This article appears in the February 2012 issue of HealthLeaders magazine.
Almost half of healthcare finance leaders (42%) feel the healthcare industry as a whole is on the wrong track, and more than a third (34%) are undecided as to whether healthcare is on the right or wrong track, according to the HealthLeaders Media Industry Survey 2012.
HealthLeaders Media Industry Survey 2012 The priorities and concerns of nearly 1,000 of your colleagues in healthcare leadership are revealed in this year's comprehensive multi-part survey, our fourth annual HealthLeaders Media Industry Survey. Download the Free Reports
As finance leaders prepare for Medicare and Medicaid reimbursement cuts and the demanding transition year leading to the 2013 full implementation of meaningful use, ICD-10, and other healthcare initiatives, the daunting nature of the big picture may be influencing their collective opinion of 2012.
"CFOs will feel less positive in 2012 because there's so much unknown. It doesn't seem like we'll know where we're going until much later in the year. With everything else we have to deal with, we are going to be faced with sequestration and the elections. These are also going to have a significant impact on our futures," says Ann Pumpian, senior vice president and CFO at Sharp HealthCare, a not-for-profit integrated regional healthcare delivery system based in San Diego.
Where do finance leaders place the blame for the uncertainty they feel and the overall healthcare industry mess? According to the survey, the government (48%) and health plans (21%) are to blame. Finance leaders are more likely to point the finger at the government than the 40% of respondents in the Overall Cross-Sector Report.
"There's no other answer than the government is to blame for where we are today," says Pumpian, whose system includes four acute care hospitals, three specialty hospitals, two affiliated medical groups, and a health plan.
"The government is always politically prudent, but that doesn't always bring about the most cost-effective or efficient results. Look at the accountable care regulations; healthcare providers had to push hard just to make it so the patients would be aware that they would be participating in one of these models. Or look at the paper reduction act, which tripled our paperwork," she adds.
Interestingly, while healthcare leaders point to the government and health plans as getting the industry to its current state, most survey respondents feel certain it won't be either who ultimately correct the industry's problems. Twenty-two percent of all respondents and 24% of finance leaders believe it will be the hospitals that save healthcare.
"Hospitals have the deepest pockets and those are the ones that have the ability to effect change," says Pumpian. "Now that a lot of hospitals are hiring physicians and the delivery networks are being significantly streamlined … institutions will have to become all things to all people."
Though the larger healthcare picture is causing concern for all healthcare leaders, when it comes to the state of their individual organization, finance leaders are optimistic. Nearly 60% feel their organization is on the right track, according to the survey.
This may be due to the renewed organizational financial strength hospitals and health systems are finding after several years of cost cutting, says Pumpian. Thirty-five percent of survey respondents say the organization's current cash on hand is 31–90 days, and 36% have reached 91–189 days. Moreover, half (50%) of finance leaders say they have accounts receivable days at 36–50 days, and 27% report it at 51–75 days. Additionally, 58% of finance leaders report a 2011 EBIDA/EBITDA margin of between 0%–3.5% and nearly a third (32%) report it at or above 3.6%.
"There's a lot at stake with investment returns now, so CFO responses may vary with this answer depending on whether these are having a strong financial performance and/or if they are seeing greater operational performance," says Pumpian.
However, she notes, 2012 does offer finance leaders some certainties that 2013 lacks, which may explain why 58% of finance leaders feel positive or strongly positive about their organization's financial forecast.
"We kind of know what we're facing in 2012; that's not where the significant changes will occur. It's what's happening in 2013 and beyond that we aren't as confident about. In 2012 it's all about sharpening our focus for better operational returns."
To achieve that end and to continue to strengthen the financials overall, one area finance leaders will likely concentrate on in 2012 is growth, according to the survey. Fifty-five percent of finance leaders surveyed say their organization will be part of an accountable care organization within the next three to five years, with half expecting to be part of the Medicare Shared Savings program and only 16% planning to participate in a commercial ACO.
Adding or expanding service lines may also be on the agenda for hospital and health system finance leaders, with the survey showing the most likely areas for growth to be: geriatrics (66%), cancer centers (66%), orthopedics (64%), primary care (63%), and emergency medicine (62%). This year may also see finance leaders investing more in capital projects, such as service line expansion and technology; nearly 20% expect to significantly increase the organization's capital spending and another 36% say a slight increase over last year is planned.
Pumpian believes the majority of capital dollars will go toward technology, as hospitals and health systems strive to meet the ICD-10 and meaningful use deadlines. However, some funds could go toward long-delayed equipment and facility upgrades or physician practice acquisitions.
Pumpian says with Medicare and Medicaid reimbursement cuts and initiatives like value-based purchasing hitting in 2012, it's not surprising that finance leaders rank their top three priorities as:
HCAHPS is the reason patient experience is at 58%, Pumpian says. "It's a major component of value-based purchasing and that's a key area for finance leaders. Plus you have to consider market share: How can you move market share from one facility to another? A lot of it comes from word of mouth from satisfied patients," she says.
Cost-cutting remains a priority for finance leaders, with 49% placing it in their top three priorities. Thirty-nine percent of survey respondents report the best opportunity for squeezing cost out of the operation will come from the labor line item. Just under half (44%) of finance leaders report they may cut labor costs by reducing employee benefits, while 38% may also implement a hiring freeze or a pay freeze (23%).
"As a CFO, I don't think any of us see the economy bouncing back soon. We are now in the third year of high unemployment and what we are noticing is that there are fewer procedures being done by choice," says Pumpian. "People are afraid to access care now because they don't have the resources to pay for it. If [CFOs] are seeing a reduction in volume over three years, they may do permanent layoffs because they don't expect the volumes to return. Hiring freezes are one tool we use; we have to use our resources effectively."
