunities for growth and expansion. During this phase, the organization will assess, among other things, whether it has the capacity to meet projected population growth, whether capital supply meets ongoing needs and how consumers would respond to a new service or facility.
Examines how the combination of financial assumptions and internal operations will influence the availability of investment funds. For example, changes in interest rates and Medicare and Medicaid payments can impact the sources and uses of capital. Changes in the marketplace and the organization's fiscal situation may impact the ability of the organization to finance its strategic plan.
These key components of the strategic plan serve as the basis for prioritizing opportunities. This ensures that all initiatives further the organization's goals.
Assessing opportunities and financial projections will help organizations prioritize projects based on financial viability, opportunity for growth and community need. Capital should be allocated to projects based on importance. Projects can be categorized as routine (maintenance and replacing equipment), mandated (a project that is required to meet regulations), and strategic (projects, such as adopting a new service line) to meet the long-term needs of the community and the organization.
An interactive process that examines whether selected opportunities support the organization's mission and will provide the projected financial, quality or operational returns. It also examines whether the organization has the capital to finance the opportunity.
This includes staffing, facility planning, process changes, technology planning and other nonfinancial activities necessary to implement the plan.
Financial and capital plans identify both sources and uses of funds. This includes directions for capital allocation and spending, as well as the development of a time frame based on the needs of the operational plan.
The implementation process for strategic initiatives must be outlined to ensure follow-through. Key players must be aware of their roles and responsibilities. Executives must assign accountability so plans are carried out effectively and set measurable goals to determine progress.
Results must be monitored continuously to ensure success. Key assumptions should be periodically reviewed to make sure they are on target. New threats and opportunities may also become apparent. The plan needs to be flexible to adapt to new opportunities.
Managers monitor the success of projects in real-time by reviewing key statistics for each project, as well as overall organizational performance. Ongoing results for each project are provided to accountable staff. Overall results are provided to top-line managers, senior staff and CEO, as appropriate.
These analytics also become the baseline for the following year's planning process.
Blaine O'Connell, CFO, Froedert Hospital, Milwaukee
In 2001, a year after a partnership that joined Froedert Hospital and Community Memorial Hospital in Menomonee Falls under Froedert & Community Health, the organization began integrating the strategic and financial planning processes of the two facilities. It hired an outside consulting company to create a five-year planning process. Neither hospital had truly integrated strategic and financial planning processes; instead, they focused more on meeting annual budgets and less on long-term planning. The new process is a year-round effort. Every fourth quarter, a market analysis is conducted to assess the environment for the year starting 12 months later. Strategic planning is the focus of the first quarter, financial planning the second quarter, and capital and operating budgets in the third quarter. Strategic plans are reassessed midyear to compare the plan with the current fiscal situation. "We feel good about the process," says Blaine O'Connell, CFO. "It provides managers and the board rules to live by."
Scott Glasrud, CFO, University of Kansas Medical Center, Kansas City, Mo.
As a state-owned hospital, KUMC's budget was determined by the state legislature on a yearly basis, making advanced planning difficult. That changed in 1998 when the hospital converted to a self-funded independent state authority, allowing it to build cash reserves. Following the change, hospital executives set out to build a thorough strategic planning and budgeting process. "We needed a structural approach. We didn't have a margin for error," says CFO Scott Glasrud. The process is a joint effort of the finance department and the combined business development and strategic planning department. "We want to ensure that we are not overinvesting or underinvesting in the hospital," Glasrud says. The strategic plan is developed on a three-year cycle. It is reassessed in the early part of the fiscal year and changes are reflected in the budget for the following year. To date, about $200 million has been invested in the hospital, including the development of new service lines and upgrading equipment. "It helps us balance investments in infrastructure and investments in strategy," he adds.
How We Did It: H&HN compiled the data for this special supplement from industry group studies, interviews, books and online resources.
Research: Lee Ann Runy (email@example.com)
This article first appeared in the June 2005 issue of H&HN magazine.