You built your 2020 budget. You took time to model out your staffing needs, plan for new business initiatives… THEN ALONG CAME THE PANDEMIC.

Now your 2020 budget looks nothing like reality. In fact, your entire business looks nothing like it did 6 months ago.

On top of that, soon you’ll need to figure out how to budget for 2021 under “the new normal.” Here’s how:

We offer some considerations for preparing budgets in the year of the pandemic.

Some of the causes of huge budget variances in 2020 include:

  • Government decrees banning elective surgeries and other procedures.
  • Outpatient facilities saw a 60 percent drop in business in April, and are still down 30 percent, per the Commonwealth Fund.
  • CARES Act unemployment benefits paid more than local wages in some markets. This caused labor shortages for many providers.
  • Workers were downsized or furloughed.
  • Other workers quit, too scared to return to work.
  • Providers pivoted to telemedicine, often with lower reimbursement.
  • Strategic initiatives went out the window as employers scrambled to react to a flurry of new labor and leave laws. Providers struggle to keep up with new coronavirus OSHA and PPE requirements, COVID19’s impact on HIPAA requirements… Not to mention time consuming applications for relief funding.
  • Many providers have consolidated clinic locations to cut rent costs.
  • One time “revenues” from stimulus packages convolute financial statements.

Even in normal times, budgets often become obsolete by the time you’re halfway through the budget  year. This is because organizations must complete their budgets during the prior year. To do this, they use historical data that is even older. (For example, if your 2020 budget year begins on January 1st, 2020, you likely created your 2020 budget in October of 2019. But in October of 2019, your might have used the last 12 months of available financial data, which could have included October 2018 through September 2019.

That means that in 2020, some of the data informing your budget is already 18 months to two years old. The assumptions you made back then may no longer be valid.  Now, throw the coronavirus into the mix, and most healthcare organizations’ 2020 budgets are worthless.

So do you scrap the whole thing? Afterall, it’s no longer realistic.

Should you go the rest of the year without a budget? It’s not worth the effort to create a new one with only 4 more months left in the year, is it?

We don’t recommend stumbling through these times without a financial plan. Don’t just operate blindly. Budgets serve a purpose. They help guide you from your present position towards your future goal. Without one, you may drift off target without realizing it until it’s too late.

It’s important to see where you are relative to your goals each month. Here are some suggestions:

What To Do About It.

Good news: solutions to this problem existed before COVID19. Many organizations use the following tools to quickly adapt their budgets to changing circumstances.

Calculate Your New Break Even.

First, do a quick break-even analysis. You can download our free template.

Chances are your breakeven point has changed due to all the changes you made in response to the pandemic. Calculate your new break-even point and start there. You need to figure out if it’s even attainable in the current environment. You won’t want to budget losses, especially if you don’t have enough funds available to cover those losses.

If you’re operating at a loss because the government shutdowns tanked your volume—and you don’t see it recovering— you may need to look critically at your revenue sources and expense items. Many organizations have had to make radical changes, such as automating some of the jobs in their practice, or outsourcing.

For example, some providers are finding that with lower volumes, they can’t cover the fixed expenses associated with paying rent and staffing as many clinic locations as they did pre-pandemic. They have strategically consolidated some of their locations, lowering the number of patients they to need to see in order for the practice to break even.

In response to the pandemic shutdowns, many healthcare businesses have seen their service mix change. Bringing telemedicine into the mix has also changed the average collections per unit of service. This changes the break-even point.

Use Driver-Based, Flexible Templates.

Some organizations use static, fixed budgets. Their budget is based on a specific assumption about patient volume, which cannot be changed.

Other organizations use dynamic, flexible budget templates. These models allow you to quickly change a few high-level assumptions, like overall patient volume. Those changes then flow down to departments and line items, automatically recalculating revenue, labor expenses, and other expenses. This type of budget model can be updated frequently, and can be used to model out various scenarios.    

Using a driver-based, flexible budgeting methodology allows you to quickly update your projections in the event of more government shut downs or other major changes.

Rolling forecasts.

Most traditional forecasts are created by replacing last month’s budget numbers with actual numbers, so that your forecast consists of year-to-date actual numbers, plus the remaining months’ budgeted numbers.

A rolling forecast allows you to keep “rolling” the forecast forward, so that the most current data informs the forecast. This allows healthcare businesses to react quickly to changes in the environment, such as pandemic lockdowns.

By separating the rolling forecast into a baseline forecast, plus any special projects or initiatives, it becomes easy to adjust projections when projects are cancelled or delayed, as they were with COVID19. Another advantage: The projections from rolling forecasts may be more accurate than traditional budgets, because they remove managers’ incentives to “pad” the budget. (Instead of striving to be “under budget”, department managers can strive for forecast accuracy—which tends to lead to better informed decision making.

Just Get Started.

Do you feel paralyzed, trying to predict what 2021 will look like for your healthcare business?

Do you want easy, quick access to flexible tools and templates?

Lindsay Bennett began her career doing hospital and home health budgets in 2000. Over the years, as a CFO and Finance Director for health systems, Lindsay has created budgets from initial, high-level market-specific assumptions to final board presentations. Lindsay has created budgets for hospital systems, hospices, home health agencies, and physician practices. If you’d like some help with your budget, just send an email to Info@ConradHealthcare.com.