This article appears in the February 2012 issue of HealthLeaders magazine.
Samaritan Health Services, a nonprofit network of hospitals, physician clinics, and health services located on the central Oregon coast, is a young organization. Launched in 1997, SHS has grown from one to five hospitals and 85 clinics, caring for over 290,000 patients and offering four insurance plans to over 28,000 members. While the exuberance of youth sparked a great deal of expansion, it also brought forth millions in revenue cycle losses due to poor processes.
Early on, SHS had the foresight to create a central business office to help coordinate its facilities. Nonetheless, some revenue cycle basics got overlooked—namely workflow. Poor processes caused A/R to balloon to 58 days, and unposted cash to hover at $25 million. Dawnell Buell, SHS vice president of revenue cycle, recounts that six years ago, when she moved to SHS from the more tech-savvy Providence Health Services in Renton, WA, she quickly realized that the CBO was hamstrung by manual procedures, paper documentation, limited storage, and two disparate patient accounting systems.
In fact, nearly 85% of the payers that worked with SHS (including the organization's own plan) were sending information by paper, forcing manual entry and posting.
"Here we are an integrated health system and we're getting a manual remittance from our own payer. We were getting 600-800 pages of remittance a week, and it was taking multiple staff to administer our own health plan and manually post payments," she says. "Our processors have to reconcile the funds before deposit, so our cash posting process was just painful. We were using a lot of paper processes and we were in dire need of change."
(Before I continue with SHS' story, I'd like ask financial leaders to pause and do a mental assessment of your billing offices workflow. Do you notice people milling about photocopying and faxing? In the age of Internet technology, the one supply you should see on decline is paper. If not, you may have a process problem. Now back to SHS.)
"We started to look at all the technology that could help us and I thought, 'Do I want an imaging solution?' I have no patience, so I wanted a short set-up time," says Buell. After several months of comparing technologies, SHS selected a payment management and imaging system from OptumInsight. Buell used operational funds to purchase the technology, bypassing the capital expense budget and the need for board approval, which expedited the overall process. In less than 30 days, the program went live at the SHS CBO.
"When folks approach this [type of project] they see huge dollars, and so did I. [We] worked through this and looked at the potential return on investment—we modeled it. What we found was we'd have ROI within one year—and the system did pay for itself in that time. Operationally we saw the benefit within 60 days," says Buell.
The elimination of so much manual work, and so much paper, had a positive effect on morale and the bottom line, she says. The staff quickly latched on to the system and payments were posted swiftly; now unposted cash averages one A/R day, or just $4 million. Plus, within a year the SHS CBO was able to reduce the number of staff overtime hours, reallocate seven FTEs, and save $224,000 in temporary agency fees.
RAC audits prevented paper costs from declining, but even that was a win, Buell says. "We were able to keep our paper costs steady, though we reduced enough paper in billing to bring in another team member to help with audit management," she says. "Audits are very paper-driven; if we hadn't added this technology, then my paper expenses would've increased by 25%."
The remittance and payment processes for third-party payers is already complex, and doing it manually is painstaking. When the ICD-10 transition is rescheduled, the accompanying onslaught of codes will become nearly impossible to deal with manually.
"We're all pulled in so many directions and we're all trying to prioritize projects. Those that have the [revenue cycle] technology see the value, but there are no government penalties for not getting it as there are with EHRs," Buell says. "So it's only natural that we focus on the places where we get penalized. But we have to pay attention to the money that's coming in the door now. If you can get that money posted quicker, then you can use it to your benefit for projects like an EHR."
As financial leaders, you've read countless articles about revenue cycle and how to plug leaks. Sometimes it's easy to get caught up in daily work and become blinded by the familiar. SHS's story is a good reminder: always pay close attention to work process and flow.
Who's to blame for the mess healthcare is in today? According to the finance leaders surveyed in the HealthLeaders Media 2012 Industry Survey, the lion's share of blame goes to the government. Fortunately, survey respondents think they know who's going to fix the situation: hospitals. If that's the case, then I have a suggestion for how healthcare organizations can go about doing that: change your entire cost model and find out exactly what your true costs are.
According to survey respondents, the government (48%) and health plans (21%) are both at fault for where we are today in healthcare. It's a point finance leaders feel more strongly about than any of their C-suite peers who were surveyed.
"There's no other answer than the government is to blame for where we are today," says Ann Pumpian, senior vice president and CFO at Sharp HealthCare, a not-for-profit integrated regional healthcare delivery system based in San Diego, in the survey report.
I agree that the government and health plans are responsible for the current state of things, but let's not forget that some of the blame also rests with healthcare organizations. After all, it's not as if healthcare has been ultra-progressive, especially in terms of adding and using technology or finding better ways to be efficient with resources.
And isn't that what drove up costs and ultimately sparked the need for legislation to begin with?
Sharp HealthCare comprises four acute care hospitals, three specialty hospitals, two affiliated medical groups, and a health plan. Pumpian adds that with Medicare and Medicaid reimbursement cuts and initiatives such as value-based purchasing hitting this year and coming to a head in 2013, finance leaders need to adjust their priorities to keep their respective organizations in the black.
This year's survey shows that finance, leaders rank their priorities as
Patient experience/satisfaction (58%)
Cost reduction, process improvement (49%)
Payment reform, reimbursement (39%)
This order of priorities speaks to the unsettled state of the industry. When healthcare financial leaders are more focused on HCAHPS than on cost-reduction efforts, I think something is askew.
