Evaluating capital projects…accessing capital…using process improvement and technology to control costs and protect revenue. Top CFOs explain their strategies for success in the economic crisis.
At a Glance
CFOs at hospitals throughout the country are implementing strategic initiatives that can help their organizations succeed in challenging times:
- Revising strategic plans
- Reassessing capital capacity
- Leveraging IT to enhance revenue management
The healthcare industry is recession-proof. At least, that's been the theory. It doesn't take a Ben Bernanke-like mind, however, to disprove the axiom. A simple Google search illustrates that the healthcare industry-and the hospital segment, in particular-is being negatively affected by the harsh realities of today's economy.
In fact, the economy's downturn has resulted in the following:
- New York's governor has unveiled a proposed budget that would cut the projected spending for hospitals, nursing homes, and other healthcare providers by more than $1 billion.a
- A Chicago hospital, which lost $15 million in 2007, has been forced to hire an adviser to find a buyer. With the increasing credit crisis, the hospital would be forced to close its doors if it cannot find a buyer.b
- A Hawaii-based hospital system has filed for bankruptcy after a lender failed to extend a loan for another month.c
- A health system in Minnesota has planned to delay new building projects.d
The struggling economy and accompanying credit crunch are being added to an already long list of challenges facing CFOs, including consumer-directed health care (CDHC), Medicare recovery audit contractors (RACs) audits, pay for performance, Medicare severity-adjusted diagnosis-related groups (MS-DRGs), and impending International Classification of Diseases, 10th Revision, Clinical Modification (ICD-10-CM) coding.
The consequences? Hospitals are facing severe financial challenges, and those that were performing well now simply want to stay on course.
The strategies? CFOs are seeking creative financing and forging new capital-access strategies. They also are seeking to enhance liquidity by containing costs and protecting revenue. Technology has a special role in these strategies. IT enables efforts to enhance efficiency and thereby control costs. Also, providers are turning to revenue cycle IT to protect revenue by getting a tighter grip on self-pay collections, denials, bad debt, and administrative costs. IT also is a capital expense that must be assessed and funded like all others-a challenge as capital costs increase and availability continues to be tight. Many hope that the Obama administration's promised healthcare IT initiatives will bring them some much-needed capital to fund their needs.
Equal Opportunity Havoc
Although some struggling hospitals are reeling from the economy's upheaval, financial unrest is also affecting organizations that have been financially well managed. Certainly, Carl Herde, CFO at Baptist Healthcare System, Inc., headquartered in Louisville, Ky., was not planning to spend so much time fighting the economic storm. "Since last winter, Baptist Healthcare has faced unexpected capital challenges due to the credit crisis. This has diverted management's attention away from both strategic planning and the 'blocking and tackling.' It has also changed our planning process for future projects. Luckily, we have a strong balance sheet and have been able to weather some of this," Herde says.
The economic crisis has forced Baptist Healthcare to make adjustments to deal with the situation. For example, the hospital formally applied for bond ratings-something not done historically-since all of its outstanding debt had been insured and, therefore, carried a AAA rating. "Previously, the cost of applying for bond ratings did not add incremental value," Herde says. "However, since the tightening of credit, we had to obtain a rating to be able to even consider having success in the bond market."
Because of the credit crisis, Baptist Healthcare's Periodic Auction Reset Securities (PARS) tax-exempt bonds reset to their default rate of 15 percent, forcing Baptist to go to its banks and get a one-year loan to redeem the PARS bonds at London Interbank Offer Rate (LIBOR), the rate that banks charge each other for loans, plus additional basis points. Baptist Healthcare also took out bank loans to redeem variable rate demand bonds when these bonds increased to 8 percent to 10 percent interest rates. "We're grateful that we've had long-term relationships with our banks and the fact that our banks have been able to work with us to help navigate the situation," Herde says.
In addition to focusing on capital structure issues, Baptist Healthcare also has tightened up revenue cycle operations, concentrating specifically on denials prevention and management. The organization is planning on putting a new information system in place to improve its revenue cycle and reduce its cost to collect. ICD-10-CM is one of the major challenges Baptist plans to address with its new system.
Across the country, John Muir Health in Walnut Creek, Calif., is managing its own set of challenges related to the economy, according to Paul Swenson, executive vice president of administration. Swenson explains that John Muir is facing three primary issues:
- The equity meltdown, which is reducing capital availability
- Recession-driven volume reductions that have been "challenging this year" and will be "worse next year"
- A deteriorating payer mix driving an even greater reliance on health maintenance organizations and preferred provider organizations to bear the burden of the cost shift
Each challenge requires a different strategy, from improving revenue cycle management to investing in service-line management to aggressive expense control.
