Justifying the Cardiovascular Service-Line Capital Budget in a Post-Pandemic World

The last few years have been financially devastating for the hospital industry.  COVID-19 and its variants have plunged the industry into financial chaos, with long-lasting impact on healthcare focused on, but far beyond, mere finances. Consider these sobering facts from 2021 and early 2022 (see here and here):

• More than a third of hospitals ended 2021 with negative operating margins.  First quarter 2022 results show no significant improvement.  Just one example:  CommonSpirit, a 142-hospital system based in Chicago, recorded an operating loss of $591 million in the three-month period ended March 31, compared to operating income of $539 million in the same period a year earlier 
  
  
• The percentage decrease in median operating margin in 2020 was minus 55.6% compared with minus 16.6% in 2019.
  
  
• 22% of nurses are predicted to leave their current position providing direct patient care within the next year.
  
  
• Another example:  Advocate Aurora saw its expenses rise nearly 11% to $3.56 billion in the three months ended March 31, 2022, attributed to an increase to a boost in agency staffing and supply costs.  
  
  
• Predictions for 2029 include the following changes in patient volume:
• Hospital Outpatient Department, +19%
• Ambulatory Surgery Center, +25%
• Hospital Inpatient, -1%

The overall financial health of the healthcare industry raises questions relevant to all service-line administrators.  How do I justify budget increases when my hospital’s operating margins are low or in a deficit, and how do I keep up with the constant changes in technology which are necessary to compete in increasingly complex local and regional markets?  Further, how do I expand new service offerings (frequently dependent on new and expensive clinical technology) in the face of deficits, labor shortages, changes in average patient acuity, and an uncertain future?  The cardiovascular service-line administrator (CVSLA) faces this conundrum more than most others.  Given that patient volumes have or are returning to pre-pandemic levels (although fundamentally changing), the CVSLA must successfully address the current operations of the services while planning for a less than certain future.  Remember, failure to make adequate progress does not just mean keeping up with the competition, it actually constitutes regression! 

CFA has worked with countless hospitals to prepare and justify budgets over the years.  Remember, budget justification is a categorical narrative description of the proposed costs.  Generally, it explains staffing and supply/service consumption patterns, the methods used to estimate/calculate (including escalation or inflation factors) and other details such as lists of items that make up the total costs for a category.  While challenging even in secure economic times, budget justification needs to consider the following action items in this less secure, post-pandemic world along with the more historically relevant budgetary factors.

• Prepare a Service-Line Pro Forma – When taking on a hospital client, CFA always tries to prepare a CV Service-Line Pro Forma statement, usually for at least five years in retrospect.  This is intended to provide a comprehensive financial overview of operations.  This is easier said than done, because many, and often most hospital SLAs do not have complete information and do not routinely prepare a service-line pro forma.  It is vital to know how your service-line contributes to overall hospital finances – both patient volume, revenue and expense.  How important (as a percentage of overall hospital financial performance) is CV-services to your hospital’s overall profit/loss situation?  Frequently, the CV service-line is one of, if not the most profitable service line, but it needs to be tracked service-by-service for complete understanding and minimally, as back-up for budgetary enhancement.

Obtaining complete, up-to-date financial information is often fraught with problems, including timeliness, the methodology for the allocation of overhead, the potential “downstream” revenue CV patients can accrue over time, and associated physician costs (particularly for employed physicians).  At a minimum, the pro forma must include all relevant costs and revenues, exclusive of allocated overhead, which is often as much a political as it is  a financial calculation.  If you know your overhead allocation, and the consensus is that it is reasonable, by all means, include it for the truest picture of total performance.  But remember, the SLA has little ability to impact allocated overhead; and physicians have virtually none.  This is critical information, not only to pinpoint managerial issues, reconfigure resource allocation, and head-off problems, but to inform any budgetary justification that may be needed for a particular expenditure, project or function.  Simply put, the more financially impactful the CVSL is to the hospital, the stronger your capital budget negotiating position – all other issues being similar.

