Academic Hospital Finances Today: Q&A With Tufts Medical Center CFO C. Okey Agba
Last year, PwC released a report that delved into the future of academic medical centers and what they needed to do to "avoid a margin meltdown."
Indirect medical education, disproportionate share hospital payments, narrowing networks with commercial payors and federal research grant funding were among the many financial challenges outlined in the report that face AMCs today. For Chibueze Okey Agba, CFO of Tufts Medical Center in Boston, those challenges are just beginning to unfold as healthcare reform remains in its infancy.
Mr. Agba, who previously served as CFO of Harvard Medical School and held various financial roles within Partners HealthCare, helped Tufts record a strong fiscal year 2012 (pdf), which ended Sept. 30. Massachusetts is a hotbed of its own healthcare reform, yet Mr. Agba helped grow Tufts' asset base by more than 13 percent last year while limiting the growth of expenses to less than the rate of healthcare inflation.
Here, Mr. Agba discusses how Tufts was able to record such a positive year despite the fiscal hurdles, what is most important when looking at financial data and why academic medical center financial executives must be so flexible today.
Question: In FY 2012, net income at Tufts Medical Center increased more than 46 percent to $25.3 million, which is almost unheard of today for non-profit hospitals and academic medical centers. It appears the hospital made significant gains in investment income. Can you give some insight into how the hospital was able to achieve this?
Chibueze Okey Agba: Fiscal 2012 was a very challenging year for Boston academic medical centers since volume growth was flat across the city, so we are particularly pleased with what we were able to accomplish financially. We were able to achieve a reasonable margin by focusing our efforts on cost containments.
Q: Can you talk about the financial hurdles associated with operating income and operating expenses and how other CFOs like yourself have been handling these pressing times?
COA: We embarked on a major cost-cutting program in the first and second quarters of 2012. As a result, our operating costs increased only 1.6 percent last year, quite impressive considering medical inflation is running at more than 3 percent. Reducing our expenses to below-inflation levels was one of our major financial achievements.
As CFO, I focus my attention on areas I can affect, which include working with our clinical leaders to provide care that is second to none at the most efficient cost possible.
Q: Tufts Medical Center's total assets jumped 13.7 percent, which is another bonus for the institution. How have you and the organization been able to increase value so much? How important is cash flow to this equation?
COA: By reducing our expenses and improving our rate of collections from major payors, we have been able to significantly build our cash position, which is key to our financial health. Cash flow is extremely important to us, not only because we must meet our covenants with our bondholders, but because we need a healthy cash position for future borrowing to support capital expenditures. I'm proud to say that in 2012, we achieved 85 days cash on hand, up from 71 days in FY 2011. I think this is an excellent indicator of our overall financial health.
Q: Overall, from the FY 2012 results, which numbers stand out to you most? Which numbers signal a positive trend, and which figures need to be improved this year?
COA: We started FY 2012 with claw back from most of our Medicaid HMOs, but as we worked hard on our cost-control initiative, we were able to change course, demonstrating our ability to be nimble. We do watch days cash on hand very closely, and we want to continue to improve on this. With reductions in Medicare and [National Institutes of Health] funding ahead, all hospitals — particularly academic medical centers — will be challenged, and we want to make sure we maintain our cost-competitive position in this market.
Q: When a hospital records its quarterly financials, which numbers are most important?
COA: Operating results are obviously important, but the change in key balance sheet accounts, such as increasing cash, decreasing accounts receivable and steady accounts payable, are equally critical.
Q: Based on your experiences, what is the best way to present a hospital's finances to the board, employees and public?
COA: I present financial information to the board within the context of our strategy and long-term risks and opportunities we see in the market. Employees need to understand how their role impacts our finances and why our overall financial picture matters to them and the areas in which they work. They need information they can act on to help them be as effective as possible. For the public, we present our true picture as represented by our audited financial statements.
Q: You mentioned NIH funding reductions earlier. As an academic medical center, are there certain healthcare reform or reimbursement issues that concern you most right now? What about graduate medical education?
COA: As an AMC, we are also a major research institution, so any time the federal government reduces funding as is happening with the NIH, we feel an impact. And any reduction in Medicare rates of reimbursement is an area of concern for us. With the recent fiscal cliff debates and agreements, many issues and decisions on future funding have only been postponed, which creates uncertainty for all healthcare institutions. Additionally, the budget stresses on states and the future funding of Medicaid is at risk. Graduate medical education is definitely a part of this mix, but so are disproportionate share funding and other forms of funding.
Q: Are there certain components within Massachusetts' healthcare reform that demand your extra attention that other CFOs may not realize?
COA: The challenge I see in Massachusetts is related particularly to the new cost-containment law that was passed last year, which has its pros and cons. The biggest challenge we have at the moment is that so many of the regulations have yet to be promulgated, so we are not in a position to analyze its potential effects on us. And we cannot plan for what we can't analyze.
Q: How do you foresee your organization's alliance with Vanguard Health Systems playing out to build a successful CO-OP?
COA: So you are referring to the Minuteman Health Initiative, a CMS-approved Consumer Oriented and Operated Plan, which we sponsored along with Vanguard and which was approved by CMS last September. While we and Vanguard were sponsors of Minuteman's application, along with our New England Quality Care Alliance physicians network, Minuteman will operate independently and is not owned by either Tufts Medical Center, Vanguard or NEQCA. Like all of these plans that have been accepted by CMS, Minuteman is expected to begin enrolling members no later than January 2014.
Separately, Tufts Medical Center and Vanguard are forming a partnership that will enable us to offer innovative new options to physicians groups and hospitals looking for partners who have a strong track record of offering high-quality, efficient care.
Q: Any other advice or thoughts to share with other hospital and health system CFOs as they enter 2013?
COA: I believe 2013 is just the beginning of an even more challenging period for healthcare. The impact of the Affordable Care Act and the fiscal cliff-related measures Congress enacted will be significant to AMCs. Funding from NIH and other agencies and the decrease in funding for training new [physicians] will be among the most significant issues we face. CFOs are going to have to continue to focus on efficiency in order to meet those funding challenges.
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