See My Guest Blog on Fierce Healthcare Website

I've been busy acclimating to a new position, which has put a crimp in my posting to this site, but was recently invited to contribute a blog to Fierce Healthcare's Hospital Impact site. The blog is entitled "Value-based purchasing is coming your way". I invite you to visit the site...and let me know what you think!


Hospitals Face Dramatic Cuts in Medicare Reimbursement

Quoting an article today in a Modern Healthcare article, "Hospitals may have gotten a reprieve after a bipartisan fiscal commission did not get the 14 votes required to send Congress an ambitious debt-reduction proposal including billions in healthcare cuts, but they're still anxious that parts of the report could be used in future budget plans.
On the one hand, we were certainly pleased they didn't get the 14 votes necessary,” said Tom Nickels, senior vice president of policy for federal relations at the American Hospital Association. "On the other hand, it's still disturbing that 11 members of the commission were willing to embrace these policies that we think could be harmful to healthcare."
If the recommendations are approved, here are some of the implications:
Both Direct and Indirect Graduate Medical Education payments would be reduced, at a time when there is a need for more primary care physicians to ensure access to healthcare.
Bad debt reimbursement, which partially covers beneficiaries' unpaid copayments and deductibles, would be eliminated over time. This at a time when the economy has high unemployment and hospitals are struggling to provide care to the uninsured and underinsured.
Implementing medical malpractice reform ( a good thing), but removing a requirement that punitive and non-economic damages be capped.
Freezing the physician payment formula through 2013 and providing a 1% cut in 2014.
There-'s more, but suffice to say the Commission's final report estimates total healthcare savings from their recommendations would be $417 billion through 2020. That's $40 billion a year, or an 8% reduction in annual Medicare and Medicaid expenditures.
Hospitals have dodged a bullet for now, but it appears certain more cuts are on the way. As senior managers of healthcare institutions, we can't throw up our hands and shut the lights. We'll have to find new ways to meet the challenges of this reimbursement environment. Maybe we'll be able to successfully implement Accountable Care Organizations, bundled payments and other delivery schemes. Maybe we'll be able to implement Electronic Health Records that meet "meaningful use" standards, to facilitate reimbursement for IT investments. And maybe these actions will reduce our healthcare delivery costs while improving quality. MAYBE?


What is the Cost of Quality in your Organization?

CFOs often work closely with operations-focused consultants, as both of us are very interested in efficiencies that positively affect the organization's bottom line. In one of my past assignments, I worked with Rebecca Brooks of Efficient Health Care Operations. Here, she has contributed her input on why efficiency and quality go hand in hand in process improvement efforts.

• Do you or your staff spend more time fixing mistakes than preventing them?
• What happens when your usually-smooth work flow is disrupted? Does it ruin the rest of the day?
• How much time is spent after an action or interaction on issues that should have been resolved before or during that event?
In these economic times, those who prosper look for every opportunity, large or small, to streamline operations and reduce costs. Often, the opportunities we can identify are not huge, slap-in-the-face ones, but rather small, incremental ones that can add up to big savings. That is why operations improvement has been labeled a “game of inches.”

A quality process uses the shortest route to a good patient outcome, both clinically and economically. Mistake correction can cost 10 to 100 times what prevention costs; this is the Cost of Quality. The Cost of Quality model shows that where in a process resources (labor, supplies and equipment) are expended greatly influences the overall expense. The goal is to perform the correct steps in the correct order, avoiding re-work, bottlenecks and preventable snafus. This applies to care in both inpatient and outpatient settings, to non-clinical support areas, and especially to time and process-critical services such as surgery, imaging and laboratory.
HOW THE MODEL WORKS: When prevention activities are deployed early on in a process, fewer correction costs are necessary to address process failure. “Good” expenses up front reduce bad events; expenses incurred to fix mistakes after they have happened waste resources.
The four cost categories in the Cost of Quality model are:
To ensure a smooth process, PREVENT mistakes.
Examples of Prevention activities are:
• Appointment reminders, to reduce or eliminate no-shows;
• Pre-registration and pre-authorization, plus ensuring necessary blood work, radiographs, and physical exam beforehand, so treatment or surgery is not delayed.

As we work, APPRAISE, or monitor and adjust for the way the process is actually happening in real time. Appraisal might more appropriately be called ADJUSTMENT: modifying processes on the fly based on unforeseen or unusual situations.
Appraisal possibilities are:
• Reassigning a staff member on the spot to accommodate an absence;
• Deploying more resources to bottlenecks that develop, to ensure planned schedules stay on time.
If PREVENTION and APPRAISAL have not been successful, INTERNAL FAILURE may result. Internal failure happens when we don’t prevent a mistake, but we discover and correct it a short time later, before it travels outside the organization. It is a “save,” but it certainly takes much more effort.
Internal Failure Examples:
• Missing a medical record or test result for a patient, but finding it at the last minute before the patient arrives; or
• A patient arrives in surgery without blood work, but results are obtained in time so that surgery can still be done later that day.
EXTERNAL FAILURE is the worst case in wasting time/money by taking action too late in the process. External failure happens when we fail to prevent a mistake, we don’t catch it, and it travels beyond the institutional walls.
External failure examples are:
• An uncollectable debt, due to initial failure to obtain correct patient and insurer information;
• Inability to schedule a follow up appointment in an appropriate interval, because a future scheduling template had not been created, necessitating a call back to the patient to reschedule.
THE COST of QUALITY: The Cost of Quality model states that if the relative cost of Prevention or Appraisal is $1, the relative cost of correcting it when it becomes Internal Failure rises to 10 times that, or $10. If the process is so out of control that it results in External Failure, the relative cost to fix it rises exponentially to $100, or 100 times as much (!) spent in labor, loss of customer satisfaction and dollars to fix something that could have been avoided with $1 worth of effort.
The message is powerful. The quality organization shifts emphasis from fixing what went wrong to preventing breakdowns in the first place. During this shift, it is cost-efficient to spend a bit more time and money up front on Prevention and Appraisal/Adjustment activities; as a result, many times less will be spent on activities associated with correcting Internal and External Failure.
Think about the time you spend on “fire drills,” i.e., all resources directed at an immediate and critical problem. Could those fires have been prevented? Ask your staff how they spend their time. Then allocate resources to the best place in the process. The result will be better quality at a lower cost!


Reasons Hospitals Become Profitable...My Opinion

I recently read in Healthcare Finance News, a blog entitled "Five reasons hospitals become profitable", posted on September 16th by Mike Stephens. Mr. Stephens lists the following influences he believes contribute to profitability: Payer mix; market leverage; product differentiation; highly disciplined and rigorous control of expenditures; and true hospital/physician integration.

While I agree these are important factors for the long-term development of profitable operations, I submit that, with the exception of expenditure control,  they do not get to the root of the issue. Payer mix is important and can be influenced by service offerings and marketing, but may be limited by the demographics of the population served.

 Market leverage, through market share, is achieved through mergers, acquisitions and other collaborations (such as managed care negotiation), but may also be under limited control due to the marketplace in which a hospital or system operates.

Product differentiation and hospital/physician integration lend themselves to proactive strategic initiatives, and may therefor be more controllable. Each of the five factors are appropriate objectives to facilitate future profitability, unquestionably. I would submit, however, the first steps in building profitability are: revenue capture and collectibility; control of expenditures: customer service culture; and focus on quality.

Start with any institution you can think of, that is not sufficiently profitable (as Mr. Stephens points out, "The median operating margin for hospitals in the same category (200 beds and over) is reported to be minus 0.7 percent." The first areas of opportunity to improve operating performance are those functions that already exist. The hospital is providing services. Is it capturing all of the charges, and coding them appropriately? Are the registration, billing and collection processes optimized to collect as much cash as possible, related to those services?

Similarly, has every effort been made to identify areas of cost reduction opportunity? Have all contracts been reviewed? Are productivity standards in place? Have processes been analyzed for potential improvement? I could go on, but my point is profitability can be immediately improved by increasing revenue generation and cost reductions under the existing model.

More importantly, will physicians and patients find their experiences at the hospital to fulfill their quality and service expectations? We need to develop a customer-friendly culture and the clinical practices and protocols to ensure quality results. This is no mean feat, but if we can't deliver quality and customer satisfaction, the strategic initiatives rightfully suggested by Mr. Stephens will be doomed to failure.

To summarize, I do not disagree with strategic initiatives to improve payer mix, create market leverage, establish product differentiation or develop true hospital/physician integration. These are certainly hallmarks of the 25 most profitable hospitals in the country as listed in a recent article in Forbes titled "America's Most Profitable Hospitals", and cited by Mr. Stephens. I do believe, however, there are initial steps to take that can and should precede these strategic initiatives, so as not to put the cart before the horse.


