Six key strategies for successful financial health in your hospice business

A budget serves as a financial plan that supports a hospice agency’s goals and objectives as outlined in the strategic plan. Budgets ensure that financial resources are allocated in a way that aligns with the organization’s long-term vision. The budget plays an important role in ensuring that patients receive the best possible care within the constraints of available resources.

The following budgeting best practices can help hospices achieve and maintain financial sustainability:

Use driver-based budgeting.

Best practice budgeting reflects a thorough understanding of what moves the numbers on each line of the income statement. Having a clear understanding of the revenue and expenses associated with delivering care to patients is critical to developing an accurate, meaningful budget.

Driver-based budgeting entails identifying operational drivers that directly impact revenue and expenses. In the hospice world, drivers of revenue include admissions, average length of stay, and payer mix. Different expense categories have different drivers. Direct costs—such as drugs, medical supplies, and therapy— tend to be driven by patient days. Caregiver mileage costs should correlate with census. Indirect expenses, such as insurance and education, do not change with census fluctuations. Therefore, those line items warrant a different approach.

Besides improved accuracy, another benefit of a driver-based budget is that it makes it possible to recalculate the budget quickly if any of the underlying assumptions change. Budgeting activities usually occur several months before the start of a new budget year. This means that by the end of the budget year, the underlying data used to develop the budget is often 12 to 18 months old and may no longer be relevant. A driver-based budget model can quickly re-forecast revenue and expenses based on different inputs.

Engage in pre-budget planning.

Since assumptions regarding census levels, length of stay, payer mix, etc. determine the revenue and expenses in a driver-based budget, these underlying assumptions warrant careful consideration.

Pre-budget planning sessions bring together key stakeholders from various areas, such as clinical operations, finance, marketing, and philanthropy, to discuss trends and initiatives that could impact budget assumptions. For example, demographic trends in the service area, new marketing initiatives, or the entry of a new competitor into the market could impact the organization’s admissions.

Pre-budget planning presents an opportunity for stakeholders to discuss and align financial goals, priorities, and resource allocation strategies. It also promotes collaboration, transparency, and buy-in across the organization. This early planning phase facilitates a review of past performance, identification of challenges and potential opportunities, and consensus on realistic and achievable budget targets. Additionally, a pre-budget planning session provides a forum for discussing and resolving any conflicting priorities and resource needs, ensuring that the final budget reflects the collective input and insights of all relevant departments and stakeholders. Overall, it sets the stage for a more strategic, coordinated, and successful budgeting process that supports the organization’s overarching goals and objectives.

Use staffing models.

Labor tends to be the biggest expense line items for most companies, not just hospices.  Staffing models should serve as the foundation for hospice budgets because the quality of care provided to patients is directly influenced by the staffing levels and skill mix of healthcare workers. Staffing models consider factors such as volume, acuity, and care requirements, which impact workload and resource needs. This approach optimizes resources, promotes efficiency, and manages costs by balancing standards of care with financial sustainability.

Use a hybrid budget approach.

A top-down approach involves setting budget targets at the top levels of management and cascading them down to lower levels of the organization. This method allows quick decision-making and a good fit with strategic goals, but it can lack information from front-line staff who may have a deeper understanding of operational needs. On the other hand, a bottom-up approach to budgeting, where input from numerous departments is aggregated, fosters a sense of ownership and buy-in but can result in a budget that is not financially viable or is out of sync with long-term goals.

A hybrid approach combines elements of both top-down and bottom-up budgeting, to leverage the strengths of both approaches. By incorporating input from both senior management and front-line staff, hospices can create more realistic and achievable budgets that are aligned with strategic objectives while also reflecting the operational realities of the business.  

Pay attention to key ratios.

Another best practice involves validating the budgeted financial ratios against actual historical ratios and/or industry benchmarks. This helps identify any errors or items that may have been missed during the budgeting process. Using the budget numbers to calculate key ratios, such as operating margin, average length of stay, revenue per patient day, cost per patient day, staff-to-patient ratios, or benefits as a percentage of salaries helps to ensure that the budget is realistic, attainable, and consistent with organizational goals. Budgeted ratios also play an important role in variance analysis. There are a number of tools available ranging from features within hospice software to apps that handle financial administration that can assist with this priority. 

Perform timely variance analysis.

Another best practice is to analyze actual-to-budget variances regularly, and to take prompt action. By conducting timely variance analysis, hospice leaders can identify deviations between budget and actual revenues and expenses. By drilling down to the root causes of variances, hospices can address issues in a timely manner, preventing financial problems from escalating, and maintaining financial stability.

Hospice organizations that use driver-based budgeting will find it easier to quantify the causes of budget variances. For example, it is simple to determine whether pharmacy costs were over budget due to an increase in patient volume versus an increase in drug prices. By swiftly responding to variances and implementing action plans, hospices can improve their financial performance, operational effectiveness, and ultimately the quality of care.

The Takeaway

Budgets play a crucial role in keeping hospice organizations on track financially. Some of the best practices hospices can use include understanding driver-based budgeting methods, conducting pre-budget planning sessions, utilizing staffing models, using a hybrid budgeting method, ensuring that the budgeted ratios make sense, and promptly addressing variances. Using these methods, hospice leaders can better position their organizations to meet their strategic goals and have the resources necessary to provide quality patient care.  

Author’s Note: Views, information, and guidance in this blog are intended for information only. We are not rendering legal, financial, accounting, medical, or other professional advice. Alora disclaims any liability to any third party and cannot make any guarantee related to the content.

References:

Census projections

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