Accounting and Financial Reporting

A Physician’s Guide to Financial Management Basics

September 28, 2017 5:07 pm

Translating the bedside impact of business decisions requires a basic understanding of key financial management concepts and the ability to navigate an income statement.

Physicians want to direct funds to “what’s best for patients,” but not all investments in patient care result in an ROI. Physicians thus need to understand the basics of finance so they can thoughtfully contribute to these discussions at the practice, department, and organizational levels, says Richard Priore, president and CEO, Excelsior HealthCare Group.

Yet physicians frequently are at a disadvantage in discussions with financial and operational leaders. “Physicians often aren’t given the knowledge, tools, or resources to be good stewards of increasingly scarce resources,” Priore says. “But as the industry moves from volume to value, physicians understand that they need to know how to participate meaningfully in their meetings with administrators.”

Physician voices are especially needed to help guide strategic investments. “For every dollar that a physician leader can spend, there are multiple dollars of need,” Priore says. “One of physicians’ greatest organizational leadership responsibilities is allocating those dollars to the greater good. The need to balance the seesaw of quality and cost exists whether it’s your first day of practice or you’re 20 years into your career and you’re CEO of a large system.”

Measuring Financial Performance

When physicians first take a leadership role, they may struggle to navigate financial reports such as income statements, which show profitability from the flow of revenues and expenses over a period (usually a month). Yet physician leaders need to be able to interpret these reports so they can conduct a financial forensic analysis to gauge the performance of their practice, department, or organization.

Understanding how measures like total asset turnover and cost per discharge are defined also can help them converse with finance leaders and gain a better knowledge of how their balance sheet measures up against industry benchmarks (see an exhibit on using benchmarks to gauge the financial health of an organization).

At the department level, physicians may benefit from using a financial algorithm that mimics how they make clinical decisions, such as when assessing a patient’s lab values. When physician leaders conduct their monthly operations review, Priore recommends using a financial pathway as a tool for determining which steps to take if they identify specific variances in their operating revenue or operating expenses (see the exhibit below for an example).


Making a Business Case

Beyond reading and reacting to an income statement, knowing how to make a business case is another tenet of financial management. For physician leaders, articulating a tangible financial benefit of an initiative, instrument, or other investment can be particularly challenging if their financial acumen is limited, Priore says. An even more difficult scenario entails suggesting such capital allocations when the organization has a moratorium on funding quality improvement initiatives that do not have a positive ROI.

Even the organizational culture can present barriers when making a business case. “The prevailing policies, politics, and personalities in any organization may be difficult for the physician to navigate,” Priore says. That’s why it helps to have a game plan.

When proposing enhancements to services or staffing, physicians should develop a financial pro forma. Take the case of a medical director in an emergency department who wants to combat blood culture contamination, which is causing unnecessary patient morbidity and driving up healthcare costs. After reading in a journal article that cross-contamination rates are significantly higher in blood draws by nurses than in draws by phlebotomists, the medical director wants to assess the ROI of hiring dedicated phlebotomists to conduct blood draws. By comparing the contamination rates of nurses and phlebotomists, and determining the unreimbursed cost per contamination, the medical director can assess the potential savings. From there, the director can determine the incremental operating expense of hiring more phlebotomist FTEs and the ideal number that would produce a positive ROI.

When calculating the financial ROI of an initiative, another key concept is net present value (NPV), which represents the sum of the present values of a project’s net cash flows discounted at the cost of capital. Understanding NPV helps physician leaders assess how a $1 return today stacks up against the same $1 at a future date, Priore says.

While financial analysts often can help crunch these “what if” numbers, physician leaders at every level should understand how to best make their case, Priore says. “Demonstrating ROI can be challenging, but it is best for physician leaders to be conservative in their estimation of results,” he notes. Overpromising financial gains can compromise a physician leader’s credibility with the C-suite. 

