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CFOs Take on Bigger Roles as Strategic Advisors

Analysis  |  By Gregory A. Freeman  
   January 15, 2018

With the healthcare industry landscape so uncertain, CFOs are feeling pressure to 'advise on the financial impact every decision an organization makes.'

Healthcare CFOs are increasingly becoming strategic advisors for their organizations, with stakeholders looking to them for answers about how they should best position the hospital or health system.

CFOs are feeling the pressure to trade in their spreadsheets for crystal balls, when what they really want is a good way to integrate long-range financial planning with the tactical cost reductions they are implementing every day.

The changing landscape for reimbursement and the uncertainty over issues such as health insurance legislation mean that there is more focus on the financial impact of every decision made in the boardroom and the C-suite, says Jay Spence, vice president of healthcare solutions with Kaufman Hall, which provides consulting and software solutions to the healthcare industry.  

Making the call

"[CFOs] are being asked to determine and advise on the financial impact of every decision an organization makes. They need to be able to project out multiple versions of the future, multiple scenarios," he says. "The idea of making assumptions about the future and then having one forward-looking plan could be done 10 or 15 years ago with a fair amount of confidence, but not now. They're being asked to do that with multiple possible scenarios now."

It is becoming critically important for CFOs to be able to support initiatives-based and scenario-based modeling capabilities around financial planning processes, Spence says. That means being able to set baseline assumptions around market volumes, reimbursement rates, and cost structures.

"That's what they will need to keep operating margins back, maintain a certain amount of capital spend, and have a certain operating margin to support that. All of those things are impacted by the decisions that have to be made on a daily basis, and healthcare organizations are increasingly looking to the CFO for the answers," Spence says. "CFOs are feeling the demand but they are not always sure how they are going to predict the future and make the right call."

The plight of today's healthcare CFO

In the company's 2018 CFO Outlook report, 95% of surveyed healthcare CFOs said they are experiencing increasing pressure to have greater insight into how financial results impact business strategy, and 90% think their organizations should be doing more to leverage financial and operational data to inform strategic decisions.

Cost reductions were the biggest concerns for CFOs heading into the new year, but CFOs also expressed concern that they lacked the proper tools to reduce costs.

Ninety-six percent said that cost transformation is a "significant" to "very significant" need for their organizations today, but only 25% had confidence in the accuracy of results in their existing cost accounting systems.

The lack of tools often results in insufficient processes, Spence says. CFOs are limited in their ability to integrate and make efficient planning and monitoring activities across management levels in their organization, Spence says, noting that approximately half of CFOs indicate that their organizations have outdated processes and insufficient tools for effective financial planning and analysis.

"Many healthcare organizations struggle to link their long-range financial plans to the operational and capital budgets. They don't have that integrated planning process," Spence says. "They need to be able to say, 'Here is our baseline projection as we look ahead, and here is the incremental impact of these various go-forward strategies, whether those are partnerships, new acquisitions, or service line rationalizations. What is the impact if we choose to grow certain service lines or reduce others?' "

CFOs need the ability to model those scenarios dynamically, to have the organization's long- range financial planning influence their short-range tactical decisions, Spence says.

Only 15% of surveyed CFOs say their organizations are "very prepared" to manage evolving payment and delivery models with current financial planning processes and tools, and only 25% are "very confident" in their team's ability to quickly and easily make adjustments to strategies and plans.

Patient-level cost accounting is becoming more useful for CFOs, Spence says, giving them a granular understanding of the cost of providing care across their service lines and where there might be opportunities to improves processes.

CFOs also are working more closely with chief medical officers and other clinical leaders to reduce costs, he notes.

The factors that led CFOs to this position are continuing, with no reason to think they will end soon, Spence notes.

"The cost of providing care is going up at a faster rate than the reimbursement for that care," he says. "The hospital operating margin is very tight now and it's getting even tighter. The integrated financial planning process helps healthcare organizations understand what kind of cost-reduction activities need to take place, in light of the trajectory we're seeing in volume, the reimbursement expectations, and our cost structure."

Gregory A. Freeman is a contributing writer for HealthLeaders.

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