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5 Nuggets of Wisdom from CFOs

 |  By kminich-pourshadi@healthleadersmedia.com  
   January 09, 2012

The Next Phase of Cost Containment is HealthLeaders Media's latest Impact Analysis report, based on survey data and a roundtable discussion with five of the nation's top healthcare CFOs. The report highlights how these leaders are addressing the need to contain cost increases, but it also underscores a looming issue for healthcare organizations. CFOs may feel more like jugglers than financial leaders in 2012 as they navigate a trio of costly technology transitions, including the meaningful use mandate for electronic medical records, the implementation of HIPAA 5010, and ICD-10 deadlines.

With so much to accomplish and finite resources to work with, here are five nuggets of wisdom mined from our CFOs to guide you through 2012:

1.When it comes to technology, know the difference between want and need. "A lot of people don't understand the difference between expenditure and investment. … I put IT definitely in the investment category," says John Dragovits, executive vice president and CFO at Dallas's $1.1 billion Parkland Health & Hospital System.

There was a time when technology was a want, but now failing to have the right technology in place can mean your organization will miss out on stimulus payments. Consider the government incentives for meeting the meaningful use deadline on EMRs (also known as Stage One).

Adding an EMR and using it in a "meaningful way" falls under the Health Information Technology for Economic and Clinical Health (HITECH) Act, a part of The American Recovery and Reinvestment Act. Stage One of the implementation process should be completed or nearing completion at many healthcare organization, as billions of dollars in stimulus payments are at stake. To attain the maximum incentive payment, Medicare-eligible organizations must begin participation by 2012. Incentive payments for eligible hospitals began in May 2011. The amount an organization will receive is based on several factors but begins with a $2 million base payment.

2.Assess supporting infrastructure in labor costs. "We struggle with the infrastructure that supports patient care. … I don't think we have a good handle on how much is enough and how much is too much," says Edward Miller, CFO at Floyd Memorial Hospital and Health Services, a 219-bed health system in New Albany, IN.

If you are struggling to assess any area in your budget—especially labor—it may be because you are using old methods in a new era of healthcare. You need to find your true cost of each and every procedure, so you can understand if you are staffing correctly.

Though the ratio of costs to charges and relative value units are the most common methods for assessing the cost of operating a service line or procedure, these can both fall short at arriving at the true cost of a service, say several experts I spoke with recently. For instance, the 73-hospital system Catholic Health Initiatives uses an entirely different cost accounting method called process-based cost modeling to get at the true cost of a procedure. It's keeping the organization's expenses down, according to Doug Wickerham, vice president of CHI corporate finance.

There are also other cost accounting models to consider using in 2012, including micro-costing and activity-based costing. Both can be superior to the diagnosis-related groups (DRG) system.

"Hospitals are constantly looking to see which DRGs are winners and losers, but the problem is … even the DRG is only roughly 85% accurate," explains David W. Young, professor emeritus in the Health Sector Program at Boston University's School of Management.

"Activity- or process-based costing is a careful assessment of direct costs. Why does it take the tech x minutes to do the MRI, for instance? … From this, some efficiency and process improvement can take place with overhead. You can ask, 'Why do we have one person scheduled for an MRI versus a CT?' When you know those answers you can make [informed] personnel decisions," he explains.

3.Put patients to work for you. To schedule my annual physical this past year, I decided to email my provider. The physician's office, which is part of a large Massachusetts hospital, responded a day later with three available time slots. I replied the same day with the time that fit my calendar. Though my appointment was scheduled without a phone call, the process still seemed a bit antiquated. In the age of technology, why couldn't I simply see a physician's availability in an online calendar and then select an appointment time? I can do that to get a massage or a haircut or schedule car repairs, but not to see my doctor. Seems a bit backward.

I'm not the only one who thinks self-scheduling is long overdue in healthcare. There's money to be saved.

"Having MDs and their office staff spending time managing their schedule is not a good use of their time. … We're implementing self-scheduling for our customers, essentially using patients to perform clerical work we currently have to do ourselves," says Dennis Dahlen, senior vice president of finance and CFO at Banner Health, a $4.7 billion organization in Phoenix.

Labor costs are high in healthcare, but finding where to trim is challenging. You don't want to eliminate staff to the detriment of patient care. By having your patients do some of the work booking their appointments online, there may be an opportunity to reduce your costs.

4.Empower staff to reduce expenses. "The most successful year I ever had a prior organization was focusing on the total budget. … We didn't redo the budget, but we focused our department heads on what's happening and what they need to change and gave them the ability to make changes themselves," says Beth Ward, former executive vice president and CFO at the $700 million, eight-hospital Wellmont Health System in Kingsport, TN.

Your organization's staff knows the correlation between the need to cut costs in order to keep jobs and a strong bottom line. Give them the authority to make cost-reducing decisions and you may be surprised how much you save this year.

An excellent example of this type of leadership is that of Jim Dague, CEO at IU Health Goshen (IN) Hospital. He promised employees that if they could shave $3.5 million off the budget, he'd shave his head. After receiving 4,500 suggestions, the 143-bed organization cut nearly $7 million out of the budget—and he got a $7 buzz cut in exchange.

5.Get it together. "It," in this instance, is organization-wide technology. Though costly, converting to a single EMR system brings several advantages: Everyone in the organization has access to the same information, There is less chance of ordering unnecessary tests (and then losing the reimbursement when a payer refuses to pay), and EMR improves population health management. If hospitals work with local group practices to implement a shared EMR system, all area healthcare providers can begin to track patients, especially those with chronic conditions, on a wide scale.

"It is a way of finally getting us to interact and share information together. It's the beginning of what we need to do organizationally to start acting as a true system, as opposed to disparate groups within a larger whole," says Greg Pagliuzza, CFO at Trinity Regional Health System, a 25-hospital system in Rock Island, IL, with annual revenues over $2.3 billion.

Unquestionably 2012 is going to be a watershed year for CFOs to help their organizations meet numerous technology deadlines. Containing cost will be exceptionally challenging as the monetary outlay for this technology continues. However, by applying some of this advice and reframing your approach to cost reduction, you may find some new and innovative strategies to get the job done.

Karen Minich-Pourshadi is a Senior Editor with HealthLeaders Media.
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