
Chapter 09: The Economic Forecasting Model: A Tool for Growth
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Description
Dr. Leach begins this segment with comments on how MD Anderson grew under the leadership of Dr. John Mendelsohn and how they worked to balance resources in order to develop research.
Dr. Leach then discusses the Economic Forecasting Model he began to use on arriving at MD Anderson to predict the pressures that specific growth initiatives would place on operating margins. He describes the variables, limits, and uses of the model. In the former economic context, predictions were valid for six years. Now it is more uncertain.
Dr. Leach explains that the forecasting model was his brainchild, developed while he was in the insurance industry, and refined to suit MD Anderson and bring intellectual rigor to the budget for the first time. It is a key strategic planning tool.
Identifier
LeachL_02_20121127_ C09
Publication Date
11-27-2012
City
Houston, Texas
Interview Session
Leon Leach, MBA, PhD , Oral History Interview, November 27, 2012
Topics Covered
The University of Texas MD Anderson Cancer Center - Institutional Change; Contributions; Overview; Institutional Processes; Professional Practice; The Professional at Work; Fiscal Realities in Healthcare; Discovery, Creativity and Innovation; Discovery and Success
Transcript
Tacey Ann Rosolowski, PhD:
So I understand what you see coming and the nimbleness that has to—the kind of nimble quality that MD Anderson has to acquire and perpetuate to address that. What about the situation when you first arrived—various key points during the amazing growth that took place during John Mendelsohn’s presidency? What were some of those processes like in this academic medicine context?
Leon Leach, MBA, PhD :
Well, they weren’t terribly different than what I just described. While we did make a lot of progress, it was because we were able to balance those things. We didn’t go—we spent a lot of money on research, but we spent a lot of money on growing the clinics and hospitals very profitably that could seed the growth in the research. If one of those wheels get out of balance or had gotten out of balance, we wouldn’t have had the growth that we did. And feeding the research comes back in dividends that let you further feed the hospital and clinic side. We’re the ones who develop the next new treatment or can get it to the bedside. It’s not always our science, but we get it to the bedside. That was one of the— I think part of the magic that made it work with Dr. Mendelsohn was we were able to keep those competing resources somewhat in balance.
Tacey Ann Rosolowski, PhD:
And how did that happen? How were you able to do that? Leon Leach, MBA, PhD Arm wrestling. No, John understood the business needs. But John’s first love was research, and the business function was a means to an end, to feed research. John understood that, but John also understood that we had to keep the financial side healthy in order to feed research. We would have intimate discussions about, how fast can we grow or how much money can we spend on this. We have a planning process that would tee those discussions up.
Tacey Ann Rosolowski, PhD:
So tell me about that.
Leon Leach, MBA, PhD :
We have an economic forecasting model that is a model of how MD Anderson works.
Tacey Ann Rosolowski, PhD:
Is this the Enterprise Forecasting Model? Leon Leach, MBA, PhD 3 Yeah.
Tacey Ann Rosolowski, PhD:
Okay, yeah. Leon Leach, MBA, PhD Well, it’s actually called the Economic—I think the patented name—and this was patented—The Economic Forecasting Model. But what that does—there’s about 200—as I recall—200 variables, and there are probably about somewhere in the teens of what I would call—what we call primary variables—they’re the ones that you change them a little bit, and they move model a lot.
Tacey Ann Rosolowski, PhD:
What are some of those variables?
Leon Leach, MBA, PhD :
Excuse me.
Tacey Ann Rosolowski, PhD:
What are some of those key variables?
