The CFO’s Game Changer: Creating Value Through Performance-Based Partnerships
Well-chosen partners can help healthcare organizations achieve their supply chain management goals.
CFOs and other senior finance leaders in health care are increasingly called upon to be operational strategists in addition to performing their traditional role as stewards of the balance sheet. They must juggle the sometimes competing objectives of preserving or increasing cash reserves, funding strategic growth initiatives, and investing in a rapidly growing list of critical hospital operational investments needed across the organization. And they must meet all of these objectives while also maintaining razor-thin margins to keep the doors open, which is no simple charge in today’s healthcare economy.
Hospital senior finance executives frequently are required to rely upon three traditional financial management control levers—improved revenue cycle management, continuous cost containment, and tight capital budgeting—to steer their organizations through the next fiscal year. Often, these executives find themselves in a “fire-fighting” capital rationing mode—allocating equipment and infrastructure investments to the areas with the greatest perceived need, which all too often results in disconnected systems that don’t work well in an operational environment that requires standardization. They must prioritize where to spend and make difficult decisions on where to make cuts.
These factors make it difficult for senior finance executives to drive the transformational change required to have meaningful effects on the metrics (quality, access, sustainability, and outcomes) that matter in health care. It is important for these executives to acknowledge that stopgap measures will not solve the larger strategic organizational issues and long-term needs of their hospitals. To be successful, senior finance executives must adopt different strategies to meet new demands.
Solving the Supply Chain Conundrum
Getting tough on the supply chain is a common default for organizations under financial stress. However, even the most successful supply chain management initiatives cannot eliminate all potential waste and excess in capital equipment spending on their own. Senior finance executives can foster more efficient management of the supply chain, but to do so, they may have to change the way they view this area.
Most healthcare institutions’ supply chain capital equipment strategies are oriented around individual departmental needs, annual budget cycles, “squeaky wheels” and “use-it-or-lose-it” urgency. Indeed, procurement processes remain largely siloed and episodic even in larger networks and some progressive institutions that are making progress in the area of capital planning and strategic purchasing. This piecemeal approach creates inefficiencies across all areas of the enterprise.
The problem is particularly acute in the area of technology and capital equipment acquisitions, where the pace of innovation has a proportionally higher impact on the balance sheet. Senior finance executives can help their organizations address this situation by advancing a strategy that allows for creative management of relationships with supply chain optimization partners—for example, using different business models.
Recognizing Misaligned Incentive Structure
The big problem with traditional financial management control tools and methods is that they focus far too narrowly on procurement transactions and costs. Typically, equipment-purchasing tactics are designed to make vendors give up margin in exchange for order volume or timely purchases. As a result, suppliers may work toward securing short-term purchasing commitments to meet needs of particular groups versus taking into account how the equipment fits within the long-term strategic goals of the organization.
Both parties are caught up in a misaligned incentive structure that yields sub-optimal gains for both sides.
Unfortunately, traditional procurement models are not designed to assess the comprehensive value of, or ROI on, technology purchases. In today’s health systems, supply chain experts focus on reducing purchasing and direct operational costs (e.g., maintenance and parts costs) in relative isolation. Finance leaders may not have adequate insight into how efficiently assets are operated or how the data they generate is used for broader value across the organization.
For example, a procurement team that is focused on negotiating single-digit price reductions on the capital and service costs of a new magnetic resonance imaging system also will require—but all too often lacks—visibility to important questions on long-term value creation, such as:
- Is the organization’s clinical staff trained to use this particular piece of equipment efficiently in advanced, high-margin procedures?
- Does the current workflow create long wait times and increase left-without-being-seen rates?
- Is this modality standardized across the system so appropriately trained staff can float between locations to improve enterprisewide asset utilization?
- Will this equipment be optimally positioned within the organization’s geography to capture new patients that may generate downstream revenue for the health system?
- How great is the risk that the technology will become obsolete or insufficient in the course of its lifecycle?
Reinventing the Supplier-Provider Relationship Toward Value Creation
Understanding the flaws inherent in traditional, transactional purchasing models, health system senior finance leaders and their teams must become operational strategic leaders for their organizations. They must expand their focus to costs and operational improvement across the entire enterprise value chain. Central to this shift is to adopt an approach in which suppliers and vendors become key partners for value creation.
