Risk Management

The Evolving Role of the Hospital CFO

Why is a finance director involved in what seems to be operational minutia? Because operation drives finance.
David RosenbaumSeptember 27, 2012

Even in the midst of the great national health-care debate, as CFOs parse the enormous impact of the Affordable Care Act (ACA) and businesses begin to alter the ways in which they provide health care to employees, small changes can still make big differences to the quality of care and to the bottom line.

At 155-bed, not-for-profit Jordan Hospital in Plymouth, Massachusetts, Gail Robbins, the organization’s administrative director of financial planning, is making changes large and small as the health-care financial landscape shifts beneath her feet.

“In our operating rooms,” Robbins says, for instance, “scrub nurses put tools in a basin, put the basin on a cart, stick the cart in the elevator, and send it down to the sterilization team.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

“Everyone was frustrated. The [operating room] was getting surgical kits back from sterilization and things were broken. The sterilization team was saying it was getting stuff from OR in a bad state, with heavy instruments tossed on top of delicate stuff.”

There was tension between the teams. Robbins, leading the hospital’s efficiency initiative, got everyone together, and the sterilization team asked surgical to do a little something for them: When the surgical team put the cart in the elevator, would they please roll it in so the handle faced out? When the handle faced in (as it often did), the sterilization team had to wriggle around the cart to get it turned around.

“The people in OR said, ‘Get out. Why didn’t you tell us?’” Robbins recalls.

“That saved, like, five minutes a case. Added up, it saves time, it saves money.”

But why is a finance director involved in what appears to be operational minutia?

Because operations drive finance. And as hospital revenues are affected by the ACA (next week, for example, ACA penalties for patient readmissions will go into effect), finance executives like Robbins will be forced to become more operational — and operations will become more strategic.

The Incredible Complexity of Hospital Finance
Boston Children’s Hospital, a 390-bed, nationally-known facility and number one in this year’s U.S. News & World Report rankings, announced last week that it will eliminate 2.6% of its 9,600 jobs as it tries to find $150 million to cut from its fiscal 2013 budget. And that’s with a 2011 surplus (nonprofits have surpluses rather than profits) of $82 million.

The pressures of health-care reform on every node in the health-care value chain are only increasing, as states curb the rise of Medicare reimbursements (which make up nearly half of hospital gross revenues) and Medicaid payments (which account for another 11%). According to a 2011 Moody’s Investor Service report, top-line revenue growth is falling at many not-for-profit hospitals. And the report expects Medicare rate reductions to hospitals to continue in the coming years.

This means that hospital finance executives need to be able to forecast revenue more precisely than ever before. And that, as Robbins notes, is terrifically difficult.

“Revenue in the health-care environment is terribly complex,” she says. “You have multiple insurers who are paying very differently for the exact same service. One insurer may pay $200, another $500.” CFOs in other sectors can only imagine the difficulty of forecasting revenue if their product’s price is similarly variable.

In addition, patient populations vary. An older population will contain a greater percentage of Medicare recipients than a younger population, thereby adversely affecting revenue over time as reimbursement levels decrease. In Plymouth, Jordan serves a relatively affluent community, with a lower Medicaid population than an urban hospital typically serves.

But all hospitals share the same problem: an aging population.

“With an older population,” says Josh Gray, managing director of the financial leadership council of The Advisory Board Co., a health-care and educational consultancy, “you get a higher proportion of medical as opposed to surgical care. Older people have fewer surgeries, and medical care is reimbursed more poorly than surgery. This places incredible pressure on hospital margins while costs are increasing.” (And they are. According to a recent New York Times investigation, Medicare reimbursements to hospitals were $1 billion more in 2010 than five years earlier.)

Hospital margins are already grocery-store thin. At 2%, Jordan Hospital’s is relatively robust, with a total 2011 surplus of a little more than $4 million on net patient-service revenues of $194 million. But Jordan Hospital is part of the Jordan Health System, which also includes 50-doctor Jordan Physician Associates, Cranberry Hospice, and a wellness center. As a whole, the Jordan Health System’s margin was under 0.5%, and its surplus was $900,000.

