Hospital CFO Panel: How Are You Approaching Your Fiscal Strategy Right Now?

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The Medicare hospital trust fund is projected to become insolvent in 2024. Hospital credit downgrades are predicted to outpace upgrades. The healthcare reform law will impact hospital revenue. Bank letters of credit are shaky. Collections are getting tougher to collect on both the front and backend.

This isn't a lightening round on a healthcare finance game show. These issues — and many more — are only the tip of the iceberg for what hospital and health system CFOs have to deal with today. However, the panic button does not need to be pressed.

Taking a step back to outline and monitor the progress of specific financial challenges that lie ahead is a good first step for hospital and health system CFOs that feel overwhelmed. Here, four hospital and health system CFOs — Carl Biber of Columbus Regional Healthcare System in Whiteville, N.C.; Denis Conroy of Northeast Health System in Beverly, Mass.; Dan Fromm of Fairview Health Services in Minneapolis; and Mark Krieger of Barnes-Jewish Hospital in St. Louis — share how they are dealing with the biggest healthcare financial challenges of the times, ranging from government reimbursement and commercial payor negotiations to ICD-10 and the credit markets.  

Question: What are some of the biggest issues facing your hospital's or health system's finances today?

Carl Biber is CFO of Columbus Regional Healthcare System.Carl Biber: There's a number of paradigm shifts happening in the industry right now, one being the emphasis on quality. That's not a new idea as much as it's keeping in mind that the patient is truly at the center of receiving that service. With any industry, the customer is always number one. Right or wrong, whatever the customer perceives as "value" is what we're trying to understand and provide.

Patients know what they want, and it originates from the two basic questions: 1) What's wrong with me? and 2) Am I getting treated? From their perspective, the rest is just processes or systems they have to go through to get to the value.

As we continue down the road with various stakeholders, we cannot expect reimbursement to go up in any way, shape or form. We are a low-cost provider, and our charges are some of the lowest in [North Carolina]. From a strategic business perspective, we're in great shape, but the way we see the environment unfolding, we have to continue increasing the value proposition 5 to 10 percent over the next three to four years to remain viable in the community.

Denis Conroy: One is as we switch to a budget-based payment system from fee-for-service, we are having to change the way we managed in this environment. We have a physician hospital organization, and we have been doing [global payments] for commercial contracts, so we have a little bit of a leg up. But with Medicare going to an ACO arrangement, we have to get even better at it.

Another issue relates to the financial markets, principally the interest rates. We have interest rate swaps and defined benefit pension plans, both of which are negatively affected by the low interest rate environment. There are positive impacts of the lower rates as well, but the calculation of pension liabilities and swap market values are very sensitive to interest rates, and they haven't been in our favor recently.

Dan Fromm: The list is broad and expanding. However, there are four issues that are high priorities as I think of challenges to our financial health. One is the growing strain on all sources of revenue — commercial and government. Two, we have numerous challenges resulting from new healthcare delivery models, including new payment models. Three, slow economic growth has weakened the macroeconomic environment. There have been lower utilization patterns and increased exposure to uncompensated care. Lastly, balance sheet pressures are increasingly driven by continued volatility in markets, swap portfolios, access to capital and liquidity issues.

In addition to these four areas, there are also increasing costs in attracting and retaining our workforce, and IT costs are spiraling out of control. A newer trend is the convergence of clinical and financial issues. That's certainly something we're paying close attention to.

Mark Krieger: Always at the top of mind is the downward pressure in the reimbursement environment. This challenge makes us think continually, "How do we deliver high-quality healthcare at a better price point?" Our leadership priority is to engage our employees and medical staff around the value proposition of delivering excellent outcomes and service in the most cost-effective manner so there is more value for the patient. This calls for a continuous focus on more efficient workflows, reducing supply cost waste and capital asset investments designed to more readily adjust to future changes in care delivery. Over the past six years, we have been on a journey of adopting lean tools and methodologies as the way we continuously improve — and we are seeing results.

