Decision Quality Financial Analysis for Healthcare Digital Strategies

Health systems are facing unprecedented financial and strategic challenges, including workforce shortages and corresponding labor cost increases, downward pressure on reimbursement, uncertainty about new technologies like AI, and the growing threat of disruptive new entrants. Leading health systems are responding to these challenges by using digital solutions across the enterprise to improve performance. Examples include providing a personalized, “consumer grade” experience to patients, automating highly fragmented and manual processes, and delivering increasing amounts of care virtually.

However, capturing the full value of digital initiatives is often impeded by antiquated, traditional approaches to financial analysis required for approval and funding. Health systems need to push beyond these limitations and employ more progressive techniques to create “decision quality” insights to advance their digital agenda.

Articulate value so the CFO understands

The first challenge centers on effectively articulating the value proposition of individual digital initiatives in a way that directly connects to the potential financial impact. The value propositions for many digital initiatives typically include important clinical or operational key performance indicators (KPIs) but stop short of clearly linking those improvements to measurable changes in financial line items. 

For example, the value proposition for a remote patient monitoring solution may include important metrics such as the proportion of clinically eligible patients using the tools and improvements in rates of care plan adherence for those patients. However, those analyses may not extend the impact all the way through direct financial impacts such as reduced readmissions and a reduced total cost of care for the portion of the patient population that’s using those solutions.

Leaders seeking to gain approval and funding for digital initiatives need to clearly demonstrate the downstream financial impact of their recommended solutions. Will their digital solution ultimately reduce labor costs via reduced overtime and contract labor costs? Will the solution free up additional inpatient capacity that can be backfilled with additional admissions? Will their solution reduce leakage outside the system’s network and protect outpatient revenue? Regardless of the specific digital solution, operational or clinical metrics need to be complemented with related financial metrics to build support and momentum for the initiative.

Start with the macro-economics

The second challenge with existing approaches for evaluating digital investments revolves around the level of precision typically required to secure funding approval. The finance functions within many health systems require extremely granular submissions of financial impact as a prerequisite for funding consideration. These multi-tab spreadsheets often look for details by procedure code, cost center, payer contract, and other dimensions. While this level of detail is certainly necessary for prudent financial management of budgets, it can significantly slow, if not fully suppress, innovative digital initiatives before they get off the ground.

With digital initiatives, the phrase “you don’t need a three decimal point answer for a no decimal place question” applies. Even with conservative estimates, the economics of digital solutions can be extremely compelling and serve to secure initial approval to proceed with the initiative. For example, health systems have been implementing digital solutions to better schedule their operating room utilization, including rooms, staff, and equipment. Conservative estimates for the financial impact of a modernized approach to the OR yield a 2-4% increase in the number of surgical procedures performed. After applying a revenue or contribution margin estimate to increased procedure volume, a compelling financial return can be calculated. 

This point is not to imply that health systems should fly by the seat of their pants when it comes to important financial decisions surrounding digital investments. Rather, health systems can accelerate their decision-making and speed-to-value for digital by first conducting a macro-economic analysis to activate their initiative. Then, follow on with the more detailed, micro-economic financial planning to incorporate the benefits and costs into their operational tracking systems.

Take a longer term view for digital investments

The final challenge related to traditional financial planning methods impeding digital progress is one of time horizon. Health system financial planning typically focuses on multi-year projections for major capital projects, and annual budgets for ongoing operations and shorter-term initiatives. Individual digital initiatives are often smaller than capital expenditure thresholds and don’t neatly fit the accounting criteria for long-lived assets to be capitalized. That leaves funding for digital initiatives subject to the annual gauntlet to compete for scarce operating expense resources. In an already low margin business facing extreme financial pressures, that puts longer-term progress towards a digitally enabled, modernized health system at great risk.

Imagine if a health system’s multi-year plan to build a new ambulatory brick-and-mortar facility faced the same financial risks for continued funding as an integrated digital strategy. What if in year two of the three-year building plan, the system had a particularly bad year negotiating reimbursement with a key payer, putting strain on near term margin? Would the budget for the paint on the walls for the ambulatory facility be eliminated? Would the general contractor be told to cut the number of electricians working on the project in half? Of course not. But that is the reality facing leaders seeking to execute a multi-year digital transformation.

Unfortunately, there’s no “easy button” for this challenge. One approach that can work is to make digital transformation a Board-level issue. While acknowledging the practical challenges of balancing operating and capital budget constraints, health system digital leaders need to present a multi-year roadmap along with a corresponding multi-year budget for digital initiatives to their Board for approval. The Board-endorsed commitments to funding the multi-year digital strategy can then be engineered into the integrated financial plan for the system during the planning horizon. Strong partnership with the system’s finance function is essential for success with this approach.

Decision-quality insights drive speed to financial value

Many health systems are facing an existential crisis due to the continuing difficult financial environment. Others are challenged to differentiate and grow. For all health systems, digital solutions can make a substantial contribution towards achieving their objectives, whether to survive or thrive.

Unfortunately, well-intentioned but outdated financial management systems are jeopardizing the potential return from digital. Leaders need to reimagine their approach to evaluating and funding their digital investments, focusing on “decision quality” insights to accelerate their progress to financial success.