Why a Career in Hospital Turnaround Management?

The following article was written by a colleague, Arnie Kimmel. Arnie (for clarity, let's call him Arnie2) is an experienced turnaround CEO currently a partner at Tatum. I want to express my gratitude for Arnie2's contribution to Arnie's CFO Spot, as this is an important and timely topic for the industry.

First let’s clarify terms. I find that people use the terms “interim management” and “turnaround management” interchangeably but appropriately when describing a short term leadership engagement in a hospital facing some sort of transition. Typically such a transition involves a search for a new CEO, a deteriorating bottom line and/or a pending affiliation. Since none of these circumstances could be described as maintenance of the status quo, let’s stick with turnaround management.

Next, the advantages. It’s a virtual certainty that there is and will continue to be a significant demand for these services. Hospitals continue to lag other industries in the application of technology to effectively manage both productivity and quality, the boost from Obama-Care notwithstanding. To the extent that payers, starting of course with Medicare, phase in a hybrid system of payment that takes into account both the quantity and quality of services and to the extent that hospitals and doctors will begin to have partially aligned incentives to provide mutually accountable care, there will be many hospitals and health systems that won’t be able to adapt quickly or well enough.
In my experience, most of the hospitals facing these issues are aware of the need for change, so the time, energy and political chips needed to be spent for education there is minimized. Otherwise, leading the unwilling becomes a most unpleasant and time-consuming challenge. The process of sorting out priorities to be addressed in the short term is both a challenge and an opportunity. Making decisions with incomplete information, trusting one’s intuition as well as intellect and then making a positive difference in an organization that’s not used to positive change can provide the kind of reward that makes the profession of management worthwhile in the very first place.
Finally, the disadvantages and a word (or two) about risk. Clearly the major disadvantage of the kind of work described above is travel and the dislocation caused by being gone during the week for months at a time. There are ways to minimize the dislocation, such as being sure to be home both Sunday and Friday nights and Skyping.

Also, it must be said that turnaround management on an interim basis does not provide the satisfaction of seeing the long term benefits of decisions made earlier.
My advice is that turnaround management is not for the faint of heart. It requires a fair amount of courage and self confidence to believe that one can identify the right issues in what Peter Drucker described as the most complex organization to manage; that is, a hospital. Being able to do that and then “turn” the organization in a positive direction can provide a significant feeling of major accomplishment.

Is Your Business Model Sustainable?

There is much talk, particularly in the healthcare industry, about the need to "change the way we do business". That can mean anything. It could be major shift in moving from treating illness to preventing it. It may involve a renewed emphasis on quality, or transparency. It may mean developing or participating in an Accountable Care Organization...and on and on and on.

But what if the existing business model for your organization is unsustainable? By that I mean the core of your business, given such factors as physical plant, location, demographics, competition, program and service viability, reimbursement issues, etc., cannot be sustained for the long term. If this is the case, no amount of tinkering will solve the underlying problem.

Barring a decision to close, intensive strategic planning efforts must be undertaken, to determine whether an alternate business model is a viable alternative. Let me provide an example. I was the CFO of a non-profit organization. Let's call it OopsCo. This organization had been perhaps the premier provider of its particular services in the United States, and had been in existence for a hundred years. Aside from its core business, its mission involved a non-reimbursed teaching program and the provision of charity care.

All was well, until OopsCo took its eye off customer service to both the direct consumer and to the referrers of customers. The result was that a for-profit competitor was enticed by several important referrers to come to town and open a similar business.
Within a year, 30% of OopsCo's volume had been lost, and this at a time when it's endowment, used to fund its operating deficit, had suffered the results of a market downturn. While the local demographics were good, customers chose to travel to another part of town, where the competitor had established a competent, customer-friendly alternative. OopsCo's physical plant was not designed originally for its current purpose, and was grossly ineficient. It's charitable mission was draining dollars it could ill afford to spend.

The senior management team suggested the Board reconstitute a Strategic Planning Committee, and evaluate alternative business models. Several models were discussed, any of which might have strengthened the organization's future viability. These included: spinning off the mission-driven activities into a foundation; merging with the new competitor, who was not averse to the idea; and being acquired by a national chain that provided the services offered by OopsCo.

This is not a success story, as the Board chose to maintain the organization in its current form. I have not followed OopsCo's fortunes over the past several years, as I and the rest of the senior management team, seeing no solution, left the organization. My guess, however, is the losses have not been sufficiently stemmed, and OopsCo's future is uncertain.

We can learn from this anecdote. While you plan for growth and change, don't forget to monitor the basic viability of your underlying business model. And if you sense there may be an unswattable fly in the ointment, do your homework and then have the courage to bring the matter to the attention of your governing body.


The Importance of Strategic Positioning

Let's assume you have been working diligently within your organization to become more operationally effective. You acquired the best technology, improved processes, enhanced productivity. You can deliver care effectively, efficiently and with high quality. That's great, but here's the rub. Just as you drew from best practices and benchmarking, so will your competitors. So everybody is lowering costs and increasing value to customers. What are we talking about? Commoditization. Services are improved, but we become less distinguishable from our competitors.

If we want to distinguish ourselves and gain a competitive advantage, we need to determine what's unique or distinctive about our hospital/health system or other organization. We either have to provide different services, or at a minimum perform similar services in a different way. That's what strategic positioning is about.

So, you want to create a unique position...maybe you're going to provide fewer programs, but to a larger population. Or, maybe you want to serve a more select population, but with a broader range of services. This may likely require you to think about trade-offs. It may be a cliche, but it's can't be all things to all people.  And, there needs to be a fit between the services offered, a way in which the services and programs interact with and reinforce each other. You may have to choose what not to do, in order to focus on your unique and appropriate service mix.

Here's an example. Some years ago, I was the CFO of an inner city health system that was surrounded by competitors, and was operating at a rather large deficit. We looked at the demographics, the clinical needs of the community, the relative profitability of each service and the fit of existing services. We determined several things. The community had a high incidence of tuberculosis and diabetes, and there were no programs serving those needs. Furthemore, the reimbursement for tuberculosis treatment permitted a surplus to be generated, and the diabetes treatment often involved unrelated medical complications which generated additional service opportunities. The obstetrics service had insufficient volume, and was generating a deficit. Finally, the community, which consisted of lower income families, was utilizing the overcrowded emergency room as its portal to the hospital.

Through some creative financing, we obtained the capital and operating funds to create a state-of-the-art in-patient tuberculosis unit and a diabetes clinic. We expanded and modernized the emergency room and created an effective triage system to redirect non-urgent cases to less expensive clinic settings. And, though it was not an easy decision, we shut down the obstetrics service. Although it had been an important component of the mission, the losses could not be sustained, nor the volume enhanced. As well, it was the least integral program from the standpoint of interaction and reinforcement of other programs.

It took discipline, an ability to set limits and strong internal and external communications to accomplish these changes, but the organization successfully differentiated itself. These actions, combined with the development of operational efficiencies, put the organization on a much stronger footing.

The message here is to reconnect with strategy. Look at what you currently do. Which of the services are most distinctive, and possible centers of excellence? Which are most profitable? What's driving our customer satisfaction? Refocus on the unique core of your organization, realign your service offerings, and make certain to take into consideration the near and longer-term industry trends driven by healthcare reform, aging populations and other environmental factors.


Ensuring the CEO Speaks the Language of Finance

In my last two posts, I wrote about effective communications throughout the organization, and the importance of board education. It occurred to me that, as CFOs, we should not take for granted our CEO speaks our language. Of course, in these days of sophisticated management and critical financial issues we can assume our CEOs have a at least a basic understanding of financial terminology. And certainly there are many CEOs out there who are extremely knowledgable of fiscal matters.

It's not the CEO's job to understand everything there is to know about finance. That's what (s)he's got a CFO for. That said, there may be gaps in the boss's financial knowledge that for any number of reasons we're unaware of.

Consider a scenario where you are proposing a particular action or strategy related to financial management. Let's say you've developed a set of metrics you propose to provide in a dashboard format. The CEO reviews the metrics and indicates he sees no need for a measure of the "quick ratio". You know this ratio is more important than the current ratio, as it focuses on the ratio of immediately liquid assets to immediately liquid liabilities, rather than all current assets and liabilities. So, if you're in a situation where liquidity is critical, this is an important measure. But, if the CEO does not understand the ratio or its importance in your current situation, (s)he may insist on eliminating it in order to focus on the handful of measures he considers most important.