Q: How do Medicare and Medicaid factor into your organization's overall fiscal strategy right now?

CB: Medicare is about 50 percent of our patient base, and Medicaid is about 20 percent. Ten percent are uninsured. On the Medicare side, an average hospital will barely cover its costs. Medicaid, for an average hospital, gets reimbursed 75 to 80 percent of their costs. There isn't any other industry I'm aware of that has that kind of dynamic. That's the healthcare environment we're in right now, and that's our challenge. Part of our strategy plan is marketing and meeting the needs of those who do have insurance. Most hospitals aren't this heavy in Medicare and Medicaid, but it's our mission.

DC: They are a high percentage of our business. Between the two, they are roughly 50 percent. Neither of them pays very well. We were on a trajectory to get our expense structure in line to make money on Medicare, but some of the cuts are starting to materialize — and there are more on the horizon — so it's hard to get there.

We qualify for Disproportionate Share Hospital payments, but it appears that will be going away. And who knows what's going to happen with sequestration. These pressures contributed to us entering affiliation discussions with another not-for-profit organization, the Lahey Clinic. Lahey has a wide range of tertiary services, and for a number reasons, they are a very good affiliation candidate for us. We're about 15 miles apart, and we complement one another in services and geography. They are very much an adult specialty, tertiary place, and we have OB, pediatrics, long-term care and behavioral health — it's a good fit that way as well.

Dan Fromm is CFO of Fairview Health Services.DF: We have strategies for each. At the federal level, we are trying to play a role in industry reform. We are one of the 32 organizations participating in Medicare's Pioneer ACO project. At the state level, there are increasing exposures from a budget perspective. We have been in discussions with lawmakers to develop alternative models of care and payment for these populations as well. Our work began several years ago with various commercial payor partners to develop new payment models that reward value created by increased patient satisfaction, higher levels of quality and reduced total cost of care. Now, the state and federal governments are mirroring what we've done on the commercial side.

MK: Medicare is close to 40 percent of our payor mix, with Medicaid approaching 20 percent and another 8 percent being uninsured. Since there is not a city or county hospital in our area, we are a major safety-net hospital. Given the deficit reduction challenge placing pressure on federal and state budgets, there will be fewer dollars coming from government payors. This reality supports the case for change and is part of our ongoing communications with our employees and medical staff. We are very focused on the value-based purchasing metrics to ensure we avoid the penalties and maximize the reimbursement available from these payors.

Q: Can you explain how payor and managed care negotiations have evolved over the past 12 to 18 months?

CB: Even though our hospital is owned by the county, we have a specialty group that manages the payor negotiations with managed care payors.

DC: We have three major commercial payors in Massachusetts — Blue Cross Blue Shield, Harvard Pilgrim and Tufts Health Plan. We have relatively recent contracts with two of the three — Blue Cross and Tufts. In both cases, we're trying to get away from the fee-for-service arrangement to more of a risk-based one. The Blue Cross product is called the Alternative Quality Contract, and that has a budget and quality component. We're now in our third year, and I think it has the incentives in the right places. There's enough quality money in there so it's not lip service. Tufts has the same kind of arrangement but more of the focus is efficiency.

As a result of the intervention of the state regulators, we expect the payment levels are headed toward a fairly narrow range. All three HMOs are not-for-profit and are very much focused on the long term. We're an important provider for all three. It's still a negotiation process, but it's not an acrimonious one.

DF: We have four major commercial payors in the Twin Cities that dominate the marketplace. We've done work with all four to develop new payment models. [Negotiations] have become more collaborative and less adversarial. We have been able to find shared goals and objectives as we look to reduce total costs of care and improve quality. Our negotiations have been grounded in principles developed around those goals, and I've found them to be a lot more collaborative and less contentious. It's a much different perspective today than several years ago. That's not to say all ills have been solved, but I would say in general, the approach is very different.

MK: The managed care contracting is done at the BJC HealthCare system level. Managed care payors represent employers, who are also having challenges with regards to their cost structures as they strive to remain competitive in their markets. So we are beginning to see some of the same types of focus on value-based purchasing and pay-for-performance in those negotiations as with the government payors.

