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For Tufts Health Plans, Driver-Based Modeling Lifts Accuracy

  • By Nilly Essaides
  • Published: 10/26/2015
finplanMore and more, companies are relying on driver-based models to improve their planning and forecasting processes and provide management with better decision-making intelligence. Why driver-based models work and how companies use them is the subject of an upcoming AFP FP&A Guide, Driving Performance: Implementing Driver-Based Models.

“Driver-based modeling is understanding the key operational metrics of the business and using those to project forward the company’s cost or revenue structure,” said David Mann, director of financial planning and performance at insurer Tufts Health Plan.

Mann has always relied on models to help think about the business. It was especially the case when he was FP&A head at a fast-growing software-as-a-service (SaaS) company, where the company had to focus on the entire funnel of what led to customer acquisition from lead generation forward.

Leveraging the driver-based models

At Tufts, Mann relies on driver-based modeling in the forecasting and planning cycle to figure out expected revenues and manage expenses. Driver-based models are also integral to his sensitivity analysis work in areas that experience more volatility, e.g., high-growth or new markets. “Using driver-based modeling is particularly effective in areas of high levels of variability,” Mann said.

To identify the right drivers requires work on multiple facets, according to Mann. First, it’s about collaborating with frontline stakeholders. “It’s working across the business to identify similar drivers,” he said. In the case of customers, he works with a large customer-support team. The other factor is materiality. “The question is: What are the drivers that really impact revenue and expenses?” he said. “What are the things that really make a big difference?”

At Tufts, this typically starts with how many members are using the product. The next question is what they’re paying the company year-over-year. “I look at medical cost ratios as well,” he said. “One example: percent of medical cost vs. premium to see how those are changing.”

That sort of analysis is part of the day-to-day work of FP&A and its monthly forecasting process. “You have to be cautious when looking at driver trends over time. You have to be careful to tease out the difference between systemic changes and one-off events,” he said. For example, last winter, the company saw medical costs fall and profits rise in the Northeast due to bad weather, which prevented people from going to the doctor. It wasn’t a long term trend. “It was a false alarm,” he said.

Benefits and obstacles

Mann counts many benefits to this model-based approach. The first, he noted, is efficiency: “It allows me to do sensitivity analysis more quickly. I can validate the numbers and understand the assumptions,” he said. It also lets him have a better conversation about the business with various stakeholders. That conversation is no longer about absolute dollars, but about the indicators and drivers of their operations.

But getting to these benefits can take some time and effort. Finance and operations need to work closely together.  There are other questions, such as the quality of the operational data, whether other stakeholders are looking at the business in the right way and identifying the right drivers, and whether the company’s leadership is comfortable having the conversation about integrating drivers and finance. “That’s a cultural component,” said Mann.

For companies seeking to adopt a driver-based modeling approach, he had a few quick tips. “Keep it simple and focus on the things that are most material; there’s no need to boil the ocean,” he said. “Seek stakeholder alignment and have a good plan as to what you’re going to approach first.”

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