Why Revenue Forecasts Break in Healthcare (and How to Make Them Defensible)

Forecasting revenue in fee for service healthcare is inherently difficult because finance teams must predict the amounts that will be collected from insurance companies and patients each month.

Key sources of uncertainty include:   

-Uncollectible Amounts: Patient collections, short pays, and complex denials must be estimated and extrapolated using historical data; these trends can change over time especially as patient volume is added and claims increase
-Insurance companies can withhold payments (for any denial reason) to stretch their payables owed to providers, a common tactic
-Insurance denials are resolved and paid unevenly over time, creating lumpy collections
-Insurance Audits can emerge suddenly, derailing forecasts
-Allowable amounts can drift or insurance companies drop rates suddenly without warning

Probably the most common failure when forecasting revenue is over-reliance on recent collections without fully understanding long-term collections trends and improvements in long-term billing (revenue cycle management) strategies. 

A temporary improvement in cash deposits (catch-up from prior DOS, delayed appeals that finally pay, seasonal mix) can often be mistaken for a long-term improvement in AR management (improved appeals and billing strategies) — and baked into forward forecasts when booking revenue at month end; this misjudgment can lead to large true ups and choppy reported earnings that can reduce credibility of financial leadership. 

In value-based care, the same forecasting failure shifts to the cost side: short-term utilization improvements are often mistaken for durable behavior change, leading teams to underwrite savings that have not yet stabilized

What Defensible Healthcare Forecasts Require in Healthcare

Whether FFS or VBC, defensible forecasts require guardrails:

• Anchor forecasts using trailing multi-month cohort data to reduce volatility, which can help to distinguish timing-driven collections fluctuations (noise) from durable improvements in collections strategies (FFS) or utilization behavior (VBC).

• Explicit reporting and reconciliation of allowable amounts and payer rate changes by insurance each month

• Parallel monthly cohort reports that reconcile net revenue booked, realized allowable, cash collections, and (in VBC) incurred cost

Strong finance teams don’t just forecast a number — they explain in plain language why that number should persist using tight guardrails.  When forecasts are built this way, finance moves from optimism management to credibility management — with leadership, boards, and investors.