Eight Steps to Successful Use of Financial Modeling
The viability of any hospital initiative depends on its financial performance. Financial modeling is therefore the foundation for determining feasibility, whether for a new hospital program, a joint venture or a new business. Financial modeling can be quite complex in the healthcare environment, with significant uncertainties regarding physician buy-in, competitive response and potential reimbursement changes. Yet your board and other stakeholders want straightforward answers. In this article DGA Partners shares eight key steps for success in using financial modeling to evaluate new initiatives.

1. INCLUDE THE RIGHT STAKEHOLDERS ON THE PLANNING TEAM

Involving the right people from the beginning is critical. It allows everyone to work out agreement on the scope of the analysis, the constraints and the parts of the model that can be based on simple assumptions rather than in-depth analysis. Having the right team working together can uncover unexpected information that is critical to all further analysis of a venture. The team should include clinical, financial and operational stakeholders; the participation of relevant physicians is essential.

2. BUILD YOUR MODEL ONE LEVEL BEYOND WHAT IS EXPECTED

It’s one thing to do a quick and dirty analysis to give yourself a general sense of how a venture might go. It’s quite another to let the results of that analysis go beyond your office door. Figures on a spreadsheet always seem to carry a certain weight and validity, no matter how simplistic the model. Before you know it, everyone has forgotten that the figures were preliminary, and you have to start justifying any changes as the analysis gets more rigorous. To avoid this, design the model one or two levels up from what you think you need at the moment. Fight the pressure for a quick answer; the figures will hold up better, you’ll be more comfortable and so will your stakeholders.

3. NAIL THE VOLUME

Volume projections are at the heart of most financial models. The key to developing solid projections is triangulation. Use multiple approaches to projection that provide checks on each other. Consider historical volumes where relevant (both yours and the market’s). Check that your volume results in an achievable market share. Use the best available utilization benchmarks and population data. For new technology, look at research articles about the technology’s uses, and relate that to incidence or prevalence. Once you are informed, talk with the clinicians. Watch out for “hockey stick” projections—where a “handle” of slow growth suddenly turns up dramatically (and usually, unrealistically).

4. CLARIFY ALL ASSUMPTIONS WITH STAKEHOLDERS

Make sure that everyone on your team, and eventually, everyone involved in the initiative, buys off on all significant assumptions. Lay out the figures and talk through them, covering variables including:
  • Volume and growth curve
  • Payment rate
  • Payer mix
  • Facility size
  • Cost per square foot
  • Staffing levels
  • Hours of operation

5. DEMAND THAT THE FINANCIAL MODEL BE ROBUST

As planning moves forward and thinking changes, financial models need to change to reflect that. The core model must be clean, organized and well-documented, so that when the inevitable refinements and “patches” are made, sometimes months later, you can still see how the model is working and spot any anomalies.

6. MAKE SURE THE MODEL IS TRUSTWORTHY

Check the model for reasonableness and accuracy before relying on the figures it produces. You want to be sure there are no errors in logic. If you take the volume to zero and you still have variable costs, something is wrong. If you change the volume growth rate, the model should show a proportional increase in gross revenue. Fixed costs should never vary. Have someone outside the model-building process review the model for accuracy. It is no reflection on the model-builder if fresh eyes spot a problem—in fact, it’s all but inevitable.

7. ADDRESS UNCERTAINTY BY MODELING DIFFERENT SCENARIOS

When you have a robust model that you trust, and you’re comfortable with your base case, you are ready to look at how market uncertainties might influence your bottom line. Make sure the model can answer “what if?” questions such as:
  • What if the physicians only move half the volume you are projecting?
  • What if Medicare cuts rates?
  • What if competitors open a similar program six months after you launch?
The model will be more sensitive to variation in some factors than others. Once you know where the model is most sensitive, you can consider how you might control uncertainty or how you would respond to certain scenarios.

8. DO WHAT IT TAKES TO MAKE SURE YOUR BOARD WILL HAVE CONFIDENCE IN YOUR RESULTS

To make sure your board is comfortable with and confident in your results, do some extra homework. Present a baseline scenario and show them a “worst case” scenario as well. Review results with a test audience before taking your presentation to the board. Anticipate board members’ questions, and answer them before the meeting.
 
Design: Aaron Design, Inc. | Implementation: Christopher D. Hunter