During the past few months, I’ve noticed a number of articles discussing
the changing role of a healthcare CFO. One article mentioned the growth
in unpredictability CFOs would be faced with because of healthcare reform.
Increasing financial risk would be another new issue for the CFO to contend
with because of new reimbursement models. Significant capital investment
in population health management was also mentioned as requiring the CFOs
attention. I read these articles in my home office with a smile on my
face. Because while it may seem and feel new to some, most CFOs in the
late fifty to sixty age bracket have seen all of this before.
I left public accounting in 1987 to become CFO of one of my clients. For
those too young to remember, in 1983 the Health Care Financing Administration
(HCFA) implemented the Inpatient Prospective Payment System (PPS) which
converted Medicare from a cost reimbursement methodology to a prospective
payment methodology. The most visible artifacts today of this legislation
are the 600-900 bed hospitals that have been converted to some other use
or are running at occupancies of 25-35% of what they were prior to the change.
The response by many healthcare organizations to this new legislation was
the formation of the integrated healthcare delivery system comprised of
organized/employed medical groups, development of insurance vehicles (HMOs)
and hospitals. In the early eighties, almost 90 percent of all HMOs were
nonprofits. Today these vehicles are going by the name accountable care
organizations (ACOs). When HMOs were getting traction in the late seventies
and early eighties, the business strategy was to compete on quality and
price. (Sounds like today’s definition of patient value) The theory
behind the original HMO concept was to compensate physicians for preventative
medicine in hopes of reducing hospital utilization. Unfortunately, many
of these integrated delivery systems were dismantled in the nineties because
the cost of physician employment was too high or the financial risk associated
with owning an HMO proved too much for many governing boards.
The irony in all of this is the market conditions that have brought about
the latest phase of healthcare reform are very similar to those of the
late seventies that brought about DRGs, HMOs, integrated delivery systems
and a hope for improved quality and lower prices. The interesting twist
is despite a more than doubling on what is spent on healthcare since DRGs
were introduced. We’re still in the same place with effectively
the same proposed solutions under different names. The trigger for the
latest healthcare reform legislation was the growth of the uninsured to
almost 40 million people. The politicians decided that wasn’t acceptable
so included in the legislation an approach to provide health insurance
for everyone (or almost everyone).
Hopefully, I’ve convinced the CFOs out there most of what is being
touted as “new” isn’t new at all. But there are somethings
that I see as being really different today versus in the 80’s. First,
transparency is growing exponentially and is going to accelerate. Second,
the industry has a ton of learning/experience of what worked and didn’t
work through the eighties, nineties and into the 2000s. The challenges
are the same!!! Learn from your predecessors mistakes. If you allow your
organization to repeat the same mistakes your predecessors made shame
on you!!! If the strategy is the same, what’s going to make the
outcome different? Third, the really big issue facing CFOs and your organizations
today is common to every business in America-improving customer value-
better quality, easier access and affordability. Consumers are used to
innovation giving them more for less in almost any other area they spend
money. Higher deductibles and healthcare spending accounts (HSAs) are
going to unleash a “consumer” reaction to healthcare. Let
me make my point this way. Every morning for the last several weeks the
local morning TV show has a reporter at a gas station where the gas price
is precipitously lower. I’ve watched the price drop from $2.69 a
gallon to today it was $1.69. Inevitably, the reporter interviews someone
that’s filling up one car and going back home to get the second
car filled up. So here’s my point. The gas station by my house is
selling gas at $2.29 a gallon. That’s a $.60 a gallon difference.
Let’s assume a 25 gallon fill-up that’s $15 dollars times
two vehicles that’s $30 dollars. Typically, by the end of the broadcast,
the reporter shows the huge lines of vehicles at the station waiting for
the savings. This illustrates consumer behavior and it is coming to healthcare.
One advantage you have that your predecessors didn’t have is there
are many more alternatives to find partners that all ready have the expertise
to do what you need help doing. If you are recreating the wheel, stop
and ask yourself is this really a core competency? Population health management
is what HMOs attempted to do in the integrated delivery system 25 years
ago. It was really really hard to do. Ultimately, they mostly all quit
trying. Understand it translates into keeping people out of the hospital.
I sat in executive team meetings listening to the HMO guys argue with
the hospital guys because they were operating at cross-purposes. Check
to see if your organization previously owned/partnered with an HMO before
you spend a nickel on population health management. Are you starting an
ACO? Do the hospital folks understand it’s purpose isn’t to
fill the empty hospital beds? Are the metrics for success clear to everyone?
Delivering customer value is a risk inherent in any business. Because most
hospitals have been caring for Medicare patients ever since the advent
of DRGs at a loss, there was risk. This risk has been mitigated by charging
other patients more. Understanding where risk exists and being able to
develop strategies to mitigate that risk has always been the CFOs role.
Is there more or less risk then back in the 80’s, I don’t
think so. The question the CFO must ask is the team we are operating with
capable of performing at the new expectation levels of value. Can we mitigate
the new risks we are facing?
I started what’s new with transparency. Information has become ubiquitous
in our lives because of social media and technology. A significant challenge
facing CFOs today vs. 20 years ago has to do with information explosion.
For example, your payor, whether the government, an insurer or an employer,
has and is using more information about how patients are spending their
healthcare dollar and the outcomes being delivered then ever before. This
information is going to be used in future decision making processes to
determine if your organization’s value is better or worse then other
providers. Ironically, departments reporting to most CFOs are generating
this information. CFOs must have an equal to or greater awareness of this
information. Knowing whether or not your organization is a high or low
value provider of care will ultimate determine success or failure. If
you have poor quality in certain medical areas, employers will steer business
somewhere else. If your prices aren’t market competitive, patients
will go elsewhere. In the event this sounds too dramatic or theoretical,
I suggest you get the book, The Company that Solved Healthcare: How Serigraph
Dramatically Reduced Skyrocketing Costs While Providing Better Care, and
How Every Company Can Do the Same, by John Torinus and also check out
The National Business Group on Health and Tower Watson’s Annual
Employer Survey on Purchasing Value in Health Care. For those not interested
in these options, check out the website spendwellhealth.com. All provide
very useful insight as to what new approaches are being implemented on
the buyers’ side of healthcare.
Finally, I don’t think the following are changes to the CFO’s
job. I do think they are critical roles for CFOs to be comfortable playing.
Change agent. Not all organizations are going to make the journey necessary
to be successful in the “new” healthcare world. This includes
being highly efficient. Develop processes to eliminate waste. Real-time
measurement tools are necessary so everybody knows what their contribution
toward winning is. Having people explain budget variances at the end of
the month is a waste of time. Adjustments need to be made in real time.
Support agility and adaptation. If you’re in a hierarchical organization
(most healthcare organizations are), change will be hard because the hierarchy
is designed to protect the status quo. Create information flow that flattens
the hierarchy and increases agility.
Rightly or wrongly, I believe superior patient care, superior quality,
superior outcomes and affordability have always been the theoretical objectives
of our healthcare delivery system. Unfortunately many factors have influenced
the delivery model off course. Adaptive systems have shown us that self-correction
is inevitable. As a CFO, enjoy the journey.