Hospital CFOs Dig In for a Tough Fight

Whatever the Supreme Court rules on health-care reform, related finance challenges for hospitals are just beginning.
David McCannApril 19, 2012

As the fate of health-care reform is batted about behind the closed doors of the Supreme Court, stakeholders continue preparing for a future that may feature widespread compliance with many provisions of the law — even if the High Court substantially depletes it or Congress later repeals it.

Among the stakeholders, CFOs at hospitals and hospital systems will face a number of weighty challenges in adapting to the massive changes in care-giving, billing and reimbursement, capital investment, and more that probably will evolve over the next few years because of the Patient Protection and Affordable Care Act.

But won’t it be “business as usual” for these health-care organizations if the Supreme Court, as many observers expect, declares unconstitutional the reform law’s requirement that everyone buy health insurance? After all, that was to be the source of funding that purportedly would make expensive provisions of the law viable, and the PPACA may not be able to withstand the individual mandate being quashed. But no, hospitals will very likely reinvent themselves anyway.

Because the degree of reinvention considered necessary to comply with the law was so extreme, and because some of the changes had effective dates that would strain hospitals’ ability to prepare for them in time, most have already invested heavily in new infrastructure to enable compliance. “Irrespective of politics or what the Supreme Court does, the world of health care is getting hugely more complicated because of the reform movement, and that will continue,” says Doug Fenstermaker, managing director of Warbird Consulting Partners, a firm that provides recently retired hospital-system CFOs to counsel sitting finance chiefs in that field.

Health-benefit plans, and consequently hospitals, are already well along in working toward a future in which insurance reimbursements for doctors and hospitals are bundled together and where physician pay is determined by patient health-care outcomes. Under the reform law, those changes would take place in steps from 2013 to 2015. That doesn’t leave a lot of time to get ready. “The mechanics behind those things take years to develop, and health-care CFOs will face many challenges,” says Fenstermaker, who held such posts at various organizations for 18 years before becoming a consultant.

A national pilot program to be established under the PPACA by January 1, 2013, is intended to encourage hospitals, doctors, and other Medicare providers to work together to improve the coordination and quality of patient care. Under the program, there will be a single payment to be shared by all the providers for an entire episode of care, rather than the current system in which each service or test is billed separately. It’s been thought likely that employer-sponsored health-benefit plans would eventually adopt a similar payment model.

“If the government prices a hernia surgery at $10,000 and says, ‘Here’s $10,000, you guys decide how to divide it up,’ that is a major issue for [hospital] CFOs,” says Fenstermaker. “The politics of sharing money with physicians will be difficult. You have to make that $10,000 cover all the services performed, set up systems and processes to do that in a fair and balanced way, and have the right kind of cost-accounting system in place.”

Price bundling is actually a component of a bigger picture in which providers would be paid to manage patients’ overall health rather than just treat incidences of illness and injury. The reform law provides that, effective January 1, 2015, payments will be tied to the overall quality of care provided, as reflected in patients’ health outcomes. Though how that will be done is unclear, health-care organizations across the country are currently at different stages of implementing so-called population health management, notes another Warbird consultant, Pam Vukovich, former CFO of Legacy Health System. “What we’re going to see shake out over the next few years is who ends up doing that the best,” she says.

Hospital CFOs must play vital roles in setting up the infrastructure to accommodate that major transition, interpreting the financial impact, and maintaining a stable financial environment so that however a population’s health is managed, the organization remains viable, says Vukovich.

More specifically, the heart of the infrastructure challenge is integrating financial and clinical information, says James Fox, until last year the CFO of Fairview Health Services. “The focus of [hospital] CFOs today should be improving financial processes to the point that they provide good information continuously, and then marrying that with the clinical-outcome data in order to reduce costs and at the same time show what clinical processes produce the highest quality,” he says.

A system for tracking Medicare and Medicaid patients outside the hospital may be a particularly important infrastructural element. Such patients account for about half of the health-care costs in the United States. The reform law provides that when patients are discharged from the hospital and suffer complications, the hospital is not entitled to additional compensation for treating them. But many elderly patients don’t stick to their drug regimens, and get sick. “As a CFO, you know you can’t continue to do that [and] survive, so you’ve got to build a system to manage and track those patients. Hospitals have never been responsible for that,” says Fenstermaker.

But the revenue-generation problem is hardly limited to elderly care. The operating margin for U.S. hospitals tends to be 2% to 3%, Fenstermaker notes. In the event that the Supreme Court strikes down the individual mandate, there will continue to be many people expecting free health care. That, combined with the new costs for the aspects of reform that are likely to go forward, could deal a death blow to some hospitals. Most of them are nonprofit organizations that use part of their profit margin to pay bondholders, take the difference in cash, and use that for investment in capital equipment.

“Without a margin, they’ll have limited ability to pay on their debt and to make sure their equipment is current and high quality,” Fenstermaker says. “These CFOs are going to have a lot of sleepless nights trying to figure out how to keep their hospitals from going south.”