Q: What are some of the major initiatives you and the hospital are focusing on right now in the revenue cycle, billing and collections departments?

DF: We have tactics and strategies across the entire revenue cycle. On the front end, we are looking at how we increase our self-pay conversion rate by helping uninsured patients find coverage alternatives. Clinical documentation and charge capture are also a major focus in the mid-revenue cycle, and then on the back end, we are continuing to be as efficient and effective with our follow-up collection processes as we can be. Clearly, technology is becoming an important factor as we see higher exposure to patient liability expenses, which are costlier to collect, so we're looking to automated workflow solutions to help make the process more efficient.

MK: Significant efforts are under way in upgrading our revenue cycle technology platform. It's a BJC HealthCare system-wide effort. We're in the process of implementing an entirely new registration and patient accounting system and a health information management system.

As part of that effort, we're looking at all of the workflows and processes to make sure we eliminate defects in the registration and scheduling areas and have all the required pre-certifications to assure we are paid for care provided. These new systems incorporate tools and require you to do that in the front end of the process. It's a big change for employees as well as the ordering physicians.

Q: How has the ICD-10 delay impacted your operational strategy?

CB: Even with the announcement of [CMS] delaying [ICD-10], we are still going forward with it. There's no risk in adopting early. Even if we meet initial deadlines and no one else is ready, we can still submit everything in ICD-9. We're going to meet our milestones and tweak things on the backend so everything is perfect.

Is it going to cost any resources? Yep. But we're making sure everyone will be trained because we're expecting a less productive system when it comes to coding — and that's from everything we've heard from those who have gone from ICD-9 to ICD-10. We're being conservative so we have enough resources and make sure we have everything.

Denis Conroy is CFO of Northeast Health System.DC: We exhaled and said "phew!" after hearing about the delay. It's a significant undertaking that we're just getting started to do. The Version 5010 billing requirements that we just got through was rocky enough so we weren't looking forward to ICD-10 following on quickly.

DF: Right now, the delay has not affected us. We started on [ICD-10 conversion] early and built what I think is a very robust, thoughtful plan. We're continuing to move forward, and even with an extra year, there's still a lot of work to do. The delay hasn't deterred us at all, and we hope it won't deter others either.

MK: We have our ICD-10 conversion project under way. It's a significant change and will require education of not only our coders but also our clinical workforce. It also affects how our clinical documentation specialists interact with physicians. [The delay] is welcome, but we won't be slowing down our efforts. There's quite a bit of work to do. The delay will just allow us to have excellent execution, but it won't change our focus.

Q: What has the hospital bond market been like, and how would you characterize your hospital's or health system's current credit standing?

CB: The bond market, with the crash and credit markets of the past three to four years, has really gotten sharp and specialized. It's healthy — there's capital out there, and hospitals want to use capital to meet needs in the next five to 10 years. We have a strong balance sheet, with an investment-grade rating, but the pressure with any hospital is going to be on the operating side.

DC: Our credit rating is OK. We've been consistent at Baa2 by Moody's — which is investment-grade. Moody's just announced a potential downgrade of the short-term credit ratings of some banks, one of which provides credit support for some of our bonds. As such, we're looking at the different options right now in case they are downgraded. It's an immediate concern. Fortunately, we have good enough relationships with the banks and have decent enough credit, so if we need to, we could replace the credit support or restructure the debt in some way.

DF: We have A-rated credit, and maintaining that credit worthiness is important to us. We're working hard to make sure we remain fiscally strong and address the issues that markets see as important. It's important to be responsive to the challenges facing our industry and make wise investment decisions in a changing environment.

MK: We're part of BJC HealthCare, and that is really managed at the system level. However, we have a positive relationship with the debt markets, and our bond rating is AA, which provides very good financial flexibility.

