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What's a CFO to do?

What's a CFO to do?

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 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.