How Financial Models and Scenario Analysis Help Community-Based Organizations Compare Options, Manage Risk, and Make Complex Decisions

Our team is often asked how we support partners through different parts of the strategy development process and, more specifically, how financial modeling plays into our work. While deep-dive financial modeling is not part of every project, it is a critical component of what we deliver when organizations are evaluating multiple scenarios with variable potential costs, performance implications, and returns.

It is a well-known reality that health care reimbursements often do not cover the full cost of service provision – particularly for human and social services delivered by community-based organizations (CBOs).

For this reason, when CBOs are exploring new services or programs, or engaging in quality improvement to enhance the reach and/or impact of existing services, financial modeling can be one of the most important and powerful tools at their disposal. A strong financial model can be the difference between driving through fog with headlights or navigating in the dark.

The financial modeling exercise helps answer key questions, like:

Can we take on new obligations in a way that advances our mission without overly straining capacity, compromising program integrity, or exposing the organization to significant reputational risk?
Under what conditions are these services financially viable? What key variables do we need to closely manage because they have the greatest impact on financial viability?
What is the value of the services we provide to stakeholders beyond those directly served?
If we were to augment or enhance services in a certain way, what additional level of impact might we achieve, and what is the cost of delivering that incremental impact?

Financial Modeling in Practice

Here’s a recent example of how QV Health Solutions used financial modeling to help inform organizational decision making with a housing-focused CBO in California that wanted to explore opportunities to expand service offerings.

This organization had a strong history of providing transitional and permanent supportive housing, case management, and food pantry services in their community and knew there was potential to build on this foundation. What they needed was a process to help figure out how to deliver more and how to better meet community needs while ensuring financial sustainability.

Through the state’s 1115 waiver, California’s Medicaid office has expanded member access to new CalAIM services. Coverage now includes 15 services – called Community Supports – that address health-related social needs, help members lead healthier lives, and avoid higher / costlier levels of care.

These Community Supports help with a range of issues, offering services like asthma remediation, housing deposits, and medically-supportive meals. Through the waiver, CalAIM also provides Enhanced Care Management (ECM) for members with complex needs. Collectively, these service expansions have created a new opportunity for CBOs that have not traditionally engaged with health care to become Medicaid providers and receive reimbursement for providing CalAIM services.

With a new slate of potential CalAIM services to consider, the housing CBO needed a framework to understand their best options. To help guide their decision-making process we reviewed:

Mission alignment of each potential service
Community needs
Current investments (e.g., real estate)
Organizational capacity and expertise
Required investments (staffing, real estate, etc.)

From there, we designed three potential program expansion models – each one building on the CBO’s current operating model and introducing additional services, staffing, and facility requirements.

Expansion Options Analysis

Option	Service Expansion	Additional Staffing Needs	Additional Facility Needs	Potential Annual Revenue
A	Housing Transition Navigation, Housing Deposits, Housing Tenancy, Day Habilitation, and Short-Term Post-Hospitalization Housing (STPHH)	Minimal	Moderate	1x
B	All Option A services + Recuperative Care	Moderate	Moderate	1.1x
C	All Option B services + Enhanced Care Management (ECM) + Medically-Tailored Groceries	Significant	Significant	2.4x

Option A’s financial model showed a safe path, likely to quickly yield positive margins for the CBO. It would require the least risk or investment and take advantage of existing staffing and facility space. The same staff that provide the CBO’s current housing services could also provide new housing-related Community Supports. The greatest investment required would be related to new facility space for Short-Term Post-Hospitalization Housing (STPHH) beds.

Option B, with the addition of recuperative care services, would leverage shared facility space from STPHH, requiring only modest additional investment in staff expertise and capacity needed to help manage clients’ health conditions. Here, the modeling exercise showed that, with slightly higher investment in staffing, Option B had better margins relative to Option A.

Lastly, Option C’s financial model projected annual revenue from service reimbursements at more than double the projected revenue levels for Options A or B. However, the departure from housing-related services would require significant investment in staffing and facility infrastructure. And, while the CBO has existing food pantry space, expanding to medically-supportive grocery box services would require significantly more facility space for sorting and packing produce, as well as additional vehicles and staff to support delivery. These changes create high ongoing operating costs that could be difficult to cover and/or manage from a reliable cashflow perspective.

Playing with the Base Case

Financial modeling is most helpful when accompanied by “best case” and “worst case” scenario analyses to help illuminate the potential risks and rewards of each option.

Doing so revealed that, while Option C had the highest revenue potential, it also came with the highest cost and infrastructure requirements. It would only be sustainable with high client volumes and would subject the operating CBO to more risk that they were willing to take on.

Option B had stronger margins than Option A and provided more upside potential with minimal additional costs – even in the worst case scenario analyses.

Lessons Learned

This kind of modeling gave the CBO staff and board members a way to evaluate their choices. While Option C aligned with their bold vision, and Option A felt the safest, Option B struck the best balance and offered slightly more revenue, with modest additional cost.

What’s Next?

Financial modeling can be an effective way to test drive options under different conditions. By testing different variables – e.g., staffing, client volume, facility space – CBOs can assess base-case program design and also make incremental adjustments to ensure alignment with priorities.

Additionally, modeling provides hard numbers, drawn from real data, to use in conversations with partners and supporters about program financial capabilities, needs, and opportunities.

We want and need CBOs to provide mission-aligned services, and to pursue program enhancements that deliver greater impact, but only if they can do so in a way that is financially sustainable. Modeling can help illuminate a viable path or, at the very least, help avoid taking the wrong one.

Financial Test Drives to Illuminate the Path Forward