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Financial Modeling in Healthcare [PODCAST]

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The Hospital Finance Podcast

In this episode, we are joined by Ian Schnoor Executive Director of the Financial Modeling Institute to help us understand the risks associated with poor financial modeling and how to leverage financial modeling in the healthcare environment.

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Highlights of this episode include:

  • The Financial Modeling Institute
  • Great financial model vs. a poor one
  • How financial modeling can help providers
  • The effect of inflation
  • How to improve the precision of financial models

Mike Passanante: Hi, this is Mike Passanante and welcome back to the award-winning Hospital Finance podcast. In today’s rapidly evolving healthcare environment, it’s essential for C-suite leaders to embrace financial modeling to help improve business decisions. To help us understand some of the risks associated with poor financial modeling and how to leverage financial modeling in the healthcare environment, I’m joined by Ian Schnoor. Ian is the executive director of the Financial Modeling Institute, the only financial modeling accreditation body in the world, founded in 2017 and presently serving major corporations in 50 different countries. Ian, welcome to the show.

Ian Schnoor: Thanks, Mike. It’s great to be here. Thanks for having me.

Mike: For those in our audience who may not be familiar with the Financial Modeling Institute, can you tell us more about the mission of the organization and why you helped to found it?

Ian: Yeah, absolutely. Happy to do that. I mean, our mission, quite simply, is to help establish the world’s leading community of accredited financial modelers. And what that means is we’ve recognized– and personally, I’ve been teaching financial modeling for over 20 years, and I recognize that it’s its own discipline, it’s its own professional discipline. And yet many people go about it as if it’s the Wild West, and there’s massive areas of variability in people’s models, which causes all sorts of problems. So we’re trying to raise the bar. We’re trying to have a level playing field where anyone involved in this discipline, this profession, can attain an attestation, a validation that they are really strong and capable of what they’re doing.

Mike: So, Ian, let’s start at a very high level. What are some of the hallmarks of a great financial model as opposed to a poor one?

Ian: Yeah, great. Well, I mean, we always talk about the fact that a financial model is really just a forecasting tool, right? I mean, it’s some sort of a tool usually, built in Excel, some sort of a spreadsheet-based tool. And of course, spreadsheets are ubiquitous. They’re used everywhere. Everyone’s using spreadsheets and everyone’s involved in planning and forecasting. There’s a wide, wide range of what people do. But I always tell people, at the end of the day, if you ever want to know, “Is my model, is my forecasting tool working well?” It needs to achieve two criteria. That’s it. And if a good model achieves these two criteria, it will be a really strong financial model, and many models do not. And if it doesn’t, if it doesn’t achieve these two criteria, then it can be improved. So you asked me about the two hallmarks, so they are as follows. Number one, I always tell people that a good– how do you know if your spreadsheet model is working? Well, it has to work well electronically. And what I mean by that is, if I built a model, and I emailed it to you because you were my boss or my client– if I emailed it to you, you should be able to open it up, start to play with it, click through every single cell in the spreadsheet, and feel like, “Yeah, that makes a lot of sense. I understand what Ian’s doing. I can follow it. I understand.” And Mike, I’m not sure the extent to which you’ve used spreadsheets before. I’m sure you have, because everyone has. How many times have you ever seen a formula in a spreadsheet that was so long that it wrapped around and around and it was linking to dozens of different sheets? Surely you’ve seen that before, I’m guessing.

Mike: Oh, sure. Absolutely.

Ian: Yeah, as I’m sure have most of your listeners. And I can tell you that’s not optimal. That’s never optimal. And if it’s doing that, it can be better. So I always say that if you ask me, “What are the hallmarks of a great financial model?” Number one has to work electronically, which means that anyone who opens it should feel like, as they go down cell to cell, that it’s telling a story, and they can understand it perfectly. The second hallmark, the second criteria to know if your model is working well is, believe it or not, that it has to be able to work well on paper or as a PDF. But you need to be able to take the entire spreadsheet model, print it, and turn it into a beautiful, well-designed document that works either on paper, if you printed it out, or as a PDF. And that’s because even in this day and age, the vast majority of decision-makers are going to make a decision by looking at something on paper or as a PDF, not by opening an Excel spreadsheet and poking around and clicking on various cells. So those are two criteria. Does it work well electronically? Does it work well as a printed tool on paper or PDF? If it does, it’s probably a very strong model. And if it doesn’t, and most models do not, then there’s lots of areas for improvement.

Mike: Okay, great. Ian, let’s talk a little bit about healthcare specifically. The environment for healthcare providers, it’s always a bit tenuous, whether it’s changes in regulations, payment models, reimbursement rates, to things like labor shortages, competitive partners, and so on. And of course COVID has been a major disruptor over the last couple of years, too. So my question for you is, how can financial modeling help providers navigate that type of volatility?