• Recognize Market Competitive Position – Capital budget requests, especially those associated with new programs and services (often new, clinical technology dependent) always need to be placed into the larger context of hospital/service-line strategic positioning and market competition.  It is easiest to justify new technology or new programs/services when it bolsters the hospitals strategic positioning and/or is necessary to continue to maintain/defend or enhance your competitive position in the marketplace.  Always include a narrative description within budget justifications that support your project in this broader, competitive market context.  Market data and patient volume or market share information may be helpful, for example pointing out the growth of ambulatory surgery centers/office-based labs in your market for a related project.  See also Bullet #5, to follow.
  
  
• Acknowledge Challenging Post-Pandemic Issues – Always acknowledge problematic or challenging issues associated with any budget justification.  Post-pandemic, these could include staffing recruitment and retention, agency/temporary staffing issues and costs, shifts in inpatient versus outpatient volumes, staff training costs, recruitment of staff with special skill sets (e.g., electrophysiology), potential loss of patients to competing types of facilities, trends in telehealth, increases in patient acuity, increases in post-COVID conditions (e.g., potential cardiovascular implications of “long COVID), physician support issues, supply chain, and so on.  To not acknowledge a specific issue that could adversely impact budgetary items going-forward could have serious negative consequences.  Be prepared to acknowledge, discuss and address these types of issues, even though there is no one, complete or guaranteed successful way to address any of them within the context of your local market.
  
  
• Involve Service-Line Champions – Aways appropriately involve your service-line champions, be they physicians, other administration staff, board members, community groups, or donors.  Obviously, physicians have a key role in clinically justifying capital budget items and new programs/services, and are typically actively involved in budgetary justification, formally and informally.  Other constituent groups may also play a role in data gathering, formal or informal justification, political support and even fund-raising. 
  
  
• Emphasize Efficiency and Effectiveness – Whenever possible, always build budget justification upon potential increases in efficiency and effectiveness (e.g., cost savings).  Because of staffing issues, patient acuity issues, and other forces impacting operations, any proposed process or equipment that can help streamline operations, increase throughput and enhance the overall patient experience is important.  Budget justifications should always address these issues.  Although frequently lacking hard data to the contrary, do not overemphasize these issues, and be prepared to be met with skepticism from approval bodies.
  
  
• Consult your Chief Marketing Officer (CMO) – Your hospital’s CMO should be a wealth of knowledge for gathering and interpreting data and bringing forth a forward direction for the hospital system and its component service-lines.  Post-pandemic trends have expanded the need to “know thy patient” into new, somewhat uncharted waters of patient’ lives outside the healthcare system.  The trends involving the so-called “Great Migration, The Great Resignation, and the Digital Divide” (see “Marketing through the Great Migration, the Great Resignation, and the Digital Divide.”) have major implications for all hospitals and component budgetary expenditures.  Your CMO should review your service-line situation and be asked to comment on any proposed budgetary justification, particularly as it may relate to new/expanded programs and services.  You may be surprised at the value-add they can bring to the justification narrative.
  
  
• Don’t Forget the Basics – We have all had classes in budgeting and need to remember the basics, particularly around the required narratives to justify new expenditures.  Your hospital likely has a set process and format you will need to follow.  Remember, the narrative is designed to support and defend the numbers, not the other way around.

The post-pandemic environment is shaping the budget justification process to a high degree, and this will likely continue for some time.  When money is tight, the justification process becomes critical, sometimes more political and highly competitive.  Given the relative importance of the CV Service-Line, the CVSLA is in an advantageous position to justify increases in expenditures and budget, but must recognize that such justification has to be considered in a new and challenging environment fundamentally different from the pre-pandemic past. 

If you are interested in learning more about cardiac services strategic development, service expansion and/or other programmatic needs for cardiovascular or other services, please contact CFA at (949) 443-4005 or by e-mail at cfa@charlesfrancassociates.com.