This article originally appeared on the BeyeNETWORK
Early in my career, I had a job interview where the manager asked one question – what makes for a good business decision? At that moment, the phone rang and the manager took the call, so I had a minute or two to think about my answer. I decided to dispense with a sophisticated answer and just tell him what my parents always taught me. That is, a good business decision allows us to win today, a better one allows us to win tomorrow, and the best decision is one that allows us to change the game so we win every day. For the next hour, we just talked about examples of good and bad decisions we had made and good and bad decisions we had seen others make.
I got the offer. Wonderful boss. Thankless job.
The factors that make for good, better and best business decisions have a lot to do with the factors that make for good, better and best performance measures. Business performance follows business decisions. Performance measures essentially fall into three levels of effectiveness. At the bottom are measures that simply monitor what happened. Above those are measures that steer us to make the right decisions today. And at the top are measures that give us the opportunity to transform the organization. In effect, the best measures are those that allow us to change the game.
Healthcare provider organizations measure a wide variety of activities and results from a wide variety of perspectives. Measures exist to monitor, steer and/or transform clinical quality, clinical results, operational activities, costs and results, access and outreach efforts and results, marketing efforts and results, recruiting, staffing and development efforts and results, and research efforts and results, just to name a few. And, of course, there is always the job of the chief financial officer (CFO) to make sure that the organization can perform all of these activities, achieve all of these results and still make a buck.
For the past twenty years, I have worked with executives, managers, professional and operational people, analytical people and support people across a number of industries and a number of business functions. Of all of the people I have met, the CFO of a healthcare provider organization may have the most challenging job and may very well be the one who can benefit most from business intelligence applications and capabilities. The key reason for this assessment is the sheer complexity of the job to not only analyze and report organizational results, but also to steer performance for today and transform the organization for the future. For a number of reasons that I will describe shortly, if you can make it as a CFO of a healthcare provider organization, you can probably make it anywhere.
The demands on the CFO are immense. Business intelligence can help.
Key Challenges for Healthcare Provider CFOs
Organizations in every industry have unique idiosyncrasies that increase the complexity of managing the firm’s finances. Healthcare provider organizations, including hospitals, clinic and physician groups, long-term care facilities, home care operations and so forth, seem to have them all. Consider this list:
- Diverse business models. Few industries can claim to have as many business models operating under one umbrella as can the providers of healthcare. One example is the hospital. A hospital is often a large business in itself, concerned with production of services the way a manufacturer is concerned with production of products. Then, there is the hospitality aspect, with an emphasis on occupancy rates of beds and complex staffing needs to service the “guests.” In addition, this one facility in all likelihood also houses emergency care (which operates very differently than the rest of the building), laboratories, specialist offices and a host of other types of “businesses.” Measuring and managing any one of these individual businesses is a full-time task. Measuring and managing the combination of these businesses consistently is a full-time task for a team. Add to this the fact that most hospitals are not standalone organizations, but part of larger integrated delivery networks (IDNs) with a wide variety of satellite facilities such as primary care clinics, specialty clinics, labs, home health operations and long-term care facilities, just to name a few.
- Diverse organizational structures. Not only is the combination of business models diverse, but the legal and financial organizational structures are equally diverse. For instance, rarely does a healthcare provider own just one hospital – the provider usually owns two or more. These facilities come in all shapes and sizes, including community hospitals, specialty hospitals, teaching hospitals and so on. The ownership arrangements are diverse as well, with a wide range of owned, non-owned, affiliate and parent-subsidiary relationships. Add to this that some parts of the organization can be for-profit while others can be not-for-profit operations. Top this off with the fact that one of the most obviously critical groups – physicians – may not even work for you. In effect, your organization becomes a host for others to operate their own businesses.
- Diverse strategic intentions. Most other types of businesses such as banks, manufacturers, retailers, telecommunications and even the vendors of healthcare equipment and supplies operate with a simpler mission – to make a return for owners. This is their trump card when considering a handful of other potentially competing missions. Healthcare providers, by contrast, operate with a handful of competing missions and several potential trump cards, but rarely is any one of them a clear choice in any given situation. Healthcare is a curious mix of emotional, financial, public, private, scientific and social strategic intentions. This makes decision making for the CFO of such an organization much more complex.
- Diverse customer groups. In most businesses, the customer is usually readily identifiable. This is the person who trades money for the goods or services the business produces. If only it was that simple for healthcare providers. The “customer” for these firms can be the patient, the patient’s family, the payer, the purchaser of healthcare services (e.g., employer), government organizations, charitable groups and so forth. And often, these customers are two or three-times removed from the actual transaction of caring for the patient or paying for those services. These customers may have little or no understanding of the mechanics involved in providing healthcare, as well as little or no feeling of control over the choice of providers (the one my plan allows me to go to) or the pricing or frequency of using the services. All of this puts revenues and profitability for the provider organization at a much higher risk than other types of organizations.
