John JohnstonWhile there is a big question mark around the future of healthcare reform, hospitals can be sure of one thing: We must prepare to live with further cuts to payment.

In this environment, hospitals must be prepared to undertake more radical efforts to control costs, and many healthcare finance professionals acknowledge there are major dollars tangled up in clinical care from inappropriate admissions, inefficiencies, and duplicative services. Executives are beginning to tackle these issues, and initial results reflect the potential for an outsized impact on margins. For example, one health system recently reduced annual operating costs by $12 million in just six months by organizing an initiative focused solely on reducing excess length of stay.

Achieving Alignment

But achieving meaningful cost savings in the care delivery arena requires tight alignment between finance and clinical teams. Hospitals are beginning to find success in addressing margin improvement through care redesign, yet most have not aligned fully to realize the magnitude of potential savings. With that in mind, here are some priorities that stand out for finance leaders to adopt in 2017.

Deal with the trust issues. Most hospital leaders still hold longstanding biases when it comes to the intersection of care delivery and finances. Many clinicians worry that the mandate to take dollars out of care delivery could jeopardize the quality of care and believe their financial counterparts don’t appreciate what it takes to sustain that quality. Likewise, many finance teams continue to interpret pushback from clinicians as a lack of concern for cost pressures or an unwillingness to embrace the data available to measure cost.

It’s only natural that different teams come to the table with biases, but leaders must work to ensure those biases do not get in the way of critical margin strategies. Comprehensive care redesign starts with a shared conviction between financial and clinical departments that financial improvement can be attained without compromising safety, quality, or efficiency. To set this baseline, executives can establish a set of boundaries for improvement efforts that both respect and confront biases.

Allow clinicians to lead, with accountability to hit the financial target. Finance leaders are trained to calculate variances and establish savings targets. Every hospital needs to have financial targets and understand where the data point to opportunity. Once those targets are established, however, it is crucial for clinical leadership to design and own the care delivery improvement plan.

This advice does not mean financial leadership should be completely hands-off. The best results are achieved when finance executives both sign off on the initiatives before the clinical teams launch them and conduct a reconciliation of the initiatives against their financial targets.

Stay confident with imperfect measures of financial impact. Earlier, I mentioned a health system that tied $12 million back to avoidable inpatient days. But to be frank, it’s not a perfect science when it comes to tracing clinical improvement initiatives back to real dollars.

Most finance executives understand the challenge of trying to map a one-to-one connection between clinical improvement activities and the balance sheet. Even the best cost accounting systems often base savings on average costs at some level. But the most effective leaders see the forest rather than the trees, and they successfully rely on proxy measures based on a wealth of evidence that shows clinical efforts indeed affect the bottom line in a highly meaningful, if not precise, way.

Consistent Results

Every day across the country, hospitals work to drive savings, and those savings typically are computed based on proxy measures (such as an average savings amount for every excess day that is eliminated). Over time and across many projects in recent years, hospital finance leaders have reliably reconciled a measurable impact on their bottom line that is very close to the proxy target set.

In 2017, our challenge as industry executives is to continue integrating clinical delivery with financial sustainability. We are close to turning that corner. May this be the year we see a high level of integration become the standard for how clinical and finance leaders guide our hospitals forward. 


John Johnston, CPA, MHA is senior vice president at Advisory Board, Washington, D.C.

Publication Date: Tuesday, January 31, 2017