Rolling Forecasts Foster Collaboration Between Finance, Operations

At Park Nicollet Health Services, financial analysts help department leaders guide their businesses based on current performance, rather than a static budget.

More than a decade ago, leaders at Park Nicollet Health Services, a St. Louis Park, Minn.-based integrated delivery system with $1.5 billion in annual revenue, abandoned their traditional budgeting process in favor of a rolling forecast. Since then, the organization has benefited from greater collaboration between financial and operational leaders, as well as a new management approach that empowers department heads to take action to meet their desired margins.

The decision to move from a static budget to a rolling forecast model was embraced by top leaders at Park Nicollet who were inspired by the principles of continuous improvement—namely the Japanese Kaizen philosophy—as well as the desire to reduce waste, says B.J. Miller, senior director of performance and planning.

“Some like having the security blanket of having a budget, because having a budget is in many ways easier than managing a business,” Miller says. But with rolling forecasts, departmental leaders at Park Nicollet are asked to give up some of that security and take more ownership for their business decisions—such as staffing and supply usage—by continuously monitoring current performance data. “We give leaders the ability to make choices in real time based on how their business is evolving, rather than asking them to anticipate changes that may or may not occur,” he says.

Implementing a Rolling Forecast

Setting targets based on historical performance data is one of the first steps when implementing a rolling forecast. At Park Nicollet, operational leaders work toward a margin target based on net revenue and expense data from the past three to five years. At the beginning of the year, the finance team also generates a run-rate forecast to get a current glimpse of the organization’s projected margin based on payer mix, inflation, and other factors. 

“The target is static, the forecast is dynamic,” Miller says. This approach keeps leaders’ incentives consistent, so they are not chasing moving targets. 

“Over the course of the year, we use the forecast to determine if the departments are making progress to the target,” Miller adds. “Generally speaking, a department’s target requires them to perform the same as last year or a little better. If there has been a lot of capital investment in the department, their target will be going up entering the year.”

In a typical year, Park Nicollet sees approximately half of its $45 million margin erode because of payer mix challenges and inflation, Miller says. To help close this $20-25 million gap, finance leaders work with service line and departmental leaders to ensure everyone knows that maintaining the status quo will not be sufficient. They will need to grow volume, improve productivity, and improve efficiency to meet their target.

Finance and operational leaders partner to examine how operational choices, such as staffing, will affect their ability to reach the target. Park Nicollet’s dyad leadership model helps support these strategic conversations by pairing administrative and physician leaders for each of its five service lines (primary care, medical specialties, surgical specialties, behavioral health, and hospital/inpatient care) and for each department within those service lines. Clinical departments and directly related ancillaries fall under the appropriate service line.

“Having a clinical and administrative leadership dyad is important because it makes sure that all of the perspectives are considered when we are understanding how operational choices will affect the financials, patient satisfaction, clinical quality, and our team members,” Miller says.

Finance leaders are careful to ensure these discussions with operational leaders are productive and not confrontational. “We have conversations about how day-to-day-, week-to-week, and month-to-month operating choices affect financial results,” he says. “It’s about thinking strategically, tactically, and operationally about how the business runs and what the key drivers are.”

For example, if margins are down, finance and operational leaders may look at support staffing, supplies, physician productivity, and volumes. They may discuss specific steps that the departments can take to increase their revenue or reduce their expenses, such as sending unit staff home when volumes are down. However, they are careful to keep decision-making decentralized. “We’re not trying to micro-manage from finance—we want to advise and partner so decision-making occurs on the front lines,” Miller says. 

Leading these conversations with operational staff are senior financial strategists, who meet monthly with department heads to track their progress compared with the previous year and discuss what has changed and why. “Their role is primarily as a business adviser to the service line they support,” Miller says. 

“The senior financial strategists work with the dyad leadership to understand the success drivers for the service line and help leaders of the service line and each department understand how the decisions and trade-offs they are making affect their financial situation,” he adds.

Each senior financial strategist is supported by an operational analyst, who helps gather data and report the results.

Monitoring and Reforecasting as Needed

Miller and his team provide reports for operational leaders to compare the current year’s actuals to the previous year’s for the month and year-to-date. “Our budget is essentially last year’s actuals, so we are always comparing to last year,” he says. “This avoids the debate that the budget is just wrong. Last year’s actuals can’t be wrong.” 

Keeping an eye on performance often leads to reforecasting, which is possible through Park Nicollet’s integrated financial management platform. When conversations with operational leaders reveal that situations have materially changed—if a busy surgeon departs, for example—finance leaders can generate new forecasts. In this way, a rolling forecast is constantly evolving to reflect real-world performance. “This approach helps us extrapolate trends better,” Miller says.

Lessons Learned

Miller offers the following advice for organizations looking to move away from budgeting and embrace a rolling forecast.

Gain leadership commitment on implementing a rolling forecast without a safety net. “The fact that we jumped in and didn’t do a budget didn’t let us backslide as easily,” Miller says. “But if there is not that leadership commitment, there is always the potential to backslide.”

Set a cultural expectation for continuous improvement. This mindset helps department leaders set targets and creates the expectation that departments need to do better this year compared with last year. 

Partner with operations. This approach helps ensure a smoother implementation while also decentralizing decision-making.

Make communications frequent and nonjudgmental. “Over time, the conversations that my team has with operations have gotten stronger, and the trust level has really gone up as those relationships have developed,” Miller says. 

Hire for success. In the past, clinically trained leaders relied on the budget to guide their decision-making. But with rolling forecasting, operational leaders must think more like business owners—basing their decisions on the impact to the business,  weighing the projected outcomes of their decisions. “That transition was one of the hardest things,” Miller says. “Some of our traditional managers really embraced that role and accountability, but for others, it wasn’t for them.”

Whether hiring from within or from outside, leaders at Park Nicollet look for candidates who have a knack for business before placing them in management roles. The finance team also helps new department leaders by giving them the training and support they need to understand the rolling forecasting process during their onboarding period. 

Moving to the Next Level

In recent years, leaders at Park Nicollet have taken on several major strategic initiatives to prepare for a more competitive landscape, including the 2013 combination with Health Partners, which is one of three major commercial health plans in the Twin Cities and has a large care delivery component. Leaders also have been focused on tactical growth initiatives, including expanding existing lines of business to new locations and adding new services. Through it all, Miller believes that having a rolling forecast helps keep operational leaders focused on the big picture.

Miller and his team continue to refine their rolling forecast processes, and plan to improve their performance reporting capabilities in the coming months. Specifically, they want to expand their use of key performance indicators, such as staffing per unit of service, to compare performance across the organization. “We already do this through our conversations with operations, but it is not as routinized and systemized as it should be,” he says. With more structure added, Miller hopes department leaders can benefit from additional peer pressure and shared learning.

Miller urges other health system leaders to consider the benefits of a rolling forecast and to not be afraid of the unknown. In particular, he believes utilizing a rolling forecast instead of a static budget that quickly becomes outdated helps leaders be more agile and accountable in a rapidly changing healthcare landscape.

“The fact that we don’t have a hard and fast budget doesn’t mean that we aren’t thinking about the future or comparing to expectations,” Miller says. “It just means that we are spending our time thinking about what is really happening and how we are going to adapt, rather than setting a path that will, inevitably, need to be changed.”