This may not be a realistic example, because chances are you will have a discussion about the meaning and importance of the ratio. Nevertheless, think how much more efficient your interactions would be if you developed a mini-financial seminar to present to the CEO (and, perhaps, other members of the senior management team). There would be less chance of misunderstandings and a smoother team approach under such circumstances.

Please refer to the previous two posts for examples of the type of financial materials that could be included in such a seminar, and let me know if you think this approach makes sense.


Effective Communications Yield Stronger Operating Performance

It's hard times for many hospitals. Negative margins, declines in non-operating income, investment losses, decreases in days cash on hand and declining patient volume are wreaking havoc with the bottom line. The good news is, most of us can do better. We can reduce capital spending, change debt structure, contain labor and non-labor costs, seek strategies to improve patient volume and improve processes to enhance productivity and efficiency. But WHO will do this? It won't be the CFO. It will be the strategic and operations leaders. And HOW will they know what to do? Here's where communications is critical.

I'm talking about providing the right information to the right people at the right time. Financial statements should be timely, concise and meaningful. They should be understandable, focusing on the results, metrics and variances from plan that facilitate identifying areas of opportunity. Information should be provided to the Board, senior management and operating managers, that allows them to make the correct decisions to address the organization's situation.

Its incumbent on the CFO to develop reporting that provides the greatest insight. We know the language and business of accounting and finance, but do we know the language and business of the operating departments? I understand, as CFOs we're consumed with finance-related matters. But an important first step in communications is understanding the subject matter about which we're communicating. How can we be reporting, developing, interpreting, coordinating, and administrating the hospital's policies on finance, if we do not know what is happening outside of the finance department? So, walk around! Meet with operating managers, at their desks, and discuss their operating results. Spend some time in their departments and learn what they do, and the language they use.

Once you understand their issues, create reports that communicate the relevant facts, packaging information and concepts in a way that is meaningful to the targeted reader. Think about the appropriate frequency with which to report different kinds of information. It could be daily, weekly, bi-weekly, monthly or less frequently, depending on the subject matter. Use plain language, and the terminology they understand. Use charts, overviews, trends, whatever it takes to get your information across in a meaningful way.

Here's one important reporting vehicle, to start you off. Develop a Balanced Scorecard, incorporating the Key Performance Indicators that focus on the strategies, objectives and initiatives deemed by the Board and senior management to be critical to your organization. The Balanced Scorecard should be produced monthly. The KPIs should be relevant to each accountable hierarchical level: System, Organization, Division, Subdivision and Department. Set goals based on peer-related benchmarking information. The actual KPIs could relate to productivity, volumes, liquidity, quality, etc. I won't delineate them here, for purposes of brevity.

Create a budget process that incorporates benchmarks and metrics,where each level in the hierarchy contributes to the development of targeted balanced Scorecard indicators.
Report the information consistently and timely. Create a culture of accountability, where all strive to achieve the targets, and are recognized for their achievements.

Other reports might include service line profitability analysis, supply chain analysis, labor management reports, and quality indicator trends.

Congratulations! You're on your way to creating a communications environment where  information (not data) is provided to the end-users that will allow them to make better decisions and manage effectively.


Board Education - Many Want It. Do You Provide It?

Over the course of my career, I've worked with numerous Boards. Frequently, the Board composition is diverse. There may be business-savvy professionals, along with community advocates, physicians, religious leaders and others. The level of understanding of the business they govern, programs and services, financial reporting, strategic planning principles, regulatory matters, etc., may vary widely from member to member.

The more knowledgeable a Board is with regard to the matters critical to their governance responsibilities, the more effective they will be. Of no less importance, I have always felt senior management will be more challenged to achieve objectives, and will be empowered to collaborate with the Board as a team under such circumstances.

It's also been my experience that individual Board members may be hesitant to request education on particular issues, for various reasons. With that in mind, it behooves management to work with Board leadership in developing ongoing Board education. The first step is to determine those areas of knowledge that are a) desired by the Board and b) believed by management to be important, particularly in light of the specific circumstances of the organization.

The venues and types of education can be of many types. Here are a few suggestions:

Develop a new Board member orientation package. This can include such items as: a set of by-laws; Board committees; an organization chart; a list of those policies and procedures of most relevance to the board, for example, human resources and compliance-related policies; a standard financial reporting package; and any other materials deemed important.

The orientation package should be walked through by one or more senior managers in detail with the new member. For example, depending on the members business experience, the CFO may review the financial statements in terms of the meaning of the Balance Sheet, Statement of Income & Expenses and Statement of Cash Flow.
(S)he would then review the meaning of each line item. Finally, (s)he would review key metrics and their importance. If this type of orientation has not previously been done, a presentation might be made, as an agenda item, to the full Board.

Create a standing agenda item for the Board meeting, where a Department Manager makes a 10 or 15 minute presentation regarding their particular specialty and how it interacts with the rest of the organization. This is effective not only in education terms, but personalizes the organization and has a positive impact on morale.

Dedicate a special meeting to a particular subject. The presenters can be internal or external. For example, one or more representatives of  the Board's Strategic Planning Committee, or if necessary an engaged external consultant, could explain how the planning process works. Then, senior management can describe how the plan is integrated into day-to-day operations. For example (if this was true of your organization), you could indicate how the 5-year Strategic Plan drives the annual Business Plan, which drives the Management Action Plan (assigning tasks, responsibilities and timetables), which in turn drives the annual Operating and capital Budgets.

Concurrent with posting this, I raised the question of the importance of Board education, with a LinkedIn group, the Healthcare Executives Network. Linda Ollis, FACHE, a CEO, provided the following excellent suggestions, which I thought worth adding to the post: "As a CEO, I used as many expert resources as possible for general education from local experts to the Governance Institute. Membership in organizations like the Advisory Board, Sg2 and others, generally includes board level presentations that are oriented towards general market issues and legislative/reimbursement changes while the state hospital association and experts from public health, insurers, etc. can provide more depth to local and regional issues. I like to follow these presentations with open discussion and board dialogue, linking it to our strategic plan and organizational challenges. We also shared key issues from "Trustees" magazine that have a lay board focus and orientation. Board education is one of the most critical aspects of the CEO's responsibilities."

You get the idea. Board education is critical. It makes for a more informed, interesting and exciting governance process. What are you waiting for?

Once a Turnaround Guy/Gal, Always...?

There are a number among us who have had a great deal of experience in turnarounds and restructurings. Our numbers have grown, with the worsening of the economy and its effect on our organizations. As a result we may find ourselves being cast as "a turnaround person". Being pigeon-holed as a "type" (whether turnaround, technician, small or large company, start-up or whatever) is likely to affect the way we're viewed by peers and others in our field.

I thought it would be worthwhile to discuss the skill sets we have developed in doing turnarounds, that create value for diverse organizations. The purpose here is to shine a light on how you should think of your own areas of expertise, and how your experience has prepared you for other challenges, whether within your existing organization or in a new situation.It also illustrates the need to educate peers, potential employers and others that what you have been doesn't preclude you from smoothly transitioning to what you want to be.

Organizations in need of a turnaround are generally deeply distressed. Cash flow deficits may exist. Vendors may be withholding goods and services. Employee morale is low. Management may not have a plan to address the issues. The Board may have lost confidence in management. The community, regulators, and reimbursement sources may have serious concerns. Processes and systems are probably not effective.

Did I paint a gloomy picture? So, forces are gathered to effect a turnaround. What's the common (inaccurate or, at the least, incomplete) view of how a turnaround occurs? Cut staffing and other costs, reduce programs and services...slash and burn! But successful turnarounds are the result of careful, albeit expedited, planning. Strengthening the top line is more effective and less morale-crushing than arbitrarily cutting costs, which can lead to service issues and a downward spiral. I don't argue that productivity should not be reviewed in the context of processes, or that other cost containment measures not be pursued.

Here's the point: As a result of the multiple issues to be confronted in a turnaround, we have developed valuable skills. We're stronger, hands-on strategic leaders, because we need to be. We've developed concise, meaningful timely financial reporting and established metrics to measure progress toward strategic objectives. We've been innovative and creative, in order to "operate in the grey" and to team with the rest of senior management to develop a turnaround strategy.