Finance leaders who do want to get serious about cutting costs, may be interested in a different approach to cost modeling called process-based cost modeling. Finance leaders use various terms regarding costing models, so arriving at an exact definition for PBC is challenging, explains Paul Selivanoff, CPA, vice president of finance at the 150-bed St. Helena (CA) Hospital–Napa Valley, part of Adventist Health.
I spoke with Selivanoff while researching a story about PBC in this month's HealthLeaders magazine. Selivanoff has written extensively on the topic and helped implement it at Catholic Health Initiatives hospitals prior to joining St. Helena. He is putting this cost system in place across the three campuses of his organization.
Selivanoff defines PBC as a type of cost accounting that offers CFOs a tool to better understand the resources consumed by tracking all resources used in providing the organization's products and services. It tracks direct costs and allocates indirect costs of processes and services.
Overhead is spread across all billable services without regard to the relationship of the overhead within a specific procedure. Process costing is used to ascertain the cost of a product at each stage of the process.
I can already hear CFOs objecting: "This is full cost accounting; is she nuts? That's hugely time-consuming."
Indeed, PBC and similar variations of this model do require every resource in a service to be manually tallied and updated annually, including the quantity of labor, frequency, supplies used, and unit cost. So, yes, it's a large undertaking. But it is worthwhile.
Keep in mind that healthcare reform will have a big impact on your hospital costing systems regardless of whether you change or not (though not doing so could prove detrimental over time).
If organizations are going to truly ferret out waste and reduce the cost of healthcare, then it's crucial to know the true cost of treatments and procedures.
Organizations will no longer be able to risk slim margins on the previously reasonable guesstimates that come from using ratio of costs to charges and relative value units.
"There's a heightened sense that we need to know what we can and can't afford to do. We need to know what our costs are, what the cost variations are between physicians, between patient populations, and why those costs are occurring," says Selivanoff in the article. "By applying this cost model, we can understand if the services we offer are value-add or not."
Micro-costing wasn't needed in healthcare until now, but healthcare reform makes it essential. It can be daunting to think about making another large change at your organization, especially after adding an electronic medical records system and preparing for the ICD-10 transition. Waiting to make these changes will not, however, diminish the degree of challenge.
Selivanoff suggests concentrating on high-volume procedures first to get at some swift savings, and then incrementally rolling out the program on a larger scale. There is some good news, though, for those organizations already operating under Lean and Six Sigma. This type of approach will dovetail nicely with your pre-existing pursuits to uncover process inefficiency and will help you find and trim more waste.
No one disputes that the current state of healthcare is a mess, but at this point, deciding who's to blame is less important than finding solutions. Healthcare leaders already know where to look: within their own hospitals.
Applying a new approach to cost accounting isn't going to be easy. But it won't be optional for much longer. Like it or not, changing your cost model is an idea whose time has arrived.
Thanks to value-based purchasing and the ICD-10 transition, clinical documentation is on the mind of most every healthcare leader. How accurately a patient's hospital visit is documented will ultimately affect VBP incentive payments and whether reimbursements dip, grow, or stay the same during the ICD-10 transition. Millions of dollars are hinging on your clinicians and coders, so here are two tactics to help you tackle these transitions.
1. Ease in ICD-10 codes now. Clinicians have been documenting patient records under ICD-9 for years. Although there were far fewer codes, documentation still often came up short. So it's not surprising that physicians, nurses, and coders find it a bit daunting to think about the number of new codes required by this 2013 transition—from 17,000 to approximately 141,000 ICD-10 codes.
The leaders at Mayo Clinic in Rochester, MN, are applying this technique. With 212 IT systems spanning a network of physician practices and hospitals across Arizona, Florida, Minnesota, Wisconsin, and Iowa, the Mayo Clinic faces a major task in the coding transition, just from the sheer magnitude of the organization. Mayo's goal, not unlike many healthcare systems nationwide, is for the ICD-10 transition to be revenue-neutral. To meet that end, managers started working with their clinical staff early on, and determined that a slow introduction to ICD-10 would be better received than a full-scale launch on Oct. 1, 2013.
"Instead of one choice for a headache now, there may be five to 10 choices [for codes] and that takes a little getting used to, but to have it happen all at once is very hard on the physicians," says Jeff Thompson, MD, physician lead across the Mayo enterprise.
Mayo Clinic eased the transition by initiating training and technology changes little by little. The first step was to add a few of the expanded ICD-10 codes into their existing coding system, working in more new codes over time. The second step is to show how the current documentation under ICD-9 differs from what will be required under ICD-10.
"As part of our ongoing training, we encourage physicians to get used to mentioning all the complicating factors that will be needed under ICD-10," explains Thompson.
"We target this documentation to help the physicians realize that this [older method] may work now, but under ICD-10 you need more specifics on what the procedure was and what complications occurred with the disease process. We provide the physician with feedback so he or she can understand what they need to start adding now for ICD-10 before October 1, 2013, when it starts affecting revenue," Thompson says.
Thompson stresses that getting physicians engaged now is essential to a smooth roll-out. "Getting them involved early on and helping them understand the magnitude of this and the effect it will have on them personally on the front lines makes a difference. It gives them a chance to help guide the training and strategies that will help them in their everyday work," he says.
2. Beef up your clinical documentation integrity program. Under the second year of VBP, risk-adjusted measures such as mortality kick in. This ups the requirement for documentation. "How do we know physicians are providing specific enough information to give [an organization] credit for the severity of the patient's [diagnosis]?" asks Susan Wallace, MEd, RHIA, CCS, CCDS, director of compliance for inpatient reviews and an AHIMA-certified ICD-10-CM/PCS trainer for the Shawnee, OK–based Administrative Consultant Service, LLC.