John Muir's revenue cycle improvement strategy has grown more important as the economy has declined. For example, the organization has an extensive process to deal with the uninsured patients who use its emergency department (ED), Swenson says. "We have a tremendous data-collection effort in the ED to get the data that will allow us to characterize patients as charity-eligible or not." Another strategy that acknowledges the difficulty of point-of-service collections in the ED is John Muir's strategy to "build partnerships with community health clinics and others. These groups with whom we partner can help deliver care in the correct setting," he says.
The capital crunch has come at a difficult time for John Muir. The organization is in the midst of an $800 million initiative to build two new patient care towers to address California's mandatory seismic retrofit improvements, capacity constraints, and program expansion. This project is at the "can't stop" stage, Swenson notes. The executive management team, however, has modified and/or postponed some capital expenditures not directly related to the patient care towers.
In addition, the health system has undertaken a series of initiatives that should help it more successfully cope with current challenges. On the revenue side of the balance sheet, John Muir has focused on charge capture and collection processes, including medical necessity determination for denials prevention. The health system also has focused on laboratory charge capture and is upgrading its laboratory billing system. To focus management attention on the healthcare IT transformation, the health information management department reports to the CIO, and John Muir has a broadly used systemwide electronic health record (EHR) system. Both dimensions allow for the intensive use of data to appropriately reflect patient acuity, which drives payments.
Current Challenges: Exacerbated
Even though the fallout of a faltering economy is sapping CFOs' time and energy, they still need to contend with existing challenges. In some instances, the financial crisis is making it even more complicated to manage these issues. For example, the financial crisis is adding more complexity as CFOs address CDHC. With CDHC, consumers are financially responsible for a larger portion of their care-providing them with the incentive or disincentive to spend money wisely. Decision-support tools and resources can aid in improving the consumer's ability to make the right medical care choices. No matter how much healthcare organizations help vigilant consumers with these decisions, though, hospitals need to deal with rising numbers of consumers who need care but simply do not have the financial resources to pay for it. A growing population of uninsured and underinsured heading to the ED with little or no ability to pay for their care is one of several alarming trends confronting hospitals nationwide.
Downstream, healthcare providers could be dealing with increases in bad debt. U.S. hospitals were unable to collect $34 billion in 2007 due to bad debt and charity care, according to the American Hospital Association's 2008 Uncompensated Hospital Care Cost Fact Sheet. The situation is hitting hospitals hard. A Minnesota healthcare system, for example, wrote off more than $30 million in bad debt in 2007-with more than 80 percent of that bad debt originating from patients with health insurance.e There are other signs of the crisis. Many hospitals are seeing fewer paying patients, even as the number of uninsured patients continues to climb. Many patients are being forced to choose between basic necessities and medical care. When faced with such choices, "They wait," says Ted Epperly, MD, president of the American Academy of Family Physicians.f The situation could get even worse: Average aggregate hospital margins could reach zero by 2013 if bad debt as a percentage of revenue grows at 10 percent per year, as some prognosticators predict.g
Switching from Defense to Offense
With the faltering economy, the growth of CDHC, and other challenges facing healthcare organizations, many CFOs realize it is time to more than simply respond. Thus, they are implementing strategic initiatives that can help their organizations succeed in challenging times.
Develop and implement revised strategic plans. Rob DeMichiei, CFO at the University of Pittsburgh Medical Center (UPMC), says, "I don't know how President Obama will fund the existing system, much less the proposed changes." He says UPMC is preparing for "a whole new level of government budget cuts, and providers are going to be front and center. Hospitals will have to minimize capital expenditures, new construction, and new technology and renovation." He notes that UPMC will focus more tightly on ROI, with an emphasis on operating throughput management, to get the most out of existing capabilities.
John Muir's Swenson says revenue and expense management efforts are appropriate in any scenario. "The current crisis has simply accelerated our efforts," he says. At Baptist, Herde says cost pressures are getting lots of strategic planning attention. "This is the big five-year, planning-horizon issue," Herde says. "We make decisions all the time about delivering care, whether concerning technology or personnel, or both. We don't foresee the economic landscape improving in the future. The current healthcare delivery system in this country is not sustainable long term. Something has to happen."