Our communication skills have been honed by the necessity to communicate with all internal and external constituencies, and to convince them the strategies devised by management are the right course of action to turn the ship around. We've developed mentoring and team-building skills, and re-designed functional teams, because we've had to, in order to be effective. Not least, we've developed a sense of humor to help deal with the tribulations of a turnaround, and a flexibility in the way we approach strategic, operational and financial opportunities. Finally, if we have achieved a successful turnaround, we have strengthened our confidence to accomplish what we set out to do.

I liken turnarounds to setting your hair on fire and putting it out with a hammer. Does that mean we wouldn't be comfortable and effective applying our skills in an organization that is, or has become, stable and poised for growth?

These skills would be of as much value in a stable, profitable organization, as they are in a distressed situation. We have skill sets we've developed in the course of our careers. It's up to each of us to recognize, utilize and communicate those skills, as circumstances dictate.

Activity Based Costing & Activity Based Management in Hospitals

The following article was written by a colleague, John P. Ortiz.
John is a partner in Tatum’s Healthcare Services practice.
I want to express my gratitude for John's contribution to Arnie's CFO Spot, as this is an important and timely topic for the industry.

Healthcare Looks to Other Industries for Cost Management

Historically, the healthcare industry has not been faced with overwhelming pressure to know, understand and manage costs. Some services have been and are still reimbursed based on cost actually incurred. Cost-plus revenue arrangements have historically left little incentive for managing those costs.

Times have changed. Today, more pressure exists to manage healthcare costs: Medicare at-risk, Medicaid at-risk, Pay-for-Performance, Accountable Healthcare Organizations, managed care and the rising cost of caring for the indigent. Effective operational management has never been more crucial to the success of a healthcare organization. Just as global competition has driven manufacturers to better understand and manage costs, today’s pressures are providing the same impetus in healthcare. Savvy healthcare managers are beginning to take notice of the powerful tool used in other industries, cost management through activity-based information techniques. Activity-based information techniques have the potential to be the business weapon of this century and beyond for healthcare.

Tools for Different Needs

Activity-based information techniques include two powerful components: activity based costing (ABC) an accounting tool and activity based management (ABM) a management tool. Activity-based costing looks at cost from a strategic point of view to answer the question, how much does a service or procedure cost?” It’s a way to maintain and process financial and operating data on resources, activities, the things that drive cost, cost objects (e.g. the organization’s patients, service lines, payers, physicians and network facilities), and activity performance measures. It also assigns cost to activities and cost objects.

Activity-based management takes an operational point of view to answer the question, “What makes costs occur?” It studies the things that drive costs and the activities that go into processes, and helps measure performance. ABM relies heavily on ABC information.

Not your Father’s Cost Vehicle

Organizations that calculate profitability by service line or patient usually rely on traditional cost allocation accounting. For example, a material burden charge might be allocated to the surgical services department. This method helps executives understand cost according to the revenue that’s generated.

Cost allocation is a straightforward idea for healthcare executives, but it has inherent problems for operations managers. An administrative overhead charge doesn’t reflect the diversity of the real work that goes on in the various overhead departments and it doesn’t give management the tools to manage costs. So to answer the question, “What do things cost?” healthcare financial officers have started to look at techniques used in other industries including ABC.

Traditional Cost Cutting Failures

When an organization uses traditional methods of cost accounting and want to trim expenses, cuts may be made in the wrong places. For example, executives may call for across-the-board cuts. The tactics commonly used include hiring or wage freezes, or eliminating entire portions of a budget which may improve expenses in the short term but be harmful in the long run. The organization might try benchmarking, though most benchmarking projects don’t shed light on the processes that lead to excellent results. The organization might focus on trimming the highest cost areas. But resource costs don’t provide information on activities or their value to the organization. For example, knowing someone’s salary doesn’t shed light on that person’s activities or the value they add. If managing costs in a business were as easy as saying just cut 10% across the board, then why not cut 20%. What about 50%? What the heck, cut 100% of the cost. That will really trim expenses. The obvious reason executives in healthcare have historically not specified large cuts is because they know they have no idea what effect an across the board reduction will have on their organization. So the smaller the reduction, the less likely it is for major problems to crop up.
ABM can bridge the gaps. Using activity cost as the starting point, ABM helps managers find out if those activities add value. To determine this, it provides a platform for analyzing, ‘What causes costs to occur?” In taking this approach, ABM focuses on “cost drivers” and performance measures. A Cost driver is any factor which causes a change in the cost to be incurred. There are multiple cost drivers for any activity. Understanding the significance of cost drivers, both individually and in combination with each other, is the key to both understanding what causes costs to occur and how to reduce costs.
Performance measures are used to measure the output of activities. They include not only measures, but also non financial measures such as quality, cycle time, and customer satisfaction. Understanding the impact that activities have on key performance measures is critical to achieving the optimal answer, not just the lowest cost. If the lowest cost is the only objective, simply eliminate the activity. Eliminating an activity yields no cost, however, it also eliminates any benefit the activity was providing which may have included reducing costs in other areas such as preventative maintenance.

To illustrate the power of activity-based information techniques consider the following scenario: Hospital management has dictated a 10% reduction in costs. Which expense statement below would be the most helpful in achieving the goal?

Medical/Surgical Unit                                         Medical/Surgical Unit
Labor                               $525,000                  Deliver Care                        $225,000
Benefits/Payroll Taxes          90,000                  Document Care                      115,000
Supplies                              60,000                   Process Patient Orders           110,000
Depreciation                       60,000                   Transport patients                   75,000
Other Costs                         40,000                   Obtain Test Results                 70,000
  Total                             $775,000                 Admit Patients                        50,000
                                                                        Process Transfers/Discharges 30,000 
                                                                        Develop Care Plan                25,000
                                                                        Perform General Admin.        75,000
                                                                          Total                              $775,000 
Obviously focusing on Processing Patient Orders and Documentation of Care would be a good starting point that traditional cost measures would not have surfaced as a problem.
Understanding activity-based techniques can dramatically improve healthcare management’s ability to make wise cost reduction decisions that are based in fact, sustainable over the long haul, and not at the expense of quality.

ABM is becoming widely recognized as an effective tool to manage costs in healthcare. The Healthcare Financial Management Association in conjunction with Tatum, one of the leaders in ABM, has teamed up recently to develop courses to train healthcare executives on ABM. Courses are being scheduled for the fall of 2010 and the spring of 2011.
For further information on ABM, contact John Ortiz at Tatum, at 678-637-4823.

Once again, my thanks to John. What is your facility doing with respect to managing cost?

Satisfy Your Customer To Improve Your Margins

It seems like a no-brainer, but as hospitals strive to implement programs and processes to improve their bottom line, they don't always focus on this most important element. Like most of you, I've been in the role of patient on occasion and have at times been gob-smacked by the poor customer service attitude of the employees (both clinical and support personnel) I interacted with. For example, how often have you experienced a perceived lack of compassion by clinical staff, a cumbersome or non-friendly registration process, or bad meals?

In the June 2010 edition of HFM Magazine, a brief article on data trends, prepared by the American Hospital Directory, delineates the correlation of positive patient questionnaire responses to operating margins. The data was collected by the Centers for Medicare & Medicaid Services (CMS) based on the Hospital Consumer Assessment of Healthcare Providers and Systems survey instrument.

Hospitals were ranked into quartiles, based on high to low overall ratings, and the median operating margin was calculated for each quartile. The following table tells the story:

          Quartile       Margin
               1             (1.65418)
               2             (1.46375)
               3             (0.44875)
               4              0.409934

Quality, as perceived by patients, is not solely measured by clinical indicators. Everyone having contact with the patient/customer must exhibit a passion to satisfy or exceed their expectations. This can only be accomplished through cultural training and by measuring customer friendliness as a component of employee's periodic evaluations.

Needless to say, it all starts with senior management's dedication to achieving cultural change, and the CFO is an integral player in that regard. Be a role model for your staff and the rest of the organization. The numbers indicate it can only help your bottom line.

EHR Meaningful Use Final Rules - What's The Verdict?

So, doctors and hospitals will be rewarded for the "meaningful use" of electronic medical records. The final rules (all 864 pages), issued last Tuesday lighten up on the proposed requirements that the healthcare industry deemed unrealistic. A brief overview in the July 14th edition of the New York Times indicated the industry could receive as much as $27 billion over the next 10 years to buy equipment to computerize patients’ medical records. A doctor can receive up to $44,000 under Medicare and $63,750 under Medicaid, while a hospital can receive millions of dollars, depending on its size.