"[CMS] will look at those mortality measures over three years, which means hospitals need to work on [documentation] now or it could potentially hurt [the organization]," she says.
Wallace says organizations need to be sure their clinical documentation improvement programs are up to snuff in order to accurately gauge where clinicians may need to improve to meet the ICD-10 requirements.
"Once you have the data, it gives you a sense of the shape your [organization] is in.… You can set up specific initiatives to get the information you need to get your scores up," she adds.
A clinical documentation improvement (CDI) program can be created using an expert coder trained in documentation, though the individual would need to analyze numerous files—a lengthy process. Alternately, organizations can apply technology to help with the review process.
Jennie Stuart Medical Center, a private, not-for-profit organization that comprises a 200-bed acute-care hospital, medical imaging, outpatient surgery, laboratory and rehabilitation services, and an integrated physician network took the technology route to address the upcoming transitions. Starla Stavely, health information management director at the Hopkinsville, KY–based facility, joined the organization in 2010 and quickly added ChartWise CDI software to fix what she says was a glaring problem with clinical documentation.
Stavely says the organization found that the diagnoses and procedures being documented weren't accurately showing the severity of illness or the length of stay of the patients, so the case mix index was below expectation.
"Ailments were being treated but when it came time to code, none of that information was in the charts. It was in the physician notes but no one was getting credit for doing the work. Patients could be very sick, but when it came time to code it didn't look like they were very sick, and we weren't getting paid," she says. "The lower the case mix, the less per case on average you're getting paid [by Medicare]. You could pick up almost any [patient] chart and see obvious [revenue] opportunities."
One month after Jennie Stuart started using the program, the facility calculated a $100,000 profit by coding the correct case mix. The improved clinical documentation is also helping them prepare for the ICD-10 transition by allowing them to gauge the impact the changeover may have on their organization.
Don't wait for 2013 to plan for VBP and ICD-10. By addressing clinical documentation holes now, you can improve your organization's odds of landing on the right side of both of these regulations.
When lanky Stan Laurel joined with pudgy Oliver Hardy, the pairing was visually odd but they fit together flawlessly. With nearly 80% of healthcare leaders pursuing or planning a merger or acquisition within the next year, according to a recent HealthLeaders Media survey, some of the outcomes will be as unlikely as Laurel and Hardy. But health leaders hope their combinations will work as well.
In our survey, which measures M&A interest among C-suite executives, 59% of respondents say they have a high interest in acquiring physician practices, but after that, the level of interest runs the gamut from acute care to hospice and rehabilitation centers.
M&A Drivers
It appears healthcare reform has tipped off more than the need for innovative, patient-centric, high-quality care; it has also sparked the torrent of M&A. Organizations are frenetically trying to develop fully integrated healthcare delivery networks in a very short period of time. And it's the need to integrate swiftly, along with the desire to shore up bottom lines drained by a slow economic recovery and reimbursement reductions, that will continue to drive the trend toward more industry consolidation, say industry experts.
Chicago-based Jones Lang LaSalle, a financial firm specializing in real estate, said in a statement that the growing sense of uncertainty from healthcare reform will only build in 2012, which will have an "increasingly significant impact on strategic business plans for healthcare systems, which will spill over into portfolio and cost rationalization activities and the allocation of capital at hospitals across the country."
Moreover, the uncertainty may encourage healthcare leaders to plan medical office and outpatient facilities that will help foster better physician alignment, the group says. "Health systems with the capacity and resources see this [expansion into outpatient] not only as a necessary action to adapt to healthcare reform but as a competitive advantage acting as a first mover," wrote the organization in a 2012 real estate assessment statement.
Mark Reiboldt, director of financial advisory services for Coker Capital Advisors, the investment banking arm of Alpharetta, GA-based Coker Group, agrees that healthcare industry M&A will continue in 2012, but he says the targets may be changing.
"[Healthcare leaders] realize the options: they can buy a competing hospital, but that requires hundreds of millions and has to be financed. … So, a lot of [leaders] are going back and looking at their strategic plans and realizing that buying a hospital isn't what's needed. Instead it's, 'How can we shore up our physician alignment and physician relations and fill the gaps and spend just a few million?'," he says.
So the hunt is on to find the right partners to create an integrated network without spending ungodly amounts of capital. This course of action actually began to take flight in 2011. There was a slew of merger and acquisition activity in rehabilitation facilities, laboratories, and managed care, according to Irving Levin Associates, which reported an 11% increase in the dollar value of M&A deals of this type.
"It's a lot more complex, more capital-intensive, and riskier to buy a big hospital," adds Reiboldt. "You run into more FTC ruling with anti-trust concerns. Conversely [organizations] can look at a smaller opportunity, like shoring up outpatient, and it undergoes less scrutiny and can be a significant, positive financial hit for them."
Where and Who to Watch
Although mergers and acquisitions have taken place nationwide over the last three years, the geography may narrow in 2012. Organizations in and around urban and metropolitan areas will most likely see the majority of activity, says Reiboldt. Deals will be concentrated in the Southeast, Northeast, Pacific Northwest, and parts of the Midwest.
"There are not a whole lot of incentives to do a deal in California, for instance, because it's so highly regulated versus in the Southeast," he says.
The relationship between physicians and hospitals is changing. "The burden of providing primary care has become so high on the physician practice … that it's limited physicians' alternatives. In order to survive [the practices] either close or work for the hospital," says Reiboldt.