Reassess capital capacity.Financial leaders should update their organizations' capital position analyses. An objective approach to measuring capital capacity evaluates the amount of debt outstanding, the cost of capital, and median ratios associated with a target credit rating. Of all the effects of the financial paradigm shift, the drying up of credit markets has been the most severe so far. DeMichiei says the combined effect of spending in Iraq and the Wall Street bailout "further exposes the unworkable economics of health care." He says, "Hospitals without strong balance sheets won't be able to issue low-cost, tax-exempt bonds and use debt to fund expansion and investment."
Recent evidence suggests that investment-grade (B+) providers may be paying nearly twice what they would have had to pay to issue debt just six or nine months ago.h And even the New York/New Jersey Port Authority, an AA-rated issuer, found no takers recently for $300 million in bonds, a large offering that was met with zero bids.i This sharply illustrates the challenges that even financially strong, not-for-profit bond issuers are having when they try to raise capital.
Leverage IT to enhance revenue management. Although Baptist Health's Herde realized the healthcare system needed to replace its legacy system to accommodate ICD-10 coding, he also recognized that the organization needed help to improve revenue management-and ultimately help its hospitals succeed, despite the pressing challenges of the current environment.
Herde and other providers are finding they need new systems that can improve the overall economics of care. With enterprise revenue management, healthcare organizations use software, services, and connectivity to reinvent the way they manage and collect revenue. John Muir's Swenson believes in the power of combining clinical and revenue management systems as well. He says that connecting the organization's existing EHR system with computerized provider order entry, which is coming in 2010, will help Muir achieve significant benefits in overall revenue management.
UPMC's DeMichiei believes there is still opportunity for gains in administrative efficiency. "We have successfully leveraged our enterprise applications (revenue cycle, supply chain, etc.), but I don't think many others have had the same focus that we've had," he says. "The industry needs to do a better job of integrating and leveraging enterprise systems. We're trying to simplify things and become business advisers to our clinical partners [co-workers], but we can't do this if we're still 'transactional,' focused on highly detailed small-dollar work."
The need for such transformations is reinforced by Stephen Mooney, formerly senior vice president of patient financial services at Tenet Healthcare Corporation and now president of Conifer Revenue Cycle Solutions, an operating subsidiary of Dallas-based Tenet. He says in today's environment, "scale is going to be incredibly important. Health care has evolved to become more complicated and dynamically interconnected." At Tenet, this requires an enterprise revenue management approach that incorporates more than 200,000 workflow rules, standardization of financial classes, chargemasters, and insurance plans. All this, Mooney believes, is necessary to cope with the "complex and different" financial environment facing healthcare organizations today.
Look for Opportunity
Healthcare providers are facing a new frontier. Our formerly recession-proof industry, like the rest of the U.S. economy, is facing an unprecedented financial crisis. At the same time, none of the other pressures facing healthcare CFOs and their organizations have diminished. But with challenge comes opportunity-and, as a result, healthcare leaders should resist the temptation to pull into their shells to ride out the storm. These times demand decisive, creative responses, and they may help financial leaders become even more influential.
Now, more than ever, CFOs need to apply strategies to enhance financial management efforts that are ultimately tied to their organizations' overall success. In the words of UPMC's Rob DeMichiei: "Finance will have to have more clout in this newly constrained financial environment. No project or department is sacred. Everything must be scrutinized. Finance is critically positioned and will have to act as the information champion to drive these kinds of decisions."
David Hammer is vice president, revenue cycle solutions, McKesson Provider Technologies, Fort Lauderdale, Fla., and a member of HFMA's Florida Chapter (firstname.lastname@example.org).
a. Hakim, D., "Paterson Proposes Austere Budget to Close Deficit," The New York Times, Dec. 16, 2008.
b. Yerak, B., and Jepsen, B., "Lincoln Park Hospital Seeks Buyer," Chicago Tribune, Oct. 9, 2008.
c. Abelson, R., "Disappearing Credit Forces Hospitals to Delay Improvements," The New York Times, Oct. 15, 2008.
d. Yee, C. M., "Credit Crunch Delays New U-Fairview Care Center," Minneapolis Star Tribune, Dec. 17, 2008.
e. Gunderson, D., "Hospitals Worry About Bad Debt," Minnesota Public Radio, Nov. 11, 2008.
f. Abelson, R., "Hospitals See Drop in Paying Patients," The New York Times, Nov. 7, 2008.
g. American Hospital Association Chart Book, 2008, and McKesson analysis.
h. Sutliff, N., Personal Communication, McKesson Capital, Dec. 19, 2008.
i. Brown, E., "Port Authority Can't Find Buyer for Bonds," The New York Observer, Dec. 3, 2008.
Publication Date: Sunday, March 01, 2009