I don't think there's any argument EMR meaningful use will lead to “better, smoother care, more reliable care”, as Don Berwick, the new administrator of the Centers for Medicare and Medicaid Services, has stated. The question is, will doctors and hospitals be able to achieve meaningful use in the time frame required by CMS. The clock for progressive attainment of meaningful use runs from 2011 through 2016. There won't be any incentive payments after that, and if a provider doesn't achieve the measure of progress in a given year the incentive payment for that year cannot be recovered. Meanwhile, at this point only 20 percent of doctors and 10 percent of hospitals use even basic electronic health records, according to Kathleen Sebelius, secretary of Health and Human Services.

Under  the incentive program, eligible providers must utilize “certified EHR technology” if they are to be considered eligible for the incentive payments. Whether "meaningful use" can be achieved in the time frame allotted remains to be seen, but this is only one of a number of issues raised. For example, as reported in Crain's Health Pulse, several of New York's hospitals are protesting a CMS decision to award the promised $27 billion in funding based on Medicare provider identification numbers. In New York's hospital systems, many smaller hospitals use their flagship hospital's Medicare I.D. number. One major tertiary system, which has 1,500 beds on three campuses, will be treated like it has only 500 beds,” says it's Chief Executive Officer. In his system's case, that means a loss of $25 million in potential government funding.

At the Greater New York Hospital Association, a spokesman says so many of the region's hospitals are in the same situation that the association's lobbyists are pressuring Congress to change the eligibility rules. “We're deeply disappointed,” he says of CMS' decisions, noting the restriction will prevent scores of hospitals from getting the federal money. “We do not believe this was Congress' intent.”

As always, the devil is in the details. It remains to be seen how this will all shake out. I sincerely hope truly meaningful use of EMRs will be a reality in the not-too-distant future, but it can't happen without the realization of the significant dollars associated with the Medicare and Medicaid Programs Electronic Health Record Incentive Program.

Some Financial Distress Is Self-Inflicted

Sure, there are many sophisticated and technical processes that can be applied to deal with cost management. Toyota's Lean or Six Sigma can be utilized to reduce variances in processes. Benchmarking the right indicators can identify areas of opportunity. Technology can be simply tweaked, or major EMR initiatives pursued. Clinical protocols can be established. I could go on, but you get the idea. And these steps will need to be taken to overcome the fiscal crisis faced by many hospitals (and, I would add, other industries). A good discussion of these and other techniques can be found in an article entitled Taking On the Cost Drivers, on the Health leaders media website.

But I maintain, as financial distress mounts, organizations can become so absorbed in mounting such initiatives, or perhaps are so beaten down, they fail to see opportunities that can be easily addressed by looking carefully for simple, even silly, problems. Here are two examples from my own experience, where I was involved with turnaround situations.

Let's start with a silly example. In the first week I was engaged as a CFO at a large urban hospital with a 40% Medicaid payor population, I happened to be standing near the reception desk when a FedEx courier arrived with a package. I saw the courier speaking with the receptionist for a few minutes, whereupon he turned on his heels and left with the package. I asked the receptionist what happened. Turned out the hospital had not paid it's outstanding FedEx bill, so the package was delivered COD. The receptionist had no money, so the package was not handed over. When I researched the matter, I found FedEx was owed about $125. What was in the package? A Medicaid check for $1.8 million! If someone was paying attention, the FedEx bill would have been timely paid, and the hospital, which was suffering severe cash flow problems would have received it's Medicaid funds on time.

This one is not silly, but shows how some creativity can be applied to a situation. A hospital system, again with a severe cash shortfall, could not pay it's Workers Compensation insurance premiums. As a result, the State had declined to renew several large grants, as one of the eligibility requirements was to carry Workers Compensation insurance. I spoke to the State, and indicated if they would renew the grants, we could utilize a portion of the funds to participate in a State-sponsored self-insurance fund. They agreed. The hospital obtained its insurance and obtained the grants.

This is not rocket science. Sometimes, when you're under the gun, its easy to miss the obvious. Don't let the pressures of a distressed situation keep you from scrutinizing the basics and looking for the low-hanging fruit.

I would be interested in any similar anecdotes that support this thesis.


Electronic Health Records - Two Not-So-Minor Concerns

No question, as EHRs are implemented in hospitals, elements of care will improve. Cordinated processes and integrated information, clinical protocols and patient portals will all benefit the provision of healthcare. BUT, two issues loom large. First, the cost of these systems is significant and reimbursement of a portion of the cost of implementation will hinge on "meaningful use" being achieved within a timetable proscribed by the Federal government. That timetable is, to say the least, aggresive. Our healthcare associations and various organizations are working to have these deadlines extended.

Second, in any complex system change there can be unintended consequences. Anne Zieger, in her blog, The nextHospital Manifesto, posted "Do EHRs Kill People? Maybe So". The content follows:

Here’s some cautionary words on the adoption of electronic health records, in an essay from the rich archives of wonderfully snarky and insightful site
Since IANAT (I Am Not A Techie), I can only offer an analyst’s take on the matter, but I believe author Margalit Gur-Arie’s argument makes great sense. Anytime a technology goes beyond being a tool to driving decisions, humans have to adapt — and that breaks their stride. And off-balance care can lead to patient deaths. As she notes:

If EHRs become as pervasive in everyday medicine as ONC is proposing, every patient will eventually be touched by an EHR. It is very likely that some errors will be prevented by the sheer existence of an EHR but new and unfamiliar errors will also be introduced as side effects.

I continue to hope we can find a way to make EMR use simple, natural and fluid, but honestly, I’m still pretty skeptical it will happen. So thanks to Gur-Arie for reminding people that EMRs, EHRs, PHRs and all other related tools are far from a panacea.
Anne, I tend to agree. As we develop this crucial new healthcare delivery tool , caution had better be the watchword.


Hospital Mergers and Consolidations

With the pressures of the economy, reimbursement trends and the spectre of total transformation that will be required by healthcare reform, consolidation in the health care industry is taking place at a record pace. It’s difficult for small to mid-sized hospitals to compete against larger health systems in many markets, and the depressed economic climate has led some hospitals to seek out opportunities for mergers.

Larger systems are strategically evaluating the markets they want to be in and exiting from less attracive markets. In addition, smaller hospitals and systems are understanding their survival may hinge on merging with or being acquired by another system.

Boards of Trustees and community advocates want to maintain their independence, and senior managers may be concerned with their vulnerability in a merger. Nevertheless, I believe this trend will continue, and even accelerate. Think of the difficulties a smaller stand-alone hospital, or even a small system, will encounter as they deal with the system, process and resource demands in adjusting to the new realities of healthcare delivery.

The changes afoot are dramatic: Implementation of meaningful use of electronic health records; developing Accountable Care Organizations; re-focusing on, measuring and reporting on quality indicators (linked to reimbursement); and strengthening physician integration are just a few of the challenges to be met. Not least is the need to totally transform the way in which healthcare is delivered, so as to survive what I believe will be an environment where reimbursement from all payors will be driven down towards Medicare levels.

Then there are the economies of scale that have always been available to larger systems. To name a few: departmental consolidations and centralized functions; access to experts who would otherwise be too costly; and negotiating leverage with insurors and suppliers.

This is not all bad news. The takeaways are:
  • These are exciting times for hospitals and healthcare systems
  • Change is good, and the nation's healthcare system will benefit in the long run
  • Surviving systems will have the talent and resources to deliver high quality care in an affordable way.
  • As leaders, we need to put aside parochial concerns, and strongly consider seeking out partners that will ensure our organizations will continue to exist, grow stronger and deliver cost-effective, quality care.
This is, of course, just my opinion, and I welcome meaningful feedback and debate.


Cash is King

I am, as they say, "in transition". That means I'm networking, developing my "personal brand", combing job postings and going on job interviews. I state this not to generate empathy because I'm sure the right opportunity will come along. I mention it as a backdrop for this post. Cash is king. I have been on several job interviews, and regardless of the organization, it's size, it's revenue stream, it's mission, when I ask - "What keeps you up at night?", the answer is invariably cash flow issues.

These days, in healthcare and other non-profit organizations, earnings are less important than cash. The cash flow statement is what external lenders, investors and potential donees focus on. Perhaps, if you're creative and aggressive, revenues are rising. But if third party payments are slowing down, or you're not on top of contractual payors and grantors, or you're not maximizing the potential billing you can squeeze out of every contract, cash flow is not keeping up with revenue.

It's critical to measure and monitor cash, so it's essential to develop cash flow projections, preferably of the rolling, thirteen week variety. Refresh the projections weekly. Look for points in time when your liquidity could be in jeapordy, and plan for how you might deal with the situation.