On the part of hospitals and health systems, "There have been a lot of different [employment] models, but more and more we are seeing professional service agreements and less-restrictive joint ventures. I think we'll see even more of that as hospitals evolve away from the thinking that they have to be 'in charge' of everything," he says.
A Laurel and Hardy–type merger that healthcare leaders might see in 2012 is not-for-profits pairing with for-profits. For instance, a not-for-profit health system could join with a for-profit surgery center. "We're seeing a trend where for-profits are trying to get smarter and more targeted on where they are spending capital," Reiboldt says.
The for-profit giants are assessing whether they are spending resources in the right markets. "Organizations like HCA and HMA are stepping back and re-evaluating," says Reiboldt. "They are assessing where they need to be long-term and if there's anything they can do to enhance margin. Volume is critical but there's also only so much volume that [these pairings] can achieve. You still have to be efficient with the capital. So they'll do smarter deals in 2012, but there will still be a few high-profile ones."
M&A in 2012 will depend not only on the need to integrate but also access to capital, which remains challenging for some facilities. Which prompts the question: could healthcare see further investment by private equity firms? Reiboldt thinks it's unlikely.
Private equity investment was a trend in several merger and acquisition surveys in 2009 and 2010. Since then, Reiboldt says he's heard of numerous private equity sponsors interested in healthcare—but once these firms explore the landscape, they find "there's a significant amount of work, resources, expertise and focus involved." He adds that private equity firms that have pursued healthcare opportunities have opted to back experienced, innovative management teams rather than take control of the operation.
"[In 2012] everyone involved in these transactions will need to look at the synergistic value of these ventures. You may not make money on a [medical practice's] volume, for instance, but the more aligned the organizations are, the more likely the volume is to get pushed [to the other organization]," explains Reiboldt.
As you consider your partnership needs and M&A plans in 2012, don't shy away from unlikely pairings. They could be surprisingly complementary.
These days one can hardly attend a financial conference, listen to a webcast, or, in my case, conduct an interview without hearing a CFO bemoan how challenging it is to meet the demands of healthcare regulations while trying to reduce organizational costs. I'm sympathetic, but if you think it's challenging to work around the government, just imagine operating within the belly of the beast, so to speak. Reducing costs and improving quality while answering to the Congress and taxpayers is what your counterparts at the VA do all the time.
To inspire frustrated CFOs dealing with so many mandates, I asked Michael Finegan, the network director for Veterans Integrated Service Network 11 (VISN 11) to share his secrets on making cost reductions and quality improvements in a bureaucracy.
Finegan, who received the John D. Chase Award for Executive Excellence at the 117th annual meeting of the Association of Military Surgeons of the United States last month, oversees eight VA medical centers and 27 outpatient clinics covering more than 90,000 square miles in Illinois, Indiana, Michigan, and Ohio. With an annual budget of exactly $1,978,893,258 to manage, he is accountable for every taxpayer penny.
He received the Chase Award, in part, for his efforts to improve the financial performance of his region—he was able to garner a 15% increase in third-party payer collections. Moreover, Finegan's region has been able to keep the cost per patient nearly flat for the last three years ($6,504 in FY09, $6,685 in FY10 and $6,939 in FY11), no small task as healthcare costs continue to increase nationwide.
Here are Finegan's thoughts on cutting cuts, improving quality, and adhering to budget while entwined in red tape.
HLM: The next era of healthcare will require a lot of innovation to achieve all the goals set forth by the government. With so much red tape, is innovation possible inside the government?
Finnegan: When I joined the VA in 1990, it didn't take long for the mission of the organization to grab me. Not only are we providing care to a very deserving group … but I feel privileged to be a part of what I consider to be a truly cutting-edge organization. We are branded as 'government' but when you go behind that [label] and look at what we are doing here, we are so much more.
There is this idea of the government worker, but we're extremely hard-working people. You have to be creative, too, because the deck is stacked against you. But I think the fun comes from finding the innovative creative types who consider it a challenge to see what can be accomplished in a restrictive, red-tape environment—because you can accomplish great things if you go into it with the right mindset.
HLM: How do you generate financial plans when political changes can affect the direction of the organization as often as every two years?
Finegan: Our planning horizon is different. We plan on a one- to two-year cycle and we receive advance appropriations for those two years. It gives us the ability to look out 24 months—but that's an election cycle, so our planning cycle has to be much shorter.
We have the ability to spend time on our global budget, and it gets us focused on where the pressure points are that we need to work on in the hospitals and which cost centers are increasing without regard to where our next payroll will come from. That's a distraction that can get in the way of taking a longer view of quality improvement issues, and why some quality initiatives can to get pushed to the back burner by those in private sector.
We have gotten better at longer-term and mission-focused planning. We focus on quality improvement, getting data in the hands of the provider and investing in safety—because nobody [in politics] is going to argue against those. We have a capital-rich organization, particularly in the last six to seven years, but that ebbs and flows. When budgets are tight and we hear political discussions, we know our margins will be tighter.
Right now we are focusing on increasing our outpatient presence and community clinics. We've also put a lot of money into telehealth and telehealth clinics recently because we can't be everywhere for every veteran, but we want to try to make contact.
HLM: How was your region able to improve payer collections by 15%?
Finegan: At the end of the day a lot of focus still goes into the fundamentals. You look for economies of scale and quality improvements; we find those investments make a return to the bottom line. But if you're not spending at least half your time on patient safety and quality, then you're leaving money on the table.