Leon Leach, MBA, PhD :
Well, the two key ones I just gave you—the new patients seen—
Tacey Ann Rosolowski, PhD:
New patients, okay—
Leon Leach, MBA, PhD :
—and consultations, and there are a bunch of other variables. One would be the deductions from revenue—how much you can actually—the difference between what you charge and what you actually get. And they’re all documented. We can pull that out for you and give you a list of them. And then there’s a bunch of secondary variables where it’s more or less a one-to-one type of relationship. Then there’s a whole slew of tertiary variables where you change them a fair amount and not move the model that much, but still they’re important. So we have a model that we could say, “Now if we spend this for a new research building and hire the staff we need and all of that, what kind of pressure does that put on our operating margin? How many patients would we have to see to support that type of thing?” So each year we would go through a planning process for the next year that would—actually for the next six years. The Economic Forecasting Model looks out over six years. And it’s more than just financial. It will give you a balance sheet, an income statement, and cash flow statements. But also it’ll give you, through ratios, the faculty needed to handle that kind of volume and space needed to handle that kind of volume. So we used it—and we ran it out past six years for purposes of new buildings—what’s going to be the facility needed? But frankly, the credibility of the model is pretty crystal-ballish if you get it out much past six years. And even at six years, you can pretty much bet money on the first year and second year, but after that you start—and that’s why we would refresh it each year because things would become clearer as to what’s going to happen. We still use that. The model has gotten increasingly more sophisticated year after year. We still use it, but it’s probably a little less reliable now. It’s not that the model is any less reliable, but the model looks a lot at trend lines and says, “This is what it was, and this is what we would like it to be.” The purpose of the executive committee was to have a subjective interference in that where we would say, “No, what’s happening out there in the world is going to look more like this.” Today we’re becoming more reliant on that subjective interference because the world is so tumultuous, and the subjective element is just that, subjective—what is most likely to happen? Do we really think we’re going to fall off a financial cliff in January? Because if we do, it’s going to look like one way and if we don’t, it’s going to look like something else. So because of the uncertainty in the world—or in the United States in particular—on a number of fronts, the model just can’t be as accurate. It’s still, I think, very useful. It gives us a kind of ranges, if you will, but with less certainty. So that makes it—living in an uncertain world makes the experience factor that much more valuable.
Tacey Ann Rosolowski, PhD:
When did you begin using this forecasting model?
Leon Leach, MBA, PhD
The year after I got here.
Tacey Ann Rosolowski, PhD:
Oh, okay. Who was it that selected this model? Did you go out and search for some kind of forecasting model that was around? Leon Leach, MBA, PhD No, it was homegrown. It was an Excel spreadsheet. It was based on—you know—I talked about the primary, secondary, and tertiary. It was made up of primarily the primaries. We’re just getting it into the secondary drivers. It took us a number of years to get it to the point where it is today. I mean, we’ve moved it off—I think we were on an Excel spreadsheet for probably five years or so, and we moved it off of that to a more sophisticated software base. What we use today compared to what we did in the first few years is night and day. It was the first time MD Anderson really had any kind of organized intellectual rigor around a budget. It was the first time we actually ever looked at a model that predicted out into the future. They always did budgets, but it was a different type of mindset. It was more how to break even. And we were more future oriented. How’s this going to look over the next five years or six years?
Tacey Ann Rosolowski, PhD:
Now did you have a big hand in developing this forecasting model? Is it your child? Leon Leach, MBA, PhD It was my baby.
Tacey Ann Rosolowski, PhD:
How neat, yeah. And was that something that you brought with you? Had you innovated that elsewhere?
Leon Leach, MBA, PhD
It’s something that—yes. I didn’t bring one with me that was the size and scope of MD Anderson’s, but I had used that type of tool as a CFO in other places. But they were custom made. It was designed around that business to model that business, but the principles are the same. What you’re modeling— What we started modeling was just the financials—balance sheet, income statement, cash flow statement. They all look similar for Joe’s Body Shop and MD Anderson as far as money in and money out, so it was capturing that. But the level of sophistication and degree of sophistication was appreciably different at an academic medical center and more comprehensive cancer center like MD Anderson because it was just so complex.
Tacey Ann Rosolowski, PhD:
So it was really a strategic planning tool, a really important strategic planning tool.
Leon Leach, MBA, PhD :
Uh-hunh (affirmative).
Recommended Citation
Leach, Leon MBA, PhD and Rosolowski, Tacey A. PhD, "Chapter 09: The Economic Forecasting Model: A Tool for Growth" (2012). Interview Chapters. 1204.
https://openworks.mdanderson.org/mchv_interviewchapters/1204
Conditions Governing Access
Open