And as hospital revenue streams shift from fee-for-service to what The Advisory Board’s executive director Zachery Stillerman calls “risk-based services,” CFOs must develop “different business processes and tracking mechanisms.” It is, says Stillerman, “a huge challenge.”

Beyond Fee-for-Service
Instead of insurers paying providers on a transactional, fee-for-service basis, under the ACA their payments increasingly will be based on the care of individuals, a process-based system.

Jordan, for example, became 1 of 27 national Medicare Accountable Care Organizations (ACOs) in April. That means, says Robbins, “We have contracts with a handful of insurers to manage the care of buckets of patients. We have a budget for these patients. For example, we have a contract with Tufts Health Care for the hospital care of 800 enrolled Medicare beneficiaries. Tufts comes up with a budget for their care. We have to manage within that budget.”

Under the terms of the new Medicare Shared Savings Plan, if Jordan spends less on the Medicare-eligible recipients in its ACO (determined by a defined base year, with the additional requirement to report on 30 patient-quality indicators that will be used to determine future improvements), it keeps a percentage of the savings. For the first three years, if the hospital exceeds the base-year level, it will continue to be reimbursed at traditional Medicare rates. After that, it will be “at risk,” as future reimbursements, says Robbins, “will be contingent upon the achievement of improved patient-quality outcomes as compared to the base year.”

In order to reduce that risk, Robbins needs to know “what services are being offered to patients, what’s being used to excess, where physicians are operating out of bounds of reasonable utilization rates.” That is, she needs to get operational.

To do that, she needs the cooperation of Jordan’s physicians and a single view of the truth, a single view of the patient.

Transformation Through Technology
To help get that single view (or something approaching it), in 2010 Robbins implemented PowerHealth OnDemand’s new business-intelligence product. PowerHealth OnDemand is a software-as-a-service analytics and business performance system, deployed at Jordan Hospital since 2007, that allows hospitals to pull information from their legacy systems and slice and dice it: no easy task.

“The health-care information system world is made up of many different modules,” says PowerHealth OnDemand chief executive officer Paul Evans. “There are distinct silos, and bringing it into one source is a huge problem. Furthermore, hospitals have to combine third-party systems — clinical, physician management, insurance systems — with revenues and costs and electronic medical records” to get a single view of the patient.

Once that single view is achieved, it can help hospital finance executives figure out profitability and margins. “Let’s take orthopedics,” says Evans. “Having a view of what the costs are for implants in each procedure, plus the labor (nurses, physicians, and staff), allows you to know how much money you’re making or losing on a knee transplant and whether that’s a business you should be investing in.”

Robbins, for example, knew payers were reimbursing for digital mammography at a higher rate than analog, and that digital images could result in earlier tumor detection. That, in turn, could save the insurer long-term expenses in patient care. She did a business plan, a capital-expense analysis for the equipment, some scenario planning, and decided it would make good financial sense (and serve her community) to create a cohesive, branded practice: a women’s breast-health center. As you walk down Jordan’s corridors, the breast center is prominently bannered.

Operationally, Robbins says the PowerHealth system, which she subscribes to on an annual basis, allows her to run queries on what’s happening, for example, in the Emergency Department (effectively the hospital’s front door and a huge cost center) by hour of the day and day of the week. She can see how long it takes for a patient to be seen by a doctor, as well as what tests have been ordered for each patient.

“What we’ve done in the ED is pull in data and put in goals for steps in the process. I can see the data on a dashboard. I can go to any computer and do an analysis. How long did it take Dr. Smith to get to the patient’s bedside? Was it longer than Dr. Bob? Why? What can we learn from that? Our goal is to get patients back on the street in three hours. If it takes four, where in our process are we getting hung up?

“If the doctor is above average in ordering MRIs, I generate a report so that our hospitalist can have a conversation with that doctor.

“If you can’t measure it,” Robbins concludes, “you can’t change it.”