INTRODUCING THE DRIVER-BASED FINANCIAL MODEL FOR HEALTHCARE PROVIDER SYSTEMS


  • Capital Allocation: Financial stewards of healthcare provider systems must allocate capital to operational liquidity as days cash on hand, to CapEx programs and reserves for future investments including M&A and other strategic initiatives, and to support risk-taking through alternatives to the traditional reimbursement model.
  • Forecast Limitations: Best estimate budget forecasts do not allow for volatility in key income statement and balance sheet drivers such as patient volume, payer reimbursements, and capital market performance.
  • Improved Forecast: To master risk and capital allocation in a value-based ecosystem, finance teams will use a consistent economic basis that allows for risk-adjusted planning and communication across the organization and to their boards.

How much risk can a system take before it’s too much? How does a provider get a handle on the relationship between capital reserves and its ability to take on alternate payments? What drives earnings volatility, both now and under optional strategic plans? Financial spreadsheet models are built on best estimates and altered as needed to illustrate potential “what-if” outcomes. But for leading healthcare systems, a different approach is needed:

  • Operating results based on variable outcomes to measure the likelihood and extent of capital stress, or need for financing, in periods of negative cash operating margins
  • Investment yields on the capital base to quantify downside market risk simultaneously with negative margin exposure, threatening credit ratings – or in the extreme, solvency
  • Variable volume and service levels to identify areas with inherently volatile financial outcomes such as complex conditions, or payer contracting opportunities with potential upside

In a unique collaboration, two consulting firms – Willis Towers Watson and Market Innovations, Inc. – have co-designed and applied a methodology and robust toolkit that meets these requirements. Our Driver-Based Financial Model, or DBFM, has a core design that starts from key drivers of healthcare finance: patient population volumes, service levels, and payer arrangements. Together with a full-scale asset model, these uncertainties are combined in a Monte Carlo simulation. For the first time, a consistent economic basis is applied to provide advanced decision-making support for healthcare management teams.

DBFM is the ideal solution for:

  • Monitoring the level of risk capital needed to support alternate payment models
  • Evaluating competing resource planning options by embedding the quantification of uncertainty
  • Optimizing investment strategy against financial benchmarks