Chapter 18: Tools for Economic Modeling and the Budget at MD Anderson

Chapter 18: Tools for Economic Modeling and the Budget at MD Anderson

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Description

In this segment, Dr. Leach explains how economic modeling and budgeting works for the entire institution, using a “current year plus six years” plan. This long view helps his team accommodate building plans, anticipating the financial effects of expansion. He explains several cost-saving measures that have been taken to bring the budget under control. He is also proud to report that administrative costs for the institution have dropped 4% (from 15% to 11%) since 2008 and there are 200 fewer employees in Business Affairs. Dr. Leach describes how financially-focused employees are imbedded throughout the institution, influencing the complexity of bringing these costs under control.

Identifier

LeachL_04_20130429_ C18

Publication Date

4-29-2013

City

Houston, Texas

Topics Covered

The University of Texas MD Anderson Cancer Center - Overview; The Business of MD Anderson; Understanding the Institution; The Institution and Finances; Overview; Definitions, Explanations, Translations; Professional Practice; The Professional at Work

Transcript

Tacey Ann Rosolowski, PhD:

Now, in one of our earlier sessions together, we talked about the economic modeling process that you worked through. Did you send—did you use that kind of modeling to anticipate what the risks were or possible benefits for these satellite centers—? Leon Leach, MBA, PhD Yeah, all the satellites have a business plan. Virtually anything that we do, that commits new funds, would be connected to a business plan. And business may not be the right word. I use that because I’m a business man, but basically what we want to understand is, what is it we’re going to need to do, and what are the deliverables, and what are the cash flows? What are we putting in? What can we reasonably expect to get out? Time frames, staffing, any facilities costs, that kind of thing. So while people may find the term business plan uncomfortable, that’s essentially what it is. It has the ingredients of it. But the modeling that I was talking about, I believe, was more what we do for the institution as a whole, and we have an annual cycle that we go through. Today is what? April 29th today, something like that—

Tacey Ann Rosolowski, PhD:

Uh-hunh (affirmative).

Leon Leach, MBA, PhD —and we have our Rgent’s budget is due by June 6, so that’s put together through discussions at the executive committee. And there are probably about 200 variables now in that, but there’s probably about twenty that are really the key drivers. And from that you can probably get down to a half a dozen that are really in conflict. So those key drivers—those ones that are most impactful—they are discussed at the executive committee level and then factored into the model, and we’ll do some trend analysis for the others—this is what’s been trending—and we’ll adjust the trend analysis based on what we know is going to happen. For instance, this year we know there’s going to be a two percent Medicare sequestration to start April 1, so that’s a no-brainer. We know that managed care is probably not going to be paying as much next year as they are this year, so we factor something in for that, and we produce a one-year budge that is signed off by the executive committee, filed with the University of Texas, and approved ultimately by the Board of Regents usually at their August 4 meeting for the next fiscal year that starts September 1. Once that’s approved and once we have the year numbers—you know, which typically the year end is August 31—and we’ll have final accounting by usually the third week in September. Then we will take that one-year budget and roll it into what would be a seven-year plan—this one-year budget plus six years. But we already have that plan. That model exists, and it already is populated with last year’s numbers, but we also look at it quarterly, and I would say half the time we look at it quarterly and scratch our chin and say, “Oh, that’s nice.” And we don’t adjust it because it’s tracking according to the plan. If we see that there is some issue that’s not tracking according to the plan, we’ll address that and then we’ll order the projections accordingly. So we look at it quarterly. Oftentimes we will order it mid-year, and that will just filter through the whole modeling scheme for the seven years. And the magic behind seven years, one is that it’s what the UT system asked us to do—the current plus six. But there is some logic to it because we’ve grown tremendously since I came here in 1997, and you can’t grow if you don’t have buildings and places to put people. So you’ve got to go out past three years. The first three years are usually, we’ve been highly accurate. You get out further, and it—you know—then your crystal ball gets a little foggier. But what you want to do is, it may take you three or four years to build a hospital as we did. So you start anticipating that and you start modeling it in well before you really need it so you can anticipate the financial effect and you can have the monies there when you need them. And as part of that plan, there is something called the long-term capital plan, which is the funds that we use for facilities and major IS investments and that kind of thing, so that’s all part of it. And then that’s not to be confused with actually managing the budget, because once you set the budget, the idea is to manage to the budget and not let the budget just kind of happen to you, you know? (laughs) So all those go together to form kind of our financial planning system. The—you had asked if there was anything I wanted to mention. I guess a couple of kind of bragging rights type of things when it comes to the administrative side. In 1997 when I came here, the administrative cost that were—the business and regulatory affairs—took about fifteen percent of the total. And today’s it’s down to eleven percent, and we hope to get it under ten. Things like Resource One that are in the process of—it’s been installed—in the process of getting it right.

Tacey Ann Rosolowski, PhD:

And what is Resource One? Leon Leach, MBA, PhD It’s a—basically a management information system that is fairly broad based. It deals with budgets, expenditures, human resources, that type of thing. As that gets implemented, that will help us get the cost down. It more standardizes what we’re doing. You know, we’ve gone from—it’s a matter of continuous process improvement where in 1997 it was fifteen percent of the total. Today’s it’s eleven percent. A more interesting statistic—I mean, you can see the shrinkage here, but more interestingly—from August 31, 2008, to today, we actually have 200 fewer people in Business Affairs than we had in August 2008. So we’ve been able to manage that side pretty economically. And there’s still more to do. I mean, I still—to me it’s bothersome that we still take more than ten percent. I think we should get under that, and that’s what our goal is.

Tacey Ann Rosolowski, PhD:

So how did you identify the areas that needed to be cut in order to accomplish that? Leon Leach, MBA, PhD It’s not so much areas that needed to be cut. It’s areas that need to grow slower than what the institution is growing as a whole. There are several opportunities still. We have a very decentralized finance function where we have people that are part of the central finance area, and then we have folks who are embedded doing financial work in different areas, and maybe we could get better at standardizing that. We’ve had a number of innovations in facilities management. We’ve had a lot of innovations in energy management. Just how we go about buying energy these days is much more sophisticated than it was in 1997. So we’re able to control costs on a variety of fronts. Purchasing—there are still opportunities there. We’ve done a lot of centralizing purchase functions where if you don’t have a dozen pairs of—this is an example of where we haven’t done quite as good—but if you have a dozen different brands of surgical gloves, and if you can get it down to a couple, you have more leverage with those couple of suppliers. So we’ve done things along that line. There are areas where we haven’t been as good because we haven’t been as willing to standardize. So there’s still—we could still get it lower. Some of our IS systems, because we did a custom IS system station. We were bearing the total brunt of the development costs moving towards a commercial product. Nothing is cheap in IS. They are expensive, but it’s not to the same extent as doing it yourself or writing the code yourself. So that helps us in lowering that cost. Those are several opportunities that we’re still pursuing.

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Chapter 18: Tools for Economic Modeling and the Budget at MD Anderson

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