For CEOs, this transformation includes transitioning their organizations from the fee-for-service model that they are currently working under, to a future state of value-based healthcare in which they will need to provide more affordable, higher quality care at lower reimbursement rates which may include a fixed or bundled payment model. These structural changes to the industry are having a ripple effect internally and externally as CEOs are unsure of how market and reform changes will move their organizations with regard to managing population health on a much larger scale.
Changing centers of influence
Historically, most decisions within healthcare organizations have been based on clinical and patient outcomes, but today decisions are being scrutinized for their economic impact. Making the case for state-of-the-art equipment, new technology or adding staff to handle increased patient volumes is being closely evaluated by hospital administrators who are asserting their influence on all decisions.
As hospitals diversify to compete in the current climate, they continue to acquire physician practices at a record pace, which is also impacting the centers of influence within the hospital’s leadership structure. Where physicians had the sole authority to make device and other product decisions in the past, being part of the ownership structure is shifting decisions to value analysis committees and profit center leadership. Another significant issue is how to gain agreement on how to measure financial performance with these newly integrated entities.
An absence of hospital-wide financial literacy
There is a serious lack of financial understanding in healthcare. This makes sense as most healthcare professionals got into to the business to care for patients. But, as more and more focus is brought to the economics of the hospital, the need is rising for financially informed decision makers at every level. Absent a foundational understanding of the hospital’s financial drivers, uninformed decisions regarding revenue capture, cost management, cash flow and inventory management are being made in a vacuum. As a result, these changes are putting an added burden on all leaders within the hospital. There is a need for directors, department heads and supervisors from all areas to have the financial and leadership skills to perform in this new environment.
The need for financial literacy
Hospitals are under tremendous pressure to grow net patient revenue, manage expenses and re-deploy assets for a strong return. Though most employees understand the importance of improving financial performance, few understand how they directly impact the financial condition of the hospital through their every-day decisions. And fewer yet understand the importance of generating cash flow — something senior leadership is looking at with tremendous scrutiny.
With the pressure of ambitious financial goals, aligning the organization around the decisions that drive results has become critical. Even if you are a non-profit hospital, the fundamental principles are the same: grow net patient revenue, drive down costs and leverage assets. Internal communication programs around understanding how each and every employee contributes to the success of growing net patient revenues and managing expenses is critical to hitting the numbers.
Enabling managers
Decision-making must be tied to the economics of the hospital and linked to business strategy.
It is essential that managers at every level and in every department of the hospital understand how to connect with an organization’s key strategic and financial drivers if they are to deliver the results. Long-term success of the hospital depends on the whole management team. Because of its impact on how capital is deployed within the organization in the form of people, time and effort the organization must help connect managers to the decisions that drive the greatest return. However, because decisions often involve trade-offs between adding capacity and operating expenses, many managers become short-term focused and miss opportunities to increase long-term value.
Managers, in turn, must share information with employees to provide them more concrete direction about what they should do and how they should do it within their department. This helps create an environment where economic value becomes a daily discipline that is actionable, observable and measurable. Only then can management hold employees and themselves accountable for growing net patient revenue, managing operating expenses and redeploying capital that achieves the financial objectives of the hospital.
Enabling the workforce
Many hospitals have been successful in recent years in installing process improvements that have led to improved patient care, increased productivity and lower costs. They have achieved higher levels of quality through a knowledgeable, skilled and committed workforce. To help employees reach the next level, it will be important to help them understand how the hospital makes money and how they individually impact financial performance. They need to understand the key financial drivers that impact results and especially how results impact their compensation and job security.
Towers Perrin conducted a survey on the level of motivation that managers and employees exhibit when they are “connected” to their company’s key success factors. The survey results are instructional for healthcare:
“Among employees who said they understand what makes the business successful, 84 percent said they were motivated to help create that success. In contrast, among employees who didn’t feel they understood the business success factors, only 46 percent said they were motivated.”
The study also found among managers and employees who said they understand how they can help achieve company goals and who believe their own activities influence success:
“91 percent said they were motivated to help create success. But among those who don’t understand how they directly impact the key financial drivers and consequently, how they impact results, only 23 percent said they were motivated.”
Objectives
Building financial literacy can help elevate a hospital’s staff to another level. By connecting managers and employees to the key financial drivers like inventory management, revenue capture, proper coding, labor and supplies ratios to net patient revenues and return-on-assets, you enable your hospital to deliver even higher levels of care for patients, providers and other stakeholders. Building financial literacy programs and communications can help you achieve three objectives:
- Gain staff understanding of how cash flows through the hospital’s business so they can contribute to the hospital’s financial “scorecard.”
- Teach your staff how to build a business case for requesting budget funds for additional staff, equipment or other resources that improve the quality of care, increased productivity and reduced costs.
- Strengthen manager and employees commitment to the hospital and to take personal responsibility for contributing to the hospital’s financial performance through creative ideas.
4-step approach
There are four steps every hospital can take to align the entire organization around the patient care and financial goals of the hospitals.
1. Provide financial education. Provide an education program and communication that teaches staff how cash flows through the hospital and how decisions impact outcomes. Show the financial impact of small changes. For example gaining $1 dollar of improved pricing or revenue capture can deliver 8-10 percent in operating earnings. One dollar of cost taken out of the business will drop one dollar to operating earnings, which is huge to a hospital system.
2. Provide greater visibility. Educating the staff is the first step; the next step is to provide greater visibility into the key metrics that are driving the hospital’s performance. Show key ratios like Labor as a Percent of Net Patient Revenue, or Supplies as a Percent of Net Patient Revenues, Inventory Turns and Cash Generation. More importantly, it will create alignment to goals, employee engagement and commitment to achieve both quality care and economic goals.
3. Frequent progress reports. Once you educate your staff, it is important for them to see the progress and where improvements must be made. Getting frequent data on the financial performance of the hospital, the greater the chances that decisions can be made and desired results achieved. Communication programs with metered progress-to-goal charts can be great departmental and overall organization motivators to reinforce the message. Additionally, once the programs begin, ensure that new employees are indoctrinated into the hospital’s financial performance goals from day one.
4. Install a business case process. One of the consequences of a staff that lacks strong financial skills is the challenge they have in making the case for budget increases for new staff or capital investments. In today’s new economic reality, it is the greatest frustration clinicians have in doing their jobs. Provide the tools and process for department leaders to make their business case in a way that supports the hospital’s financial goals.
It is imperative for the hospital to be fully aligned and functioning at a high level. Physicians and clinicians must understand how their actions and decisions impact the economics of the hospital. Patient care will always trump financial concerns; however wasted, underutilized assets, high expenses and unused or lost inventory will make the job of providing care that much more difficult in the future as it zaps precious resources resulting in harsh financial constraints.
Stacey McClenathan is CEO of Bee-line Communications, a strategic global marketing communications firm in Libertyville, Ill. The agency represents a diverse portfolio of clients throughout the healthcare industry such as medical device firms, pharmaceutical companies, hospitals, physician groups, bio-techs and consultancies.
Bob Rickert is regional general manager of Aarthun Peformance Group. APG is a leading provider of financial literacy solutions and uses a variety of methodologies to help salespeople understand their company’s financial drivers, their customers’ financial drivers and how they can sell value without sacrificing margin. Through this knowledge, customers, salespeople and employees take ownership of the financial impact of their actions and base their decisions and actions on profitability.
