COVID-19 is changing many things, especially the way we conduct business, socialize, and interact with the world around us. It’s also highlighting the importance of rolling forecasting in healthcare.
Rolling forecasting is the process of reexamining financial information on a regular cadence to provide timely visibility into changing financials.
Facing reductions in healthcare revenue and increased costs from the pandemic, healthcare finance leaders are scrambling to adapt planned budgets and wondering how to incorporate rolling forecasting into existing processes. Should they discontinue annual budgeting until after COVID-19? What rolling forecasting techniques work best for healthcare? What length of time should they forecast ahead? Should rolling forecasting replace annual budgets?
Because rolling forecasting works by regularly reviewing and adapting to financial information, and annual budgets make a point-in-time determination to help with planning, both rolling forecasting and annual budgeting play important roles that benefit healthcare organizations and empower finance teams.
Annual Budgets Versus Rolling Forecasting
Annual budgets are useful in setting the plan for the upcoming year but generally time-consuming to produce — nearly 50% of healthcare organizations spend six months or longer preparing them. Developing budgets for 2021 and 2022 will still likely be necessary in most organizations because these documents guide development of departmental financial plans and are often required by lenders or leadership. Finance and departmental leaders must recognize, though, that budgeting for 2021 will be unlike any other year, as process efficiency and agility will be more important than ever.
Rolling forecasting enables healthcare leaders to update their financial projections on a monthly or quarterly basis to determine, “How has the previous month or quarter changed our view of the present and future?” It guides intelligent course corrections in response to current data and helps update near- and long-term projections. Rolling forecasting not only influences current expenditures and initiatives — such as ramping up traditional services at a time when consumers may avoid returning to a hospital setting — but also strategic decisions and future endeavors.
The agility and visibility that rolling forecasting provides helps healthcare leaders adjust strategy quickly as financial conditions change — not just during the pandemic, but over the next one to two years and through the aftershocks of COVID-19.
How Rolling Forecasting Works in Healthcare
Here’s how rolling forecasting works:
- Budget process participants come together for short blocks of time each month or quarter to assess and update the organization’s financial performance
- Participants select the appropriate forecast horizon (e.g., monthly or quarterly periodic forecasts for the current year and up to two years forward)
- Using the most recent data available, comparative and trend analyses are performed, often taking multiple scenarios into account. For example, to analyze the forecast for sensitivity and risk, organizations typically test against at least three sets of conditions, with favorable, unfavorable, and very unfavorable outlooks
- Based on these analyses, leaders evaluate key actions their organization should take now and in the short- and long-term to strengthen and protect the organization’s performance
Most healthcare organizations use rolling forecasting to create forecasts for six to eight quarters — a longer time horizon than used for current-year forecasting or traditional budgeting processes.
Scripps Health, a nonprofit health system based in San Diego, recently completed its ninth quarterly rolling forecast. Since the beginning of the pandemic, I’ve participated in several calls with John F. Wong, Scripps Health’s Director of Corporate Financial Planning and Reporting. He’s shared wonderful advice and detail about how rolling forecasting has informed Scripps Health's response to patient volume shifts during the COVID-19 pandemic.
For example, the system runs daily reports that monitor charges and productive hours to track the impact of reduced elective procedures and the corresponding flexed labor. Because these decisions are made differently at each of five hospitals, rolling forecasting helps leadership understand the impact by location and by department — showing which departments are flexing properly and where volumes are dropping. This has helped guide decisions such as when to close certain clinic sites and departments temporarily, and which resources to repurpose in the event of a surge.
When Scripps’ daily charges report showed a 35%-37% drop in volume, finance leaders began analyzing the revenue impact over a two-week period and projecting volumes quarterly. As volumes picked up, daily analyses helped make staffing and supply adjustments, with an eye toward patient acuity levels.
As Scripps Health began its return to elective procedures, rolling forecasting also informed which departments to open for service and how to adjust staffing for anticipated versus actual volumes. Ultimately, the cost data captured also will support the health system’s efforts to secure federal dollars for COVID-19 response, such as funds available through the CARES Act.
Each quarter, Scripps Health’s finance team makes process improvements to expedite decision-making, especially during this period of volatility. They strive to improve every quarter — prioritizing the time to think strategically and critically about issues, not allowing themselves to be solely driven by a specific deadline. John has stated that rolling forecasting empowers his health system to make the right decisions in a changing environment — which is exactly why healthcare organizations need rolling forecasting now more than ever.
For tips on how to add rolling forecasting to your financial planning practices, see Healthcare Agility, Part 2: 5 Steps to Seamlessly Integrate Rolling Forecasting Best Practices During COVID-19.