Of course, your cash situation won't improve on it's own, so now is the time to seek opportunities to streamline operations, create new revenue streams and strategically plan for better times. Good luck, and if you need someone to bounce ideas off of on where to start, feel free to contact me.


Interview with Brin McCagg, Co-Founder of, a unique finance employer/candidate matching service

I sat down with Brin the other day, to explore how he developed this job search site, what made it unique and what tips he might have for those searching for a finance position.

What is your background?

I started off in investment banking. Shortly after business school at Wharton, I started an environmental services company that we grew into an industry leader and sold out in 1997. I then formed an internet-based asset management company backed by GE Capital, Goldman Sachs, JPMorgan and others. That company was sold in 2002. Next, I worked as a senior executive on the turnaround of two private equity backed companies. Two years ago I co-founded

How was your background helpful, in creating this business?

20 years of experience in developing an early stage company has been very helpful. I also was taught at a very young age to work hard and stay focused – both essential skills in business.

Tell me about How did the idea come about?

My partner ran a headhunting firm and had the initial idea. At first, I thought we were late to the market, but after meeting with a number of top investment banks I concluded we had an enormous opportunity. Two years ago he and I dropped everything and started

Briefly, how did you get the business off the ground, financially?

Initially, we covered the costs and were uncompensated. However, we fairly quickly needed to raise what amounted to a considerable amount of funding as a seed round.

What is your vision?

To be the dominant platform where individuals manage their careers and stay connected with highly relevant opportunities.

What’s unique about

While there is competition, there is no application comparable to OneWire. We utilize structured data for candidates to build their profiles, which results in precise matches against searches (All other sites use Boolean or fuzzy search logic). Candidates always control their confidentiality and reveal their profile details only when and to whom they want. Employers can manage all aspects and stages of recruiting, including sourcing, screening, communication, interview scheduling and on-boarding, in one seamless application. Campus recruiting is also an integral focus for us. We guarantee better candidate results and a reduction of recruiting time and expense of at least 75%.

What has been your growth pattern?

We officially launched the site six months ago and 65 top firms are utilizing our service. We expect accelerating growth in both firms and candidates signing up.

Where do you see the business in 5 years?

As the dominant platform where individuals manage their careers and stay connected with highly relevant opportunities

  • What is your opinion of the ideal CFO candidate?

That depends on many factors including what stage the company is at. The right CFO for IBM is not the right CFO for a startup and vice versa. That said, a good CFO universally must have excellent accounting and math skills, have a conservative disposition and be highly organized.

  • As someone in the job search industry, what would be some tips you would give job searchers?

• Build a detailed profile on immediately. If you’re out of work, you should try to get employed as soon as possible, even if the position is not optimal because times are tough, you need to stay engaged, and earning some compensation is better than none.

• Assess what you really want to do and where you have a reasonably good chance of success

• Focus is the key to success in everything and with search. Focus on exactly what you want and develop every channel to making it happen.

• Network to find people that can open doors

• Be able to pitch your qualification cold. Do not leave room for error by being unprepared.


Accountable Care Organizations & Collaboration

Accountable Care Organizations, or ACOs, are an exciting component of health care reform. A study by The Commonwealth Fund, entitled The Vermont Accountable Care Organization Pilot: A Community Health System to Control Total Medical Costs and Improve Population Health, defines an ACO as  "a provider organization that takes on responsibility for meeting the health needs of a defined population, including the total cost of care and the quality and effectiveness of services."

As described in the report, the Vermont Health Care Reform Commission (HCRC) spearheaded a pilot ACO program. Their key findings were
a) The ACO cannot exist in a vacuum
b) The working design for an ACO pilot is built on three major principles:
     1) local accountability for a defined population of patients;
     2) payment reform based on shared savings; and
     3) performance measurement, including patient experience data,
         clinical process and outcome measures.
c) ACO pilots need to have threshold capabilities in five areas to get started.
For purposes of brevity here, refer to the Commonwealth Fund Report for further details.

According to an article, Lessons Learned from Vermont on Building Community ACOs,  published May 20th, in HealthLeaders Media, a working design was developed for each ACO pilot that was built on three major principles: Local accountability, payment reform and performance measurement.

In my view, perhaps not surprisingly, payment reform and aligned incentives will be the single crucial element if this model is to work. Getting primary care physicians, hospitals and other continuum of care providers to negotiate who will be the receiver of funds and how those funds will be shared - that's the biggest devil in the details. I believe it can be done, but the spirit of collaboration may need to be born, or re-born, to accomplish this mighty task.

Compliance - Corporate Culture Trumps Programs

Richard Brinsley, an Irish playwright and Whig statesman, wrote “Take care; you know I am compliance itself, when I am not thwarted! No one more easily led, when I have my own way; but don't put me in a frenzy.” These days, compliance is on the lips and minds of every CFO. Morality aside (just for the moment), the civil and criminal penalties companies and their officers are exposed to when fiduciary responsibility is breached is cause for frenzy. So forgive me if I preach to the choir.

By now, we all know it's desperately important to have a comprehensive compliance program. More important is the need to develop a corporate culture of trust. If employees believe "something smells in Denmark", but trust that senior management would deal with it if they were made aware, they are more likely to have the matter dealt with internally.

In a blog published May 13th in the Wall Street Journal, entitled "I Didn’t Want to Be Responsible for Somebody Dying’: Whistleblower" deals with the the impact of pharma-industry whistleblowers on that industry, which paid out more than $6 billion to settle whistleblower-initiated federal cases between Jan. 2001 and March 2009. Of 26 whistle-blowers interviewed for a New England Journal of Medicine story, all but four said that before going to authorities they first took their complaints to higher-ups.

So, the moral is: develop a culture of trust; pay attention to what's happening in your organization; pay attention to the merest whisper of wrong-doing; and deal with it before it evolves into a catastrophe.

CFOs - Moving From Technical Expert to Leader

As we progress in our healthcare finance careers, we develop new skill sets and don't always retain the old. I leave it to you to determine whether that's a good or a bad thing. In the beginning, perhaps we recorded accounting transactions, prepared financial statements and cost reports or created patient bills. We were technicians, and proud of it.

Assuming we worked for reasonably large organizations, as we moved up the ladder, we began to supervise others who accomplished those tasks. When we rose to CFO, we developed new skills - leadership, mentorship, team building, strategic vision, creativity, communication....I could go on.

I ran across a blog, The CFO Edge, by Jack Sweeney, where he posted a piece called Tapping the Right Side of the CFO Brain. His first paragraph reads "One of the ironies of being a top finance leader is that seldom if ever will you be heralded for your vast technical skills. Instead, you are more likely to be praised for having keen management skills or even imagination." I couldn't agree more.

The longer we've been in leadership roles, the more we've honed those new skills. But what of the technical skills we had in the early stages of our career? Under the theory of "use it or lose it", combined with advancements in technology, reimbursement changes and the other dynamics affecting change over time, most of us can no longer personally accomplish those technical tasks. Nor should we.

I have been a CFO for some time and as I search for a new career opportunity for myself, I understand the far greater importance of leadership skills, but I understand the importance of having had technical experience in the past. Unless you're in a small organization where you're the chief cook and bottle washer, you're supervising direct reports who in turn are supervising the technicians.

To be a "hands-on manager" doesn't mean you need to do the detail work. Rather, you're knowledgable enough to review, correct and advise others in their tasks. You can't do that from your office, and you can't do it if you don't understand the subject matter or the objectives of the work. Thankfully, our earlier technical grounding provides the foundation we need.

So, don't fret that you've forgotten the details of the task. Focus on leadership, vision, motivation and support. As the saying goes (and maybe this is a stretch), "make new friends, but keep the old. One is silver, while the other is gold".

Staff Reductions? Maybe, But How Best To Proceed?

I came across a blog entitled "Ignore Your People at Your Own Peril" by a Canadian blogger, Geoff Crane. It dealt with the problems caused by a hospital's reduction of nursing staff as a result of a non-collaborative staffing reduction on the part of management. Anyone can cut costs, and salaries & benefits are generally around 60% of a hospital's costs. No one wants to cut staff if they can help it, although the current fiscal state of many hospitals can make it unavoidable. But I agree with the author, adjustments in staffing must be done carefully. This would seem to be a no-brainer, but ill-conceived staffing cuts are not rare.

So, what's the approach to be taken? Foregive me if I'm preaching to the choir, but you've got to look at processes and responsibilities across all functions. Are there processes that can be streamlined or otherwise improved? What are the likely consequences of reducing staff in a particular department? I'm a big believer in metrics and benchmarks, They can give you a 10,000 foot look at areas of opportunity. So, bear with me as I bore through some numbers.