- Diverse stakeholder voices. Every decision made by healthcare providers has a public relations impact. And financial decisions usually have a negative impact on the organization, even if the news is good. This is due to the fact that there are so many voices who believe they have a say in the running of the healthcare provider, such as patients and patient groups, employers and health plans, politicians and governmental agencies, quality standards and safety groups, and, of course, investors and owners. These voices often have legitimate messages that if heeded can improve the quality, effectiveness, efficiency, equity and patient-centeredness of the provider. That is not the concern. The issue is that unlike most other types of businesses, the healthcare provider is constantly subjected to many more of these voices. This makes the management and measurement of performance much more difficult for the CFO.
The combination of these complex environmental components makes measuring success highly challenging. It is this backdrop of complexity that makes business intelligence that much more critical to the CFO.
Good Performance Measures: Monitoring the Healthcare Provider Organization
Most of the traditional financial measures used by healthcare provider organizations have been around for nearly a century, such as revenues per adjusted patient day, expenses per adjusted patient day, average length of stay, FTEs per adjusted occupied bed, days from discharge to final bill, etc.
In addition, the traditional financial measures used by CFOs across most industries have been around since the late 1600s, when the Spanish Mint first developed the concept of debits and credits to better track gold shipments. Examples include days cash on hand, days in accounts receivable, debt service coverage ratio, collection rates, quick ratios, long-term ratios, gross margin, EBITDA (earnings before interest, taxes, depreciation and amortization), etc.
For the most part, these measures are used to keep the ship on an even keel. There have been additions to both categories of monitoring measures (i.e., healthcare finance and general finance) over the years. And, at times, one or more measures may get extra attention in response to temporary situations (e.g., cash may get attention this year, but margins may get attention next year, and case mix may get attention the following year). But overall, they have proven pretty durable and have remained fairly stable.
One reason for their durability is that most of the traditional monitoring measures are required by government regulatory bodies. Tax reporting requirements are the biggest culprit.
These measures do suffer from two key problems, however. First of all, they are all backward looking, or as W. Edwards Deming said regarding inspection as a quality management method – it is the equivalent of driving a car using the rearview mirror as your guide. A collision is imminent.
The second shortfall of traditional monitoring measures stems from the first. In other words, while they may imply action and state the impact in financial terms, they do not tell the entire organization what to do to correct the situation, let alone improve it. This translation of financial results into the actions each person should take is often left up to the individual (in situations of really bad leadership), or translated by each department or function of the company individually (in better, but not optimal, situations).
These measures are, however, essential to the organization’s success; and this is one area where business intelligence can help the CFO. Chief financial officers have long been interested in visibility to the formal financial measures drilled down a number of different ways in order to root out problems such as pockets of excess costs, overlooked sources of revenue or capital that is tied up in nonproductive resources.
In some cases, having this capability can even have a critical, survival impact. For instance, if cash flow is in danger, it can be very insightful to be able to see cash flow sources and uses not only by formal business units and facilities, but also by service line, by payer, by facility type and even by patient and patient grouping. This data can be used to tap into sources of cash that are slow moving as well as identify cash users who are moving too fast, causing a cash shortage.
The key is to take the data already being used by the organization for formal reporting purposes and provide the ability to drill down, up and sideways in ways that have not been used before.
Better Performance Measures: Steering the Healthcare Provider Organization
Very few people in any organization have direct control over the financial resources of that organization. Most people do not touch the money. The majority of the decision makers in healthcare provider organizations have control over (or at least intimate knowledge of the pulse of) nonfinancial measures, such as patient volumes, admissions, occupancy rates, staffing levels and staffing mix, process and procedure timings, supplies purchases, practice and procedure variations, etc.
Each one of these and potentially hundreds of other nonfinancial measures can be translated into the dollar impact (positive or negative) on the organization. Nonfinancial measures drive financial success. This translation task typically falls to the CFO and his/her team, and it is one area where CFOs can benefit greatly from business intelligence.
Business intelligence capabilities offer the financial team the ability to forecast revenue based on patient volume trends and patterns. It provides information to better plan labor costs based on staffing level and mix requirements (regulatory and nonregulatory). It is used to combine data to uncover problem areas such as service lines that are consuming too much capital, but that provide little in the way of profitability.
Using business intelligence effectively in support of financial analysis and financial management to help decision makers steer the organization requires two key practices. The first is two-way translation. As stated earlier, most decision makers do not deal in measures stated in dollars, but in other non-financial measures. One key unit of measure for the chief medical officer, for instance, is people counts. Counts of people in patient panels. Counts of patients admitted, seen, treated. Counts of diabetes patients in A1c control by clinic, by physician, by gender, etc. Counts of physicians by specialty with certain educational qualifications. This is how the CMO manages his/her world. In counts, not dollars. Using this example, it is therefore essential to be able to translate from people counts into dollars (CMO to CFO), as well as from dollars to counts (CFO to CMO).