We also squeezed the lemon on our [vendor] contracts, but we're getting less savings juice from that now. Cost reduction is an opportunity to put in some Lean process improvement in place. We applied it to improve our flow management and also to our revenue cycle. We are rapidly moving through value stream mapping on other areas, so we're making more progress with Lean.
For our charge capture, we looked at our documentation—was it solid? And we did coding audits. There was really no magic to finding cost savings, but it did take a lot of discipline and focus. You have to get the low-hanging fruit but you also want to be sure you'll get sustainable performance.
[VISN 11] also has a decreasing number of veterans with third-party insurance. Since we don't score charity care, uncompensated care, and bad debt the way it can be done in the private sector, we need to compensate for that. For us it's part of our mission to help these vets, so if our [insurance earnings] are decreasing, we have to maximize what we get from the basic insurance.
When we get a budget increase, we need to show how we used that. Did we see more veterans? Then we need to show how many more veterans the system was accessible to. How did we improve our quality and patient satisfaction, and how many more new programs did we create? We measure the outcomes at the back end of our scorecard to see how much further we are stretching our dollars. We measure our margin not in margins … but look at the real value equation of access to care and quality versus cost.
* * *
Although the VA has a unique set of circumstances surrounding funding, the fundamental challenges that VA facilities face are the same as in the private sector, Finegan says. "We have physician relation issues, access to capital, and getting the data," he says. "And our leadership is also looking to improve patient flow, quality, and safety while seeing some standard, good ol' fashioned savings. Healthcare is, in my mind, the ultimate unsolvable problem, and it will keep explorers like me in challenges for our entire career. But that's what makes it truly exciting."
This article appears in the January 2012 issue of HealthLeaders magazine.
Controlling labor costs is essential for a strong bottom line and, increasingly, healthcare finance leaders are looking to reduce personnel costs, particularly for the nursing staff. By taking a new approach to nurse overtime, the use of supplemental labor, and retention efforts, organizations can save money without sacrificing jobs.
Though there may be excess cost in your nursing line item, it doesn't always rest within the wage, says Mary Nash, PhD, RN, chief nurse executive for the 932-licensed-bed Ohio State University Medical Center in Columbus, OH. The total cost of a full-time registered nurse averages $98,000 per year, or approximately $45 per hour, according to the 2011 U.S. Hospital Nurse Labor Cost Study produced by KPMG Healthcare & Pharmaceutical Institute. But base wages account for only about 57% of the total before factoring in premium pay and benefits.
"We know that cutting nurses at hospitals reduces patient volumes, and volumes are already flattening for other reasons," says Linda H. Aiken, PhD, FAAN, FRCN, RN, the Claire M. Fagin Leadership Professor of Nursing and director for the Center for Health Outcomes and Policy Research at the University of Pennsylvania in Philadelphia. Aiken is considered by many in healthcare to be a pioneer in the nursing and healthcare research for the statistical data she collected linking nurse-to-patient ratios and patient safety. "I don't think I've ever seen a staff nurse that isn't busy. You see nurses being used inefficiently everywhere, however, and that's costly," Aiken says.
Reduce overtime
One area to control costs is overtime, says Nash, a 38-year nursing veteran who was charged with the task of reducing overall nursing costs. After some data analysis, it became clear that the excess use of overtime was inflating costs beyond the budgeted registered nurse average pay rate.
Getting the right staff at the right time was critical to controlling payroll costs, she explains.
"If it's not managed with precision, you end up spending more money than is necessary, and you wear out your staff. There are always staff willing to work overtime, and they build that into their lifestyle, so the economic balance is what has to be the goal," she says.
At OSUMC, there are also union requirements that the hospital had to consider, such as giving the overtime to senior nurses first. Although the organization couldn't change the union contract regarding overtime, it could reduce the necessity for overtime. This required the implementation of the staffing and scheduling system. Prior to adding this tool, it was not always apparent how to assess patient demand and pay issues. In addition to this system, Nash also added a staffing pool to supplement staffing needs and found immediate labor savings.
"Once we had the tool in place, the administrative nursing supervisor could look at it every four hours and say, 'We have an increase in volume,' and move staff to where the need is greatest," she says.
Staffing to patient need is paramount if a facility wants to reduce costs, says Pamela Hunt, MSN, RN, vice president of patient services and chief nursing executive at the Indiana Heart Hospital, part of Community Health Network in Indianapolis. But many hospitals lack that flexibility, and still use more rigid shifts for nurse staff.
"If there are no cath lab procedures in the evening, then don't have staff come in. If you have five operating rooms, but no cases scheduled for one of the rooms, then the OR should have a crew that can flex their hours and come in at the time of the next procedure, not at a specific shift time. The key to productivity is flexing to volume," Hunt says.
Effective use of supplemental labor
Many healthcare leaders routinely budget for traveling or per diem nurses, but much of that may be unnecessary, says Hunt. Although there are reasons to use supplemental nurse labor, daily census demands shouldn't be one of them, she says. Supplemental labor is expensive, she adds, so these nurses should be used to address seasonal volume increases, medical leaves, or to fill in during large training initiatives such as ICD-10.
"I do believe there is a place for supplemental nurses; it's how you use them. If there are usually four nurses on a shift and you need to use one to replace a member of the unit or add one to address an exceptionally high census, then they work well because you have enough of your core nurses there who know the workload and who know the organization to be able to support this external staff member," she says.
Hunt explains that hospitals and health systems that rely on supplemental nurses may be overlooking a greater issue—miscalculated productivity that is masking a full-time staff shortage.