This flexibility is important as we are in the planning process of a major campus renewal. We have an aging campus with a very large complement of semi-private rooms — currently only about 35 percent of our beds are private — and one of our goals is to move that number in a positive direction, to more like 80 percent private. That's a major facility renewal effort.

We also have some of our key programs, like the Siteman Cancer Center, that have been growing significantly. We need to provide some capacity for growth in cancer, transplant programs, heart and vascular services, neurosurgery and neurology. We've been seeing growth in all of these and need to provide capacity to take on continued growth. This is in the planning stages, but nothing has been finalized at this point in time.

Q: What are your biggest financial concerns in the upcoming year or so?

CB: We've got a number of strategic initiatives in a rolling five-year plan. We want to remain nimble yet meet the needs of the community. As much as we want to make sure there's enough cash flow to meet those [initiatives], I can't bet on that. Our goal is to make sure we have everything in operations to meet our needs in three to five years. If we're short of that, we may have to go to the market and find alternatives.

Sustainability, long-term, will be a serious challenge. For the first time, we hear about institutions talking about hours of cash [on hand]. The normal metric is days cash. I've never heard of that before, and that's very concerning. No community should be put into that position. It's terrible to hear a hospital could be hours away from closing its doors. Local communities need healthcare.

DC: Our affiliation with the Lahey Clinic closed on April 30. We are focusing on bringing these organizations together. We'll get some savings by combining organizations. We're not closing any campuses because there is not a lot of duplication of services. We're going to focus on capturing market share, doing better under risk [payor] contracts, operating efficiently and saving on capital.

DF: Pressure on operations is something that's a concern. We see those pressures growing, while our capital appetite is still strong. We want to perform well and create financial capacity for future investment.

Mark Krieger is CFO of Barnes-Jewish Hospital.MK: While we have performed well financially in the past environment, we need to make significant changes to generate the cash flow to sustain our healthcare, education and research missions in the future. We have to be able to improve quality and outcomes with lower costs by engaging our key stakeholders. We spend a lot of time communicating with our employees about this new paradigm. We're also partnering with medical staff to appropriately managed supply costs and are working differently with vendors to improve efficiencies. In all of this, we've been incorporating lean principles in the way we do our work. We really have to partner with all stakeholders in different ways, and lean methods are how we are doing that.

Q: How would you advise other hospital or health system CFOs to reach financial viability within the next one or two fiscal years?

CB: We're trying to keep the community involved in strategic planning and what the community sees in the next five to 10 years. We want to stay local. We utilize regional and national resources for various reasons, but most healthcare markets are driven by local and regional forces. My advice: Be attuned to what the [local community] market needs are. Keep them first. If I'm not doing something that's adding value to patient, am I adding value? Our focus is really trying to stay on the customer. That's who we are here for, and we have to be nimble. Over the next two to three years, things could easily shift down the road. It's tough right now.

DC: We're a relatively large community hospital system, about $375 million in hospital revenue, another $100 million in our senior health unit and behavioral health units. We have decent size, and we're struggling with overhead costs associated with a hospital in today's world. There are regulatory issues, payment issues, trying to become an insurer as well as hospital — it's hard for me to believe smaller hospitals will be able to stay independent. My general advice to my friends at other community hospitals is to dust off those affiliation plans and see where there is a good fit because it's going to be awfully difficult to go alone.

DF: Make sure you have a strong planning function. We're continuously monitoring and trying to stay abreast of issues that will have an impact on our organization, short and long term. We try to get ahead of those issues, anticipate the potential impact on our organization and proactively develop solutions.

MK: It's a longer journey than one or two years. You have to engage the workforce. They know where the inefficiencies are. There are no silver bullets or quick fixes. You have to partner with your stakeholders to provide better healthcare at a better price point.

More Articles on Hospital CFOs:

Quick Tips for Financial Success: 3 Thoughts From Mission Health CFO Charles Ayscue

What Does it Take to Be a Hospital CFO Today? 6 Thoughts From Lowell General Hospital CFO Susan Green

Trimming Weight and Balance Sheets: Q&A With Banner Boswell CFO Scott Leckey

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