COVID-19 has brought a series of new financial challenges for hospital management to navigate. Amid preparing for potential COVID-19 surges, many hospitals have experienced a decline in volumes, while also experiencing increases in COVID-19 related preparatory measures. As a result, hospital executives are faced with managing operations through reductions in revenue and increases in expenses causing volatility in cash flows.
Modeling volume changes and the related financial impacts can be convoluted and difficult for healthcare providers to quantify. As COVID-19 continues to evolve, management will need to plan for and react to environmental shifts that will ultimately impact their operational plans and financial results. As each state prepares for stay at home orders to be lifted, management should consider what the elimination of many elements of social distancing could do to their organization’s ability to operate as they have in the past.
Bed demand has been at the helm as hospitals and communities look to ensure there’s enough supply to meet potential surges. Hospitals will likely see more COVID-19 cases as distancing lessens and will respond to those increases. With increased testing, bed demand as well as underlying services will come into focus given the fluidity with reopening.
This COVID-19 pandemic environment calls for models that have the capacity to respond fluidly as conditions on the ground evolve.
The Need for Service Line Models
Given the fluidity in demand for beds, management will want to understand how the change in demand for beds and underlying services impact their operational and financial outlook through the pandemic. By using a flexible model which shows these changes in the assumptions in real-time, management can get a better grip on the variables as they change.
A strategic financial impact model is designed to account for these fluctuations whether it be a V shape, U shape, L shape, or W shape dip in operations. The dip is defined in percentage and length by the decline, bottom, rebound, and surge if any. These volume changes impact revenues and operating expenses at the service line level as the service lines are defining the changes. The defined service lines include elective surgeries but also expand to include clinics, ancillaries, therapies, emergency rooms, and possibly others. These models also project changes for COVID-19 surges as well as potential transfers of services and cases.
The Importance of Rolling Forecasts and Modeling
All of these changes will significantly impact an organization’s financial statements and bring to light a fundamental flaw in the budgeting process—it is typically outdated before the year even starts. Knowing that things are constantly moving, and that monitoring financial ratios and performance indicators should be part of an ongoing process, we believe it is imperative for organizations to be able to see operational changes flow through the budget in real-time.
A rolling forecast captures these very elements by utilizing actual results to make updates to the budget, incorporate known changes to operations, and create the ability to see fluctuations in volumes or expenses. With a rolling forecast, management can project a year-end income statement while monitoring debt covenants or other operational measures important to your organization.
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