Hunt says nurse managers will staff according to a core number to meet the average daily census. "What some nurse leaders are experiencing is that they feel short-staffed, though the productivity level looks to be at 100%," she says. However, the productivity level fails to account for the quantity of overtime nurses may have to work to accommodate patient volume that is your average daily census, or the use of supplemental nurses. Using overtime and agency nurses comes at a premium rate to the hospital and drives up cost, she explains.
"What it comes down to is nurses are highly skilled at care, but they haven't been taught the language of finance. Many nurse managers don't have the level of understanding needed to watch for this type of disconnect," says Hunt.
For instance, Hunt points to a unit she recently worked with in which the nurse manager's unit was demonstrating 100% productivity. This unit had 12.5 FTEs on the roster, but routinely required 16.4 FTE to meet the target number of worked hours. By comparing the actual number of FTEs to the number needed as exhibited by the productivity target, the case to increase the number of staff on the roster becomes apparent. This plan will decrease the use of overtime and higher-dollar temporary labor.
"In the short-term, there will be extra cost to hire additional staff due to orientation costs; but in the long-run, it will be labor at an hourly rate, not a premium one. Plus, it provides a safer environment for the patients because the unit has a stable team," she explains.
In addition to ensuring each unit has enough full-time nurses to meet the daily patient demand, Nash's Ohio facility found another way to bypass supplemental labor when the need called for more nurses. The organization created a nurse labor pool by making a network of part-time staff, full-time staff, and cross-trained nurses.
"There are good reasons to use supplemental staffing, but it's also expensive. By establishing this pool when we have a staffing shortage, we can get the right nurse, at the right time, at the right price," Nash says.
With the ongoing nursing shortage, Polly Davenport, RN, FACHE, CEO at Ochsner Medical Center-North Shore, a 165-bed acute care hospital on the north shore of Lake Pontchartrain in Slidell, LA, says using an in-house nursing pool can keep tenured, more experienced nurses with invaluable skill sets from leaving the facility altogether.
"Although these seasoned nurses want to slow down and retire, you don't want to lose these experienced nurses; they have knowledge that the newer nurses can benefit from," she says.
Many organizations will pay more to in-house pool nurses because of the experience and expertise they bring, says Davenport. These nurses are usually willing to cover multiple clinical areas in the hospital.
"They are typically very flexible individuals, flexible in the hours they work and the locations in the hospital they will cover. There is a price differential; agency nurses … do cost more than in-house pool, but you're paying the RN rate plus the agency who has their own costs to cover," she says.
Stop turnover
"It's a big cost factor," says Aiken. "If an organization could reduce nurse turnover by just 3% it would save a million dollars in costs." For example, she says, if a 500-bed hospital reduces nurse turnover from 13% to 10%, it could save up to a million dollars because it costs approximately the annual salary of the lost nurse to find a permanent replacement, taking into account recruitment costs, supplemental staffing to fill the vacancy temporarily, and overtime to the other nurse to cover the position.
Additionally, Nash notes it's important to calculate the cost of the nursing search and the subsequent training the nurse will need as part of the cost. During the transition, a hospital may need to resort to using agency nurses.
"If you lose a nurse, you're talking huge premiums. And, interestingly, we know where there is turnover in our organization. But we know how to recruit, we're good at it, and we're lucky to have a great college of nursing associated with our medical center," says Nash. "What we find is professional nurses are looking for more than a job; they're looking for ongoing learning, extensive in-service meetings, nursing grand rounds and they want to be treated well."
Davenport says it's better to focus on retention than on replacement of nursing staff. "Turnover is costly; but it's also disruptive—physicians and the rest of the team like to know who they are working with, too," she says.
Davenport says at Ochsner Medical Center-North Shore, the staff reviews nurse turnover monthly to understand what may be causing unexpected departures—striving to get at the cause of the separation.
"We stay informed and are forward-thinking about what it takes to keep the RN working for us. A better opportunity may simply mean the nurse chooses to move to an 8-to-5 shift clinic position with no weekends or holidays. Hospital work is challenging for an individual's family life, so we do our best to set the expectation that we are a 24-hour operation because that is what our patients need from us," she says.
"We've found historically, if you have a nursing unit with high turnover, you're going to have dissatisfied physicians. As CEO, it's essential to me to have a satisfied physician group as well as a strong team of nurses. That combination contributes to the quality of care delivered," says Davenport. "What makes a successful, engaged physician is having a strong nurse workforce—that means retaining the nurses you've already trained."
This article appears in the January 2012 issue of HealthLeaders magazine.
Because nurses comprise a huge chunk of labor costs, they often fall under the financial microscope. Reducing these caregivers, however, can truly be detrimental to your hospital's quality of care and the patient's overall experience—two areas that CFOs should strive to bolster, not undercut. That puts nurse labor costs somewhat in limbo. Though financial leaders want to reduce costs, they grapple with how to do so without the negative ramifications.
Well, there are ways to control and potentially reduce your nurse labor costs without hurting patient quality—it just requires creative staff management. In the January edition of HealthLeaders magazine I examine how financial leaders can address nurse labor costs. Here are some excerpts and observations from that article:
Though there may be excess cost in your nursing line item, it doesn't always rest within the wage, says Mary Nash, PhD, RN, chief nurse executive for the 932-bed Ohio State University Medical Center in Columbus, OH. The total cost of a full-time registered nurse averages $98,000 per year, or approximately $45 per hour, according to the 2011 U.S. Hospital Nurse Labor Cost Study produced by KPMG Healthcare & Pharmaceutical Institute. But base wages account for only about 57% of the total before factoring in premium pay and benefits.