Within a traditional business relationship, there is little incentive or time for technology suppliers to raise more salient questions about value or to help providers address them. For example, if the factors surrounding a large piece of medical equipment and technology purchase (such as workflow, staff competency, standards compliance, or advanced feature utilization) were optimized and aligned over the life of the equipment, the aggregate benefit to the institution and its patients would outweigh any two-to-three margin point purchase price gains.
By comparison, the core competency of technology vendors is to build long-term clinical technology roadmaps, identify best practices in the utilization of their technologies, monitor market shifts and dynamics, and integrate the insights of global thought leaders and experts. By enlisting strategic technology suppliers’ expertise and access to information, providers can derive far greater value in managing their technology assets and significantly mitigate their ownership risk.
Moving from a Transactional to Transformational Business Model
The term partnership tends to be used loosely to describe positive, committed working relationships between businesses. Most hospitals already have suppliers or vendors that they view as partners. However, effecting meaningful change and transformation across a healthcare delivery system requires individuals and organizations to collaborate in bold new ways that give the term a newer and deeper meaning that focuses more on joint performance. Such performance-based partnerships between health systems and strategic technology suppliers can help the health systems transcend transactional “business as usual” risks and costs while supporting innovation and sustainability for the future. By sharing downside risk as well as upside potential, this kind of relationship can provide a basis for the type of collaboration required to yield profound improvements in value.
Aligning Resources Around Performance-Based Objectives and Meaningful Outcomes
A key characteristic of a performance-based partnership model is operational integration, in which the supplier-partner becomes embedded in the provider’s core operational areas and governance structure. Working intimately with hospital administrative and clinical staff, partner involvement and oversight may include technology and service management, educational programs, performance improvement, clinical programs, or even design and facilities initiatives. By creating an embedded partner ecosystem, hospitals can enable more effective, strategic business planning while realizing ongoing, incremental benefits in the clinical setting.
Some healthcare managers remain concerned that allowing vendors more direct insight and access into hospital decision-making and operations could at times create conflicts of interest for the vendor and allow the vendor undue influence that might allow it to overly promote its solution. This risk can be largely mitigated through structuring the governance model effectively and ensuring the vendor partner is held accountable to the appropriate hospital metrics and interests. In these partnership structures, the provider always retains final authority for all decision making and the contract should be structured to provide for complete autonomy in final vendor selection for specific technology.
Such partnerships also require a structured governance model that aligns both the provider’s and supplier’s organizational objectives. By orchestrating regular touch points, such as shared working committees and quarterly joint operating committee meetings, a strong governance model reinforces objectives and helps partners share ideas and prioritize efforts to support improved decision making.
Sidebar: Core Elements of a Shared Accountability Partnership Model
Realizing Financial Benefits through Shared Accountability
For a senior finance leader with strategic focus, this evolved business model establishes an operating system in which all critical points of influence in the economic value chain—including the core motivation of the vendor—are acknowledged and transparent to all. In this arrangement, the vendor can work side by side with its health system partner to optimize the utilization of the technology and pursue clinical innovation goals instead of focusing on less strategic transactional business practices (e.g., quarterly sales targets, forecasting, sales staffing, specific business unit performance, or vendor purchasing swings).
For the health system, the effect is to free up capital for other projects and to reduce overall operational expenditures required to support technology systems because the total extent of the systems is reduced. There is no longer a need for the health system to review multiple contracts as all of its business area concerns (such as technology, financial, facilities, IT) are now centralized and coordinated. The result is that time traditionally spent by health systems on non-value-add activities can be spent on more critical clinical and patient care work.
Alleviating Financial Pressures with Partnership Structures
This innovative supplier-provider partnership concept can alleviate many financial pressures facing health systems today through a wide range of benefits. Here are a few examples.
Reduced hard and soft costs. Partners can reduce the hard costs of transactional equipment purchases and the soft costs associated with that equipment. This includes factors such as the under-utilization or performance optimization of equipment, lack of staff training, and under-penetration of the market.
Improved planning. Capital purchasing is no longer performed in silos or restricted or dependent upon episodic annual budgeting cycles, but becomes a process that is integrated systemwide.. As a result, senior finance executives can more appropriately match and adjust purchasing and expenditures to evolving needs, and they can make decisions based on value creation for the entire hospital ecosystem rather than on simply capital cost and available budget.