For example, if a hospital has 6 Full-Time Equivalent employees per adjusted patient day (a ratio of staffing compared to patient volume) and the benchmark for a hospital of equivalent size, geography, acuity, etc. is 4.7, chances are you have an opportunity to reduce staff somewhere in the facility. But where? Let's look at a single department next. Say environmental services expends 3 hours per 1,000 square feet versus a benchmark of 2. OK, maybe this an area for further exploration. Now, we get to the important part. What do the housekeepers do, and how do they do it, compared to the benchmark you're measuring against? For example, if your hospital has housekeepers changing bed linens while another hospital uses nurse aides you're not comparing apples to apples.

I don't want to run on forever here, so let me get to the key points. Involve as many functional area leaders as possible in evaluating opportunities for staff reductions. Start with metrics, benchmarks, key performance indicators or whatever, as a starting point. But examine processes carefully to identify where the reductions should occur.

CFOs and the Business of Quality

Under the Health Care Reform Act, hospitals will be measured, and paid in part, on the basis of quality indicators. Those organizations that have not heretofore focused on quality will need to do so. Those that have will seek to move to the next level of quality. This is good news for consumers of health care, but equally good for the providers. It's been shown that as efficiencies and protocols are developed, quality rises, as does profitability. So, everybody wins. Need I mention this principle applies to every other industry as well?

What does this have to do with CFOs, you ask? We are critical members of the management team's collaborative efforts to improve quality and to measure improvement over time. We're familiar with key performance indicators and benchmark comparisons focused on such areas as liquidity, productivity and profitability. If we haven't already done so, we need to create similar, relevant statistics and meaningful reporting focused on quality indicators as well. There are a number of published statistics and benchmarks regarding numerous quality indicators, from reinfection rates to slips and falls.

I suggest CFOs be at the forefront of their organization's initiatives to improve quality, by teaming with the operations leaders to identify the strategic quality improvement objectives, develop key metrics to measure progress toward those objectives and create timely, meaningful reporting of progress.

So, for those currently involved, congratulations! For those who are not, what are we waiting for?

Hospital CFO Priorities Shift in 2010

According to the finance component of HealthLeaders Media Industry Survey 2010, quality was moved down as a priority in favor of physician recruitment and cost reduction. No surprise, as financial results suffer the effects of the recession, and healthcare reform has raised the specter of further pressures. The survey is robust and quite comprehensive. I recommend it to you, for a detailed view of CFO's concerns and thoughts.

In an April 15th article by the same organization, entitled Moody's: Health Reform Will Drive Consolidation, Hinder Credit for Nonprofit Hospitals, Moody's Investors Services is quoted as saying healthcare reform will have a long-term negative credit effect on not-for-profit hospitals, even though it will reduce bad debt expenses and charity care. "The key longer-term challenge for the not-for-profit hospital sector is the reform's reliance on extracting long-term cost efficiencies from hospitals, probably resulting in diminished hospital revenues," said Moody's Vice President Mark Pascaris, author of the report, Long-term Credit Challenges of Healthcare Reform Outweigh Benefits for Not-for-Profit Hospitals.
In the Media Industry Survey, financial leaders ranked their top three priorities for the next three years as:

• Physician recruitment and retention (37.50%)
• Cost reduction (35.53%)
• Patient experience/patient satisfaction (33.55%)

Last year's ranking was:
• Quality/patient safety (68%)
• Physician recruitment and
  retention (38%)
• Reimbursement (31%)

During a down economy, recruitment and retention is just one avenue to get a hospital’s finances in shape, revenue management is another big area. The big question to me is, what will the hospital of the future look like, given the far-reaching changes contemplated in the Healthcare Reform Act, and what should the resultant long-term strategies be to prepare for that future? That will shape the priorities for CFOs, going forward.


Fraud: Can We Prevent It?

I may be starting an assignment shortly, working with a developer who has established a group of ambulatory clinical services. One of the concerns I raised with him in an initial interview was the limited amount of financial staff he employed. While he has great confidence in the honesty of the people he employs, I pointed out internal controls are generally weak when a single individual has responsibility for multiple aspects of cash receipts, disbursements and financial reporting. I found an interesting post on a blog called Forensic Accounting Today, written by Jeff Moore of Atlanta, GA. The post, Preventing Fraud in the Workplace, lists ten anti-fraud suggestions and has links to "the Fraud Triangle", "a fraud policy", "the fraud tree" and "red flags of fraud."

Interesting stuff, and the more you read, the more likely you are to be sensitive to the risks of fraudulent activity. I plan to use Jeff's suggestions as I educate my new client.


Accounting - Art, Science...Or Manipulation?

I've always believed accounting could be viewed as an art or a science. My own belief is that its an art. I don't mean to say the numbers should be inaccurate, just analyzed and reported from more than a straight transactional perspective. To clarify, let's look at a contra-asset account that involves an estimate, like allowances for doubtful accounts. If we prepare a monthly analysis based on consistent formulae, we derive a number for the allowance. If we book that number based on each month's analysis, we may end up with dramatic fluctuations based on circumstances that could change month-to-month. This would cause the financial statements to reflect those fluctuations, giving rise to concerns that may be unfounded. In my view, it's preferable to smooth out these fluctuations by adjusting the allowance to reflect what we know to be the trends. With a thorough knowledge of the company and industry on which we're reporting, we will have a high level of confidence that the year-end result will be accurate, but with less periodic fluctuation. This is what I mean by art, rather than science.

Ah, but what about manipulation or obfuscation? If by our art we make the reader so confused or the numbers so opaque as to be difficult to perceive or understand, we're now treading in fraudulent waters. In a March article by Sarah Johnson, in CFO Magazine, entitled "Now You Don't See It", the author illustrates through example how auditors are less likely to find manipulated earnings when management directs their attention away from areas of financial statements that contain errors. It behooves all of us to ensure we don't fall into that trap. I would be interested in your thoughts on this matter.


Not-For Profit Tax Exemptions in Peril?

Ther's a lot of buzz around the Government's scrutiny of not-for-profit enterprises. Not surprising tax exemption is being looked at, given the Federal and State budget deficits. A recent article published on the Healthcare Financial Management Association website, entitled  Tax Exempt Status: Additional Scrutiny on the Horizon?, stated "Regardless of (healthcare) reform’s ultimate fate, providers should anticipate increased federal scrutiny in this area. Given the fiscal difficulties currently being experienced at all levels of government, it’s not hard to see challenges to tax-exempt status on the horizon for many providers."  I feel certain such challenges won't be limited to healthcare organizations. The revised Form 990 has a Schedule H, to be filed by non-profit hospitals. A good summary of the shortcomings of this form in assessing a hospital's charitable works is presented on page 54 of this month's issue of Hospitals and Health Networks magazine. "Fix Schedule H Shortcomings", by Bradford H. Gray and Ashley Palmer, makes the point the expenditures measured on the form are, at best, a crude measure of community benefit. For example, they say, how does one use expenditures to assess programs to reduce teeenage pregnancy? As another example, is the value of sustaining a money-losing program that provides needed services best measured by the amount of services it requires? And, if you're industry is not healthcare, get ready for similar scrutiny. It will be up to the not-for-profit industries to convince the government as well as the public of their charitable or educational mission and the appropriateness of continued tax exemption. I'm interested in anyone's thoughts about dealing with this critical issue.

Cart Before The Horse? Transactions Dictate Financial Modeling

I'm working on a joint venture involving the acquisition of hospitals. The principals involved in identifying the first target hospital described a lease-purchase transaction. Spent a good deal of time creating financial pro formas reflecting what operating results would look like post-transaction. Then, an investor was identified and he's contemplating a totally different scenario. Guess who calls the shots? Now, we're trying to nail down just exactly what the transaction will be, so we can re-do the projections based on reality. Lots of time and resources wasted. The lesson learned? Getting busy with analysis before understanding where the project is ultimately heading is a supreme waste of time.
Have you ever found yourself in a similar situation?


HCA - One Way to Pay Those Big Bonuses

At one point in my career, I worked for a division of Hospital Corporation of America. As I learned about the company's origins and strategies, I discovered they were both creative and bold. They were one of the first national hospital ownership and management companies, founded in 1968 by a doctor in Tennessee. Not so coincidentally, at the time Tennessee's (and their Blue Cross plans) reimbursement to hospitals was amongst the most liberal in the country. Blue Cross paid 90% of a hospital's charges! Guess where the first hospital they acquired was located? As they grew, they targeted other Southern states with similar reimbursement and demographics. HCA is now, of course a giant, national hospital chain.

