What Every CMO Needs to Know About Finance

It isn't all about clinical care. CMOs need to know how the money works.

CMOs shouldn’t only be concerned about clinical care, says Lee Scheinbart, MD, chief health affairs officer at the Burrell College of Osteopathic Medicine. They should also have a good knowledge of finance.

While CMOs concentrate on clinical areas such as patient safety and care quality, they also impact the bottom line at healthcare organizations. For example, managing cost of care is a key financial component of care delivery, and CMOs must understand financial connections like this to help ensure the success of their organizations.

"In leadership, it is imperative to have an acute understanding and keen awareness of the environment," says Scheinbart, the author of The Chief Medical Officer’s Financial Primer: The Vital Handbook for Physician Executives, which was published by the American Association for Physician Leadership. "Unfortunately, while physicians are expertly trained and highly specialized in clinical care, they do not always come with the knowledge of the finance environment that wraps around everything that a healthcare organization does."

"If there is a lack of awareness of the finance environment, it is an impediment to the success of all the stakeholders," he says.

Cost of care

Health system and hospital CMOs need to understand the cost of care at their organization, Scheinbart says.

"Early on, hospitals charged for the cost of care based on the cost of gauze, Band-Aids, and X-ray plates, for example, and it was passed on as a straight charge and payment was expected," he says. "We are nowhere in that universe anymore."

Cost of care has become more complex, Scheinbart says.

"To pay for hospital costs, there is a highly complex system of players who are involved in the dollars when the patient is in the hospital," he says. "So, the CMO needs to understand the cost of everything that occurs for the patient to bring value back to the hospital."

A CMO needs to know what costs are being incurred, who manages those costs, and the impact of those costs, Scheinbart says.

"If you carry these costs forward to the net margin of the institution and how that margin plays a significant role in the future prospects of the organization, not every CMO understands the criticality that they bear when it comes to the success of the organization," he says.

Revenue structure

CMOs also need to know the revenue structure of the organization.

Healthcare isn't like a kid's lemonade stand, Scheinbart says. CMOs need to be aware of not-so-straightforward transactions.

"Third parties pay for the care and adjudicate the payment in the process of the billing, claims, and collections," he says. "Those elements ought to be understood by CMOs because not everything is a straight payment. There are pathways and processes that bring the dollars into the organization. Then embedded in that are both incentives and penalties, particularly from the Centers for Medicare & Medicaid Services (CMS)."

A CMO, he says, may be tasked with improving a domain that is measured through Press Ganey, such as communication with doctors. That, too, has financial implications.

"There are questions that patients are asked when they are filling out their Press Ganey surveys," Scheinbart says. "When those surveys are collated, the results are given and there is a score. There can be money associated with the score. CMOs need to work with their revenue team and compensate physicians appropriately in their contract linked to that domain."

Press Ganey scores impact a hospital's CMS star ratings, which are indirectly tied to reimbursement from Medicare.

"The higher the star rating for the hospital, the greater payment to the hospital through value-based care," Scheinbart says.

Financing of health systems and hospitals

Above all else, Scheinbart says, CMOs should have a good understanding of how their health system or hospital is financed.

"A CMO might spend a lot of time dealing with quality and credentialling, but what they really ought to be doing is driving the financial health of the health system or hospital, so that the organization has working dollars to put back into patient care," he says.

CMOs should collaborate with CFOs to get a clear understanding of a health system's or hospital's financial structure and give CFOs a better idea of how clinical care affects those finances. The more CMOs and CFOs work together, the better their decision-making will be.

"CMOs may be responsible for a significant portion of quality and safety of patient care, but their efforts may lower the financial stability of the organization," he Scheinbart says. "This can hurt the bond rating for nonprofits or the underwriting ability for for-profit organizations."

For example, if a CMO does not manage cost of care, it can hurt the bottom line.

"In a nonprofit setting," he adds, "some CMOs who are new to the role may not understand that a $2 billion health system has a 3% margin, which is $60 million. That $60 million must be returned back into the health system by law. That $60 million gets carved up by every interested stakeholder, such as department heads who want an endoscopy suite or a patient transportation system."

In that case, a CMO must know how to advocate for care delivery improvements and be able to explain how those improvements boost the bottom line.

"For example, the CMO may understand that the work they do on length of stay elevates the health system by $1 million or $2 million in terms of revenue on the balance sheet," he says. "Then it is reasonable for the CMO to seek $350,000 for new software, so they can improve quality."