Health systems are pursuing a wide range of digital initiatives to meet the unprecedented financial and strategic challenges they face. These digital initiatives span the enterprise, and include the creation of a modern consumer-grade experience, automating myriad back office processes, and delivering care using virtual technologies. With the intense margin pressure facing health systems today, compelling financial returns from any digital initiative are a prerequisite to secure funding and organizational support. Historic approaches to financial management are often not up to the task, slowing progress and limiting the potential value from digital. For digital transformation to truly thrive, health systems will need to adopt not just new technology and processes, but also next generation approaches to financial justification for digital.
Establish a direct line of sight to financial impact
Digital initiatives have the potential to be truly transformative. Health system sponsors of digital initiatives typically do a thorough job of articulating the operational, clinical, process key performance indicators (KPIs) that will improve as a result of deploying digital solutions—for example, systems considering a digitally enabled inpatient command center may note the reduced time for patient transfers, reduced length of stay, and lowered staff time required to manage the manual processes most systems currently use today to manage their system-wide “inventory” of inpatient beds.
However, digital project sponsors often stop short of projecting the ultimate financial outcomes that result from the improvements in operational and clinical KPIs. In this inpatient command center example, the improved transfer rates and lowered length of stay will also free up inpatient beds, allowing for more admissions. By estimating the revenue or margin per admission, a direct financial estimate can be generated.
Similarly, the staff efficiencies from replacing a manual process with a digitally enabled solution can be translated into labor cost savings. Nurses and other staff will have more time for direct patient care, improving staff ratios, reducing overtime and/or contract labor costs, and other direct labor cost impacts.
By linking operational and clinical KPIs through to the projected financial benefit, health systems will be taking a critical step in accelerating and improving the process of securing funding for critical digital initiatives.
The right level of detail at the right time
Many health systems require highly detailed, multi-year financial projection models to approve any funding for projects. Historically, these have been used for initiatives like service line strategic plans, with details by practice, procedure codes, payer contracts, and other variables.
While this level of detail is certainly warranted at the appropriate time in a budget cycle, expecting this level of precision early in the deployment of innovative digital initiatives can be counterproductive. As with other forms of innovation, the exact manner in which digital will create financial benefits may evolve as specific use cases are identified and implemented.
To activate digital initiatives, health systems can begin with a directional estimate of the potential financial benefits to secure initial internal funding and organizational commitment. Building on the inpatient command center example noted above, digital project leaders can develop directional, enterprise-level estimates on the potential “size of the prize” with respect to incremental admissions and labor cost savings.
Once the digital command center initiative is activated, further details can be specified, such as which hospitals will see net transfers in/out, which regions may see incremental admits, and which nursing units will see staffing efficiencies. These details can be then incorporated into the rigorous financial planning and budgeting tools, along with operational scorecards to monitor performance to plan.
Plan for Multi-Year Impact from the Start
Health systems have established financial mechanisms for evaluating, funding, and monitoring multi-year projects. These are typically capital projects, such as facility expansions, building new ambulatory facilities, and acquiring expensive diagnostic equipment. While the specific accounting treatment is of course important, the fundamental economics recognize that sustained investment will be required, often in advance of the ongoing financial benefits that will be realized.
Unfortunately, digital strategies and related investments are often not managed in this manner. Digital investments are often funded through operating budgets, rather than capital budgets, and need to be re-justified on an annual basis. With the near term margin pressures facing health systems, digital investments can be at risk for continued funding at the full levels needed to maximize impact. This can result in start-and-stop focus and funding which jeopardizes and delays achievement of the full financial potential of the digital initiative.
While still maintaining accounting integrity, health systems can make a more sustained commitment to multi-year digital investment. To accomplish this, all levels of leadership need to be aligned on the financial commitment. Boards need to acknowledge and support the multi-year commitment to digital in their longer term financial planning. Financial leadership needs to account for these commitments in their forecasting and budgeting. Departmental leaders need to balance the annual (even quarterly) pressures on margin performance to stay committed to the longer term strategic value from digital.
Clearly, this enterprise wide financial commitment to digital transformation is challenging. However, given the numerous threats to financial sustainability facing health systems today, the ongoing commitment to digital transformation is a strategic imperative.
Build on a strong financial foundation
Although the next generation financial management approaches for digital described here will require a new orientation. However, these approaches build on established financial practices that have proven successful for many years. Health systems know how to identify and project future impact; they know how to estimate and summarize impact at different levels; and systems know how to fund and manage multi-year projects. Winning systems will adapt these building block financial capabilities to meet the unique opportunities presented by digital transformation.