Ian: Yeah, that’s a great question. And I got to say, what I love about that question is that while the healthcare industry is experiencing all of the issues that you just described, it’s really no different than any other industry or any other type of organization. All companies around the world deal with all sorts of pressures and changes in inflation and changes in interest rates, and COVID has hit everybody. So the nice thing about modeling is that it sort of transcends all of that. And the whole purpose of a model, the whole purpose of a strong model is to give you insight to allow you to make a better decision. Now, your question was, how can it help us navigate this volatility? And the answer to that is that– listen, let me be very clear. While we’re trying to forecast, a model is not a crystal ball. Nobody’s got a crystal ball. I can’t tell you exactly what the future is going to look like. Three years ago, I don’t think anybody was predicting that we would be hit by and be living through a giant global pandemic. I know that inflation is going up. I don’t know how much it’s going to be. I don’t know exactly what the implications are going to be over the next two years. The goal of a model is not to give us perfect certainty and perfect visibility into the future. It’s to say, “Let’s understand all the potential variables.” And if something happens, what will that do to our operations, and what decisions will we have to make, and what changes will we need to make to ensure that we are operating viably? And if something else happens, what will we need to do? A good model allows me to tell a story and understand that, under various situations or permutations, what actions will we need to take confidently to manage our business?

Mike: Ian, over the last several years, we’ve seen many healthcare organizations come together, including the merger of hospitals and health systems, the purchase of physician practices, and the extension of outpatient facilities, for instance. So how can you optimally– or how can optimally-formatted financial models help hospital financial leaders properly value these types of transactions?

Ian: Sure. Well, I mean, you’re talking about merges and acquisitions, M&A. I mean, companies all over the world in all sorts of sectors achieve their growth, as you know, in two different ways: organically, by building it, or inorganically through M&A, by buying it. And M&A is a very common tactic used in all sorts of industries, including the healthcare industries, to help grow, to try and achieve scale, to try and reduce costs, to achieve synergies. And yet M&A can be very dangerous. M&A is very problematic. I mean, people will often say there’s all sorts of studies by consultants and other organizations that will tell us that a large percentage of M&A transactions fail. Usually what that means is that the buyer overpaid for the target. If you overpay, it’s very hard to recover. But what a strong financial model does is it allows for the ability to understand all the issues. We always tell people that one of the most important parts of modeling, of the process of modeling, is planning. And we have a whole rigorous process that we encourage people to go through to plan. What planning does is it allows you to understand all the variables, all the issues, all the things you’re going to have to consider with regards to a particular decision. And if the issue is an M&A decision, an acquisition, I want to understand, what exactly are we getting into? What exactly does the target company look like? What will their forecast likely look like?

Now, you asked me about how can optimally-formatted models help the leader? Well, I’ve already used some words in chatting with you that are words that people don’t often think about with models. Words like a model has to be beautiful. It has to be presentable. At the end of the day– and I hope your listeners can relate to this. At the end of the day, while models are typically built by numbers people, by finance and accounting people, one of the most important skills that a model builder has to bring to the table is the ability to tell a story, the ability to communicate, to link it all together. It’s no different than even a doctor or a healthcare professional. Yes, they have technical skills, but it’s so critical for them to know how to communicate clearly to their audience, and that’s no different. So a model that’s well-formatted, what that usually conveys is it conveys a sense of confidence. It allows people to understand and realize that you’ve probably captured all the key ideas. It allows you to communicate clearly. And if you can communicate clearly and you’ve captured all the ideas, it will improve the likelihood significantly that you’re going to make an appropriate decision. You will either make a good decision as an acquisition, or you will walk away knowing that it’s not worth it at that price to proceed. So so important to be the leader in the meeting that you can help people confidently arrive at a decision.

Mike: Ian, how should providers account for the effect of inflation when modeling their forecasts?

Ian: Yeah, that’s a great question. It’s a great question because inflation is now rearing its head. And inflation is something that we haven’t had to think much about for the last 20 years because it’s been managed, it’s been very low. But for the first time in memorable history, inflation is starting to go up, and everyone is worried and nervous that inflation is going to rise. And they’re worried about what that will do to their business, to their organization, if it does. And by the way, this is not unique to the healthcare space. This is impacting all companies in all industries at this point. Worried about what will happen if our costs go up, if our labor costs go up really high, if the cost of supply starts to increase. So this is a critical area within modeling, and it is the job of a modeler to understand this, to manage it. Now, let me be clear. It’s not my job as a modeler to predict it perfectly. I can’t predict exactly what inflation will be every year for the next five years. My job is to help my team understand it and manage it. And inflation is a very particular type of issue. We always say that all companies have three or four or five or six, something like that, variables that are hard to forecast and hard to control. And those are called the key drivers. The most important issues and assumptions going into a model are the key drivers, again, because management can’t manage them or control them, and they can change very, very quickly. And inflation is one of them. So your question was, how should we account for the effect of inflation in our forecast? Well, the answer is, first of all, to recognize that inflation is going to be a variable that I need to think about carefully and help my team get comfortable with. And the way we do that is by turning it into a scenario.