Balance sheet flexibility. Finance executives can leverage several different financing strategies through vendor partners that provide more flexibility than traditional financing options. By partnering with a large commercial entity with extensive subject-matter expertise and ability to bear risks, a health system can enjoy flexible payment structures and contract terms that work in its best interest.
Increased resources to fund innovation. Strategic supplier partnerships can free health systems from rigid financial constraints and pressures, enabling these organizations to elevate their focus from operational efficiency to care delivery innovation.
A Case in Point: Customized Business Models
Almost all health systems are faced with managing through periods of higher demand and utilization. For example, in southern states, the arrival of the “snowbirds” in the winter.
may impact local demand and utilization at healthcare facilities, while for other states, it’s the arrival of the seasonal flu. Traditionally, health systems have focused on managing these demands through fluctuating operational capacity (such as labor and other variable operational expenses).
However, health systems tend to view capital expenses as a fixed cost that must be high enough to support peak demand. Because meeting peak demands with high-end equipment can be a costly option, a health system may feel compelled to acquire a lower standard of equipment for this purpose, with the result that it has lower-quality equipment that is under-utilized during the other seven to nine months, faces higher support costs, and has large capital dollars tied up in underperforming investments.
With a shared-accountability partnership structure, a health system has several options to choose from in such circumstances. Possible solutions include a managed services model, pay-per-use rates, seasonally adjusted payment structures, and utilization-based enterprise software licenses. Another option might be to shift the number of units deployed in response to demand.
Simply put, a provider’s long-term commitment to a vendor enables the vendor to deliver an exceptional degree of customization and flexibility. In a typical transactional model, this type of flexibility is nearly impossible, and both the capital investment and operational risk is retained by the hospital.
Implementing Successful Strategic Partnerships
Health system senior finance executives should carefully weigh the potential benefits to their organizations of a long-term, shared accountability partnership model, as well as potential disadvantages, such as the ability competitive technology solutions into the future. Again, these risks need to be mitigated both through the due diligence process of partnership evaluation and contractually by ensuring that both parties have clear exit provisions available in the case of non-performance. of the vendor partner to actually meet performance requirements and provide As with any major shift, a new partnership model will take time to create and implement. However, there are some guidelines and considerations that can be generally applied.
Understand the “why.” What are the organization’s unique challenges and community needs? What is the reason for the change? Would a strategic partner support those needs?
Define the vision. What is the ultimate desired outcome? What are the development phases that must be addressed on that path?
Determine core competencies and where you want to partner. What are the core competencies the healthcare organization wants to retain and excel in? Which operational activities would be better managed or performed by a partner? Does a prospective partner have the expertise and resources to deliver and execute? What does the prospective partner require that the health system can provide in return?
Get people on board. Does everyone in the organization understand the context for change? How will the change be received?
Strategic Vendor-Supplier Partnerships in Practice
The specific operational, financial and governance structure for each partnership will vary for each agreement. Under the most standard model, the vendor assumes the risk and accountability for supplying, managing and maintaining the medical technology to meet the financial and performance requirements set by the hospital. Those performance metrics may include pricing requirements, cash flow targets, technology availability levels and on-time delivery of projects.
The technology covered within the scope of the partnership may be limited to simply the portfolio of equipment and services provided by that vendor, but more typically will include all equipment, supplies and related services needed to meet a department, service line or clinical care system. Additionally, it can include the partner’s expertise in areas such as strategy, planning, design, clinical care, and process improvement as part of the shared commitment to delivering continuous performance improvement over the term of the agreement.
Progress is measured in technology performance metrics as well as clinical outcomes (such as hospital-associated-infection rates or length-of-stay metrics). Accountability is enforced through both performance requirements as well as opportunities to share in upside performance gains.
Pursuing Patient Value and a Sustainable Future
Performance-based partnerships with shared accountability can be a highly attractive option for strategically minded finance executives because they provide for an expanded, enterprisewide view of the value chain and they introduce new financial control levers and expertise to help identify how resources are allocated across the enterprise. These levers include the ability to more easily shift funds between capital projects and adjust and allocate spending methods for integrating different financing models and adding performance-based criteria to vendor contracts. Within aligned, long-term strategic partnership structures, health systems stand to benefit from their vendor partners’ expertise in uncovering broad new areas for savings and value. The key requirement is a careful vetting of each prospective vendor partner.