This is not to take away from the company its strong focus on effective management and operational excellence. But I draw your attention to the front Business page of today's New York Times, and the Dealbook article by Andrew Ross Sorkin entitled "Investors Extract a Payout". We all know the public uproar about investment banks paying shovelfulls of bonuses to its managers. So, here's where HCA's creativity and boldness is exhibited.

HCA announced last week that it was paying its shareholders a $1.75 billion special dividend. Just a bullish sign of the healthcare industry's health? As the Times points out, HCA was taken private in 2006. Its buyers included Merrill Lynch, Bain Capital, Kohlberg Kravis Roberts and, yes, some of HCA's own managers, along with a giant loan from a syndicate of banks. So, who's getting the dividend payout? You get my point? And this at a time when HCA has $25.7 billion of debt it still needs to pay off.

I still respect the management of the company. After all, its been tremendously successful. My question to you is (and its not rhetorical) - Is this an example of HCA's boldness and creativity, or a sneaky way to hand out "bonuses" under the radar?

Are You An Introvert?

Don't mean to put us all in one pot, but in my experience many finance people tend to be introverts, like me. If you feel this has a detrimental effect on your ineractions in the workplace, I've got a book to recommend to you - The Introvert Advantage, How to Thrive in an Extrovert World, written by Marti Olsen Laney, Psy.D.

It's an interesting paradox. Accountants, financial analysts and such often chose their careers based partially on their personalities. Among other characteristics, they like quiet for concentration, like to work on long, complex problems and have good attention to detail. Introvertive much?

Yet when one rises to a CFO position and is expected to lead, mentor and rally the troops, a totally different skill set is required. Extroverts respond quickly to requests and spring into action without much advance thinking. They like to be part of the majority opinion and feel isolated without management support. They enjoy phone calls and see interruptions as a welcome diversion. With due respect to extroverts, I don't see these characteristics  as particularly valuable for a CFO to have. Do you?

So, what's the takeaway here? Both introverts and extroverts can influence their own styles, while recognizing their natural leanings. Either can become a great CFO.

I work with a personal coach, and she is terrific. It was only in my last CFO position she helped me realize my introverted tendencies were hampering my performance. My coach recommended this book, and I found it extremely helpful.

Are you an introvert or an extrovert? How has it helped or hindered you in your career?


Measure, Monitor...and Be Flexible!

Part 3 of 3

We've talked about creating a model that lets us know where our organization is, with respect to the critical functions, so we know where we're starting from. Only then can we prioritize and aggressively seek solutions to our most critical issues. Once the model is in place, we don’t want it to sit on a shelf! Periodic (no less than monthly) status reviews must take place. Where timetables are not being met, serious dialogue must be entered into, to get things back on track. A periodic progress report to Senior Management should also be incorporated in the process.

A side, and not so incidental, benefit of the process will be the development of performance metrics to facilitate measuring progress toward the goals inherent in certain of the tasks. Again quoting from “Hospital Strategies for Effective Performance Management”, “ …performance management rests on a relatively straightforward process of monitoring core metrics to gauge how well the organization is reaching its goals and adjusting strategies accordingly. …Effective management of healthcare organizations, therefore, requires looking at more metrics and comprehending a wider scope of information than most businesses. Only by developing a deeper understanding of performance drivers can leadership address such an incredibly complex environment involving everything from clinical care and patient satisfaction to cash flow and supply chain costs.”
Finally, flexibility is crucial. As the organization's’s situation and the impact of external factors (regulatory, reimbursement, competition, etc.) evolve, priorities and timetables will shift, and must be reflected in the model.

The development of such a model is admittedly a time-consuming task, involving much collaboration. In some circumstances, it may even require external assistance – “CFO Extenders”, if you will. But the benefit of this exercise should be readily apparent. You will identify and address those areas of opportunity to strengthen your organization, focusing on the basics and positioning yourself to meaningfully attack the imperatives for future success.

Good luck, and let me know whether this discussion has proved helpful.


Putting The Concepts Into Practice

This is a continuation of  the previous blog

So...we want to develop a comprehensive set of requirements. Drawing on the expertise of the office of the CFO, along with  other C-suite executives and input from subject experts within or external to the organization, this list should delineate the preferred state (“best practice”, if you will) of every policy, process and analysis that provides the underpinning of the organization’s fiscal health and supports strategic direction.

I can't overemphasize the importance of collaboration, both vertically and horizontally, in this process. A January 6, 2010 Healthcare Financial Management Association report – “Hospital Strategies for Effective Performance Management”, in discussing the structure that best supports improvement efforts, points out “…performance typically is strongest when authority is decentralized and those developing strategy as well as those responsible for implementing strategy work together to formulate plans for growth and solutions to performance issues.”

Delineate the items, and evaluate both their acceptability within your organization and status of their completion. Priorities can than be identified, responsibilities assigned and timetables for completion projected. The finished product will be shared with all appropriate parties. With buy-in from all internal constituencies, you will have a living, dynamic document that can guide the collective effort.

A Proposed Model
If all of this sounds a bit vague or too all-encompassing, perhaps a visualization of the model will serve to clarify. While other models may work equally well, I'll describe a multi-tab spreadsheet that I'm familiar with.

• Each spreadsheet tab relates to a particular function, for example Controllership, Capital Structure, Quality, Strategic Transactions, IT, Risk Management and so forth. While such categories are universal, your organization’s particular situation may dictate additional components. If your organization is financially distressed  for instance, there may be a Turnaround tab.

• List on each tab the one-line sub-function tasks. Let’s look at the IT function. If, as it should be, your objectives are to link IT strategy to organizational strategies and to leverage your IT budget, sample one-liners might include:

o Analyze current state of financial processes and potential to rationalize, scale and automate them
o Verify the fit between improved financial systems and the company’s infrastructure, to ensure that improvements
o Ensure that adequate training is provided and financial systems are integrated with business processes, and so on...

• Having obtained input for these tasks from a wide cross-section of the organization, the draft document can be reviewed, edited, pared down and rearranged as deemed appropriate by the document owner (I suggest that be the CFO). Following this process, each contributor should be given an opportunity to review their section(s) of the draft, and be requested to sign-off.

Facilitate Accountability

• Priorities, responsibilities and timetables must be assigned. The manager with oversight of each function should take the first shot at this. The CFO should then meet with those managers to review, debate and negotiate the final draft. Then, review with the CEO and the rest of the senior management team, for buy-in.
Tune in next time, for a view on how to effectively deploy the model, to strenghten your organization by, in part, linking it to performance drivers.

And, again, what I've described is just one model.  I would be interested in other models you may have seen or be working with in your organization.


What's a CFO to do?

Although the content of this post is related to the healthcare industry, it's really applicable across all industries (All you need to do is substitute, for the italicized healthcare-specific issues throughout this post, those issues of major impact your industry is facing now and in the future).

Bob Dylan was, in fact, prophetic: "The times, they are a’changin’". And, yes, the issue of wrestling with rampant change is popping up in every professional journal and newsletter. What with healthcare reform, integrated electronic health records, depressed investment dollars, pressures on cost containment, pressures on physician income, quality metrics…well, you get the idea.

I maintain the question is less “How do we address the multitude of critical issues concurrently?” than “How do we know where we’re starting from? How can we can identify our most critical issues, prioritize and aggressively seek solutions, in the midst of so much pressure and confusion?”

The future viability of your organization will likely hinge upon the following seven imperatives (among others):
  • Focusing on quality initiatives, measures and outcome reporting 
  • Strengthening and internalizing a compliance culture
  • Identifying opportunities to maximize revenue, streamline costs and manage cash
  • Developing and reporting key metrics tied to organizational goals
  • Developing and implementing an electronic health record system
  • Finding ways to partner with and bond physicians to your organization
  • Enhancing product line accounting, to facilitate decision making and identify strategic opportunities
But here’s the rub: You’ve got to walk before you can run. You need to ensure every basic control and process in support of your higher goals is in place.

How Do I Start?
I’m sure you're functioning as an effective strategic partner with the rest of the C-suite team. Taking that as a given, you will find it productive, as a starting point, to lead the effort of developing a comprehensive set of the basic requirements or "best practices", categorized by area of risk or opportunity and by function, that are the underpinning of a strong organization.
My next post will walk through the manner in which you might work within your organization to get such a project off the ground in an effective, collaborative way. A subsequent post will describe one model that can be used to put the concepts into practice.

Meanwhile, let me know what you think of this as an approach to developing an effective starting point, before digging in to conflicting priorities?