The second business intelligence practice is comprehensive drill-down capabilities. One of the key sources of performance failure in healthcare provider organizations (or any organization for that matter) is the misalignment of performance targets and performance results measurements from the top to the bottom of the organization. If a dashboard or a scorecard is created at the executive level and no corresponding drilldown is supported at the director level, manager level and operational staff level, then how can those successive levels of people be expected to perform appropriately? What does a hospital wing administrator do, for instance, with information at the corporate level on cost overruns? What action does he/she take? What units of measure will give this person insight into decisions that will help the corporate situation? Occupancy rates? Staffing ratios? Staff mix versus patient mix?
The ability to steer decisions by people up, down and across the organization that contribute to the success of the entire organization is what business intelligence can support. But it takes two-way translation of measures and the ability to link these measures throughout the organization to be successful.
Best Performance Measures: Transforming the Healthcare Provider Organization
I once worked for a CEO who said that if you measure your success the same way as you always did, then your organization will be the same as it always was. Admittedly, this is a takeoff of Albert Einstein’s quote on the definition of insanity. Nevertheless, it is true. In order to transform your organization, new measures of success are essential. These new measures must not only help the organization monitor results, nor can they only give instructions as to what to do today. They must tell each person in the organization three things:
- What decision and subsequent action do I take today?
- How does this action contribute to the goals of the organization?
- How do I know that the decision and subsequent action succeeded in producing results for the organization?
The CFO is in a prime position to introduce these new measures of success and to link them to existing financial measures to ensure that the organization becomes lighter, brighter, faster and stronger.
Most healthcare provider organizations have four pillars in their strategic plans – patients, practices, capabilities and growth. And there are a number of new measures that are gaining traction in organizations worldwide to not only guide actions today, but also to link them to the rest of the organization and to the results of the organization as a whole.
Measuring the “strategic contribution” of every resource – tangible, intangible, financial, human, etc. – along these four pillars is the best way to not only make successful performance repeatable, but also to change the game in the organization’s favor. This is true both financially and non-financially.
- Patient Pillar. The patient pillar refers to who the organization serves. Does the organization primarily serve children, adults, elderly, men, women, rich, poor, urban, rural? Who are our populations? What do our patient profiles look like? New measures that help organizations target and serve the right patients include patient experience, patient-centeredness, patient profitability and patient lifetime value. Each of these measures has a financial component (e.g., costs of services to increase patient experience, investment in patient-centered facilities, patient revenue, etc.) as well as various nonfinancial components (both quantitative and qualitative). Ultimately, patients are where the money comes from for healthcare providers even if it is two or three times removed through payers, employers, government, etc. Every person in the organization should be able to drill down to the measures that will help him/her be successful in contributing to the organization’s goals within this strategic pillar.
- Practices Pillar. The practices pillar refers to how the organization reaches and serves its target market of patients. Does it do so through community-based hospitals, general practitioner clinics, specialties, home health, long-term care, convenience clinics, medical tourism, etc.? New measures supporting this pillar include patient reach, brand equity, service quality, reputation, trust, etc. The focus here is what do we do that resonates with our patients, payers, purchasers, investors, physicians and staff? How does the world know us? Are we beacons? Destinations? Commodities? Our decisions (both individually as well as organizationally) need to support our contribution to this pillar in order to succeed clinically, operationally and ultimately financially.
- Capabilities Pillar. Capabilities as a strategic pillar means the mix of hard and soft skills, technologies, methods, facilities and climate that the organization brings to the table to support the practices, which in turn serve the patient populations. New measures supporting this pillar include engagement of employees, partners and vendors, collaboration, productivity and activity-based management. Each of these measures translates into financial results such as better cost management, reduced turnover, favorable trading terms, improved capital decisions and greater efficiency in the use of labor, equipment and supplies.
- Growth Pillar. Finally, the growth pillar refers to the innovation and new ideas needed to keep the organization from becoming stagnant. Means of measuring growth include not only overall growth (i.e., revenue growth, profit growth, etc.) as well as growth of market segments, income growth, growth of practices, growth of capabilities, but also increased ability to grow. New measures that provide insight into a sustained ability to grow the organization include agility, learning effectiveness, knowledge development and use and readiness for new ideas and new situations. These measures translate into financial success through conversion into increased revenue and profitability, leaner capital requirements and improved return on the resources (money, machines, people) that the organization already has in place.
It is essential to the success of the organization (long-term, short-term, financial, nonfinancial) to investigate and develop these new measures, to link them across the organization and to tie them together from top to bottom.
The job of the CFO in a healthcare provider organization is a highly complex one, and it is one that can be improved greatly through the use of business intelligence capabilities to slice, dice, sort and sum both the financial data as well as the nonfinancial data used to measure and manage organizational performance. The key to success in improving the provider firm’s performance is to determine what level of measurement is appropriate (i.e., good, better, best) and then use the data the firm already owns to get the entire organization working toward the same goals.
That is the promise of business intelligence – to provide information at the level of the organization that is relevant to and actionable by each person receiving it, while ensuring that it is linked all the way up the chain to the strategic intent of the organization. In short, to measure every decision in terms of how well it contributes to the provider’s strategy.
This is what transforms organizations. This is what can transform your organization.
Thanks for reading!