Expert Advice

“You don’t need an advanced degree to improve your financial knowledge,” Priore says. He offers the following suggestions for physicians seeking to improve their business acumen.

Know the vocabulary. Having a basic understanding of key terms and concepts can help physicians feel more comfortable conversing with their peers in finance and operations. (See the accompanying glossary: Select Healthcare Financial Management Terms)

Advocate on behalf of your colleagues for meaningful data.Physicians drive healthcare costs through their selection of supplies and equipment as well as their orders for medications, tests, and specialty consults. A clinician’s documentation in the electronic health record also has a significant effect on DRG assignment and the case mix index, which are key drivers of payment.

Many physicians recognize this impact and want to be better stewards of resources. “Often, the biggest challenge for physicians is that they don’t have access to accurate, actionable data,” Priore says. A 2017 article in JAMA Surgery found that giving surgeons a scorecard helped decrease surgical supply costs. At a minimum, all physicians should press their organizations for their risk-adjusted cost per case and their quality outcomes, compared with their peers, Priore says.

Look for opportunities for experiential learning and mentorship. “Physicians benefit from being able to apply their knowledge,” Priore says. One viable scenario is to work in a dyad leadership model that pairs each physician leader with an executive from finance or operations who has a complementary skill set.

Even if physicians are not in a formal dyad structure, they should seek the insight of finance leaders on topics related to specified organizational goals, such as meeting budgeted revenue and expense targets. 

Although physicians are often expected to be all-knowing, there is no shame in seeking out a mentor, Priore says. He suggests choosing an administrator or another physician with strong financial acumen to help review and understand financial reports.

Be inquisitive during meetings. Priore says the following questions can help physicians demonstrate their credibility and learn more about the organization’s performance:

  • How is overhead calculated and allocated?
  • What is our cost of capital?
  • What is our payer mix?
  • What is our contribution margin (i.e., profit) on a particular procedure or service?
  • What is our plan to grow profitable volume?

Bridging the Divide

Armed with better financial knowledge, physicians can become what Priore calls “boundary spanners” who help other clinicians improve their business skills. For example, they can help their peers better understand how their documentation practices affect the organization’s case mix index and, ultimately, its revenues. They also can help explain how unwarranted practice variation mars clinical and financial outcomes, and work to improve the overall performance of the organization.

At the same time, they can offer administrators insights on how physicians approach financial situations through a clinical lens. “Physicians can help administrators understand the balancing act they face in reconciling cost and quality,” Priore says. Specifically, they can translate the bedside impact of various financial decisions, such as adjusting labor or updating outmoded, inefficient equipment.

“Physicians have an obligation to help administrators make effective, informed decisions about the practice, department, or health system,” Priore says. “In addition to enabling a more productive dialogue with administrators, physicians’ broader understanding and knowledge of the financial inner workings of a hospital or practice serve to continuously improve clinical outcomes.”

Laura Ramos Hegwer is a freelance writer and editor based in Lake Bluff, Ill.

Quoted in this article: Richard J. Priore, ScD, MHA, FACHE, FACMPE, president and CEO, Excelsior HealthCare Group, LLC, Minneapolis.

This article is based in part on presentations at the 2017 ACHE Congress in Chicago.


googletag.cmd.push( function () { googletag.display( 'hfma-gpt-text1' ); } );
googletag.cmd.push( function () { googletag.display( 'hfma-gpt-text2' ); } );
googletag.cmd.push( function () { googletag.display( 'hfma-gpt-text3' ); } );
googletag.cmd.push( function () { googletag.display( 'hfma-gpt-text4' ); } );
googletag.cmd.push( function () { googletag.display( 'hfma-gpt-text5' ); } );
googletag.cmd.push( function () { googletag.display( 'hfma-gpt-text6' ); } );
googletag.cmd.push( function () { googletag.display( 'hfma-gpt-text7' ); } );
googletag.cmd.push( function () { googletag.display( 'hfma-gpt-leaderboard' ); } );