My reporting turned up three main strategies for trimming the cost of nurse labor without gutting their ranks.
1. Reduce Overtime
Nash, a 38-year nursing veteran, was charged with the task of reducing overall nursing costs at her hospital. After some data analysis, it became clear that the excess use of overtime was inflating costs beyond the budgeted registered nurse average pay rate.
Getting the right staff at the right time was critical to controlling payroll costs, she told me.
At OSUMC, there are union requirements, such as giving overtime to senior nurses first. Although the organization couldn't change the nurse's union contract, managers could reduce the necessity for overtime.
This required a new staffing and scheduling system. In addition, Nash established a staffing pool to supplement staffing needs. She found immediate labor savings.
2. Use Supplemental Labor More Effectively
Pamela Hunt, MSN, RN, vice president of patient services and chief nursing executive at the Indiana Heart Hospital, told me that many healthcare leaders routinely budget for traveling or per diem nurses, but that much of that may be unnecessary. Although there are reasons to use supplemental nurse labor, daily census demands shouldn't be one of them, she says.
Supplemental labor is costly, and should be used to address seasonal volume increases, medical leaves, or to fill in during large training initiatives such as ICD-10, she told me.
Hunt explains that hospitals and health systems that rely on supplemental nurses may be overlooking a greater issue—miscalculated productivity that is masking a full-time staff shortage.
3. Stop Nursing Staff Turnover
Nash told me that it's important to calculate the cost of the nursing search but also the subsequent training the nurse will need as part of the cost. Additionally, during the transition, a hospital may need to resort to using agency nurses.
"If you lose a nurse, you're talking huge premiums. And, interestingly, we know where there is turnover in our organization. But we know how to recruit, we're good at it," says Nash. OSUMC is not as good at retention, she says. "What we find is professional nurses are looking for more than a job, they're looking for ongoing learning, extensive in-service meetings, nursing grand rounds and they want to be treated well."
What other innovative tactics are you using to address labor costs without gutting quality?
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.
In our annual HealthLeaders 20, we profile individuals who are changing healthcare for the better. Some are longtime industry fixtures; others would clearly be considered outsiders. Some are revered; others would not win many popularity contests. All of them are playing a crucial role in making the healthcare industry better. This is the story of Patrick J. Quinlan, MD.
This profile was published in the December, 2011 issue of HealthLeaders magazine.
"We recognize that the major driver for these problems is lifestyle. It’s a set of behaviors learned early on and is a part of the family history—the behaviors are contagious. "
When you hear the personal philosophies of Patrick J. Quinlan, MD, CEO at Ochsner Health System in New Orleans, it's clear why Change the Kids, Change the Future is a program created and championed by his organization. Quinlan believes the path to happiness is found by helping others and that everyone needs "a prepared mind and healthy body to be poised for success." That is why back in 2001 after he looked at some staggering state health statistics, he and his executive team set out to improve the health and wellness of the entire community—starting with the children.
"I'm very concerned about the wrong turn healthcare reform has taken. It's put our focus on expenditures," he says. "We need to focus on reducing the disease load. If we look at those individuals that have particular risks, we recognize that the major driver for these problems is lifestyle. It's a set of behaviors learned early on and is a part of the family history—the behaviors are contagious."
With the hospital already treating scores of patients with chronic conditions and the likelihood of more in the future, Quinlan asked his executive team to look at the problem during an executive retreat. The team acknowledged that working with adult patients with these problems was insufficient to solve the problem, just treating the symptom.
Quinlan wanted to get to the root of the problem. He and his team decided obesity, which often leads to hypertension and diabetes, was a lifestyle issue, and the habits were formed in childhood. A look at the stats confirmed it. At 35.9%, Louisiana has the seventh highest rate of overweight youth in the nation. And the number of children ages 2–19 given a primary or secondary diagnosis of obesity nearly doubled from 1999 to 2005.
"This is an epidemic," says Quinlan. "To reduce chronic disease in our community, we decided to change the behavior of our children and their families."
The system puts $250,000 in annual direct costs toward creating its school-based program designed to educate children and their families about the long-term impact of nutrition and exercise choices on their health. The money funds onsite nurse practitioners at schools and a mobile fitness unit that travels the region to teach parents and kids to incorporate healthier foods and behaviors into their lifestyle. The mobile fitness unit reached more than 2,500 students this year.
"We needed to work with the whole family, because when these kids get home they don't have control of the menu. We could help the school offer better food choices, but we needed to get the family involved if we were going to make a total change," says Quinlan
"We let our principles guide us to do what we are best at, and when a project goes beyond that scope we look for a partner. We can't step in for everyone; solving a problem like this is too big for just one organization," Quinlan explains. "We looked at where our presence would make the most a difference. … We know how to run clinics and we know we already have great food service and chefs and dietitians and the state's largest fitness center. So we said, let's start there and see if there's a willing audience."
Although they have covered a lot of ground, there's still plenty of work to do. In pilot programs, the fitness assessment baseline data showed that 35% of students were obese, 20% were overweight and only 16% met the minimum standards for aerobic capacity. Quinlan and his team are prepared for the challenge, and he is hopeful that other hospitals and health systems nationwide will follow suit in establishing such programs.
"We're not in banking or manufacturing; we take care of people. It's my hope that if we lead by example we can change the understanding of health in our community," says Quinlan. "We have to ask ourselves, 'what are we as a society doing to change the risk factors that give rise to disease?' Because in healthcare reform there is a debate about how to save money, and we rush past the problem. … If you're worried about cost, nothing is cheaper than a healthy person."