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 thehealthcareblog.com.
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 OneWire.com, 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 OneWire.com.

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 OneWire.com. 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 OneWire.com.

• 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 OneWire.com?

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 OneWire.com 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?