In our models, we’re going to build a scenarios page, a scenarios section. And the whole purpose of a scenarios section is it allows me to look at more than one option. So again, nobody ever expects the accountant or the finance person to tell me exactly what inflation will be. And by the way, if I came back– Michael, if you were my boss, and I told you what I thought inflation was going to be for the next three years, that shouldn’t give you much confidence anyway, because what do I know? Even an economist is not going to be able to predict inflation perfectly. So even if I did tell you what inflation would be, that really shouldn’t give you much confidence. What you should want to hear, and what I should do in the model, is to say, okay, what if inflation stays low? What if we run a case where inflation stays at 1, 2, 3 percent? What does that look like? What does that do to our cost structure and our operations and our cash flow? But what if it rises a bit and it hits 3, 4, 5, 6 percent? What happens then? What if it gets really high? So my job is to help you and the rest of my team understand, what are the implications if inflation starts to go up? Because that way, we have levers we can pull, and we can start to make decisions. And if we start to see inflation hitting 3, 4, 5, the model will help me realize, okay, now we’re going to be in some trouble. What are the options? What are we going to have to kind of do? What decisions can we make to account for that, to manage that? Is it pricing, is it cost reductions? What are we going to do to manage the situation? And that’s my job as a modeler, is to help you think about optionality under different scenarios.

Mike: Very good. Ian, what should hospital CFOs be doing now to improve the precision of their financial models?

Ian: That’s a great question. First of all, I would say that I’ve been involved. I’ve worked with some companies and organizations in the healthcare space. And again, I said a few times, it’s not so different than other sectors, but in the sense that healthcare organizations are often very detailed, they’re filled with lots of data. And as a result, the models are often very big, and they’re very clunky, and they’re often hard to use. They’re often hard to navigate. So you used an interesting word in your question. You said, “What should they do to improve the precision?” And I often like to think of a different word. I mean, precision’s fine. I mean, obviously, we don’t want anything to be wrong. Obviously, we can’t have errors in our calculations, but because we’re looking out into the future– let’s assume all of my calculations are perfect. That doesn’t mean I’m going to have a perfectly precise forecast. Our job, I think, as a CFO is not to create precision into the forecast, but to build confidence, to help people understand that regardless of what the future looks like, you’re on it, and you can manage it, and you can help control it, and you can bring it to the rest of the team’s attention. So if we start seeing huge changes in cost structure or in wages or in other areas where there’s going to be major change to the organization, you can bring that to the team’s attention and say, “Here are the three options that we can deploy to manage that.”

The best way to start thinking about building models that create confidence, and that are correct, of course, and are precise, is to start with a very, very robust plan. I can tell you that most models I’ve ever seen, it’s pretty clear, did not have a really robust, strong plan behind them. And as a result, they’re very hard to follow. They’re hard to use. I mean, it would be as simple as saying, if you were going to build a new hospital– if an organization you know was going to build a brand new hospital, what’s the very first thing you would do? You would hire a firm that specializes in hospital design and the architecture of a hospital, and you would design it and lay it out ideally and optimally. And that’s what we need to do in our virtual models, in our spreadsheet models as well. But people don’t. So we always encourage a very particular methodology, a way that models can proceed with very optimal flow so that they are well-designed and optimized. And that’s something. And that includes asking questions. “Where is our data coming from? Do we have too much data? Do we have not enough data? How should I design the structure of the file, the organization? Can people understand it? Can they follow it?” If they can, that will likely improve the precision, but more importantly, the confidence and the ability to use it as a key decision making tool.

Mike: Great discussion, Iam. if someone wanted to find out more about the Financial Modeling Institute, where can they go?

Ian: Yeah, I mean, the easiest place to go is to our website, which is fminstitute.com. We are also on LinkedIn, so you can follow us on LinkedIn and see what we’re doing. So you can check us out there, you can follow me, you can email me, follow me on LinkedIn as well, Ian Schnoor. Always happy to be in touch with different people.

Mike: Ian, thanks so much for joining us today on The Hospital Finance podcast.

Ian: Michael, thank you so much for having me as a guest. Been a pleasure to be here.

[music] This concludes today’s episode of the Hospital Finance Podcast. For show notes and additional resources to help you protect and enhance revenue at your hospital, visit besler.com/podcasts. The Hospital Finance Podcast is a production of BESLER, SMART ABOUT REVENUE, TENACIOUS ABOUT RESULTS.

If you have a topic that you’d like us to discuss on the Hospital Finance podcast or if you’d like to be a guest, drop us a line at update@besler.com.

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