The State of Healthcare Finance: 9 Major Survey Findings From Hospital CFOs

Healthcare CFOs sit in a rather unique situation right now.

Their partnerships with each member of the C-Suite vary: strategic planning with the CEO and COO, information and data analysis with the CIO, clinical integration and cost of care observations with the CMO and CNO. Each relationship has evolved during the past several years as healthcare leaders attempt to figure out the best ways to reduce the overall cost of care while remaining a viable, profitable entity.

But how do CFOs view healthcare right now? Are there certain challenges that stick out more than others?

During the past four months, Becker's Hospital Review contacted numerous hospital and health system CFOs to answer those questions, namely through a survey about the general state of healthcare finance. What follows is an analysis of the exclusive survey results.

Note: Fifty-two hospital and health system CFOs participated in the survey. About 31 percent of respondents are CFOs of small hospitals and critical access hospitals. A third serve at mid-sized community hospitals with 101 to 300 beds. The remaining 36 percent are CFOs of large community hospitals, teaching hospitals or multihospital health systems.

1. Medicare/Medicaid payment cuts, declining inpatient volumes and rising expenses worry CFOs the most right now. Of all the financial challenges hospitals are facing right now, a vast majority of CFOs (75 percent) said reductions to Medicare reimbursement — through sequestration and other scheduled declines — worry them the most.

Respondents were able to choose three options. Declining/stagnant inpatient volumes (49 percent), cuts to Medicaid (41 percent) and rising costs associated with labor and supplies (41 percent) were the other top concerns for CFOs. A recent analysis by Citi Research showed only 5 percent of hospitals reported year-over-year growth in their November admissions, the weakest level in more than a decade.

Other financial issues CFOs said were worrisome included bad debt, Medicaid expansion, RAC audits and negotiations with commercial payers. About one in five respondents selected those as a top-three finance concern for this year.

2. Merger and acquisition activity will remain high. A slew of hospital and health system transactions has defined the early part of 2014 — systems with recent deals include Community Health Systems in Franklin, Tenn., Houston Methodist, Atlantic Health System in Morristown, N.J., and WellSpan Health in York, Pa., to name a few. For many finance executives, this trend is not likely to subside.

Approximately 42 percent of surveyed CFOs said their organizations are actively engaged in or looking for some type of partnership. Most are looking for affiliations or loose partnerships instead of full-scale mergers or sales.

Forty-six percent said they will not be involved in M&A discussions this year, while 12 percent said they were unsure.

3. CFOs are divided over which elements of the PPACA are most vital right now. Most hospital-centric provisions of the Patient Protection and Affordable Care Act are now live, the most prominent being value-based purchasing, readmissions reduction, accountable care structures, health insurance exchanges and (eventually) cuts to disproportionate share hospital payments. In addition, a little more than half the country is expanding their Medicaid program to those with incomes up to 138 percent of the federal poverty level, although that is a state issue rather than an individual provider issue.

For CFOs, financial stability depends on the successful implementation of each program. About one-third of CFOs said creating an accountable care structure was their major focus right now. However, 23 percent said readmissions reductions are top-of-mind, and another 23 percent placed the highest priority on health insurance exchanges.  

4. ICD-10 is the primary revenue cycle issue for 2014. After years of delays and aggressive lobbying, the U.S. healthcare system will finally convert to ICD-10, effective Oct. 1.

The bulk of CFOs (71 percent) said the challenge of transitioning to ICD-10 is, far and away, the most important revenue cycle issue for this year. The costs associated with implementing ICD-10 run into the millions of dollars, but several industry experts and CFOs have said the costs of being behind on ICD-10 are likely to be even greater.

Other revenue cycle issues that made the cut, albeit with fewer responses, included improving patient registration, revamping the chargemaster and stabilizing cash collections.

5. Labor costs and staffing have been the most challenging operational issues to manage. According to Fitch Ratings, personnel costs represented 54.2 percent of hospital operating revenue in fiscal year 2012, one of the highest figures of the past several years.

Hospitals and health systems have handled this issue through layoffs and attrition, but 57 percent of CFO survey respondents still said managing labor costs has been the most difficult operational issue during the past year. Fitch analysts believe the increased labor costs are due to physician practice acquisition and health IT.

Other operational issues CFOs reported as most difficult included supply chain (14 percent), funding capital projects (14 percent), payer negotiations (10 percent) and pension costs (6 percent).

6. Operating margin and days cash on hand are two of the most important financial metrics. Measurable financial data is essential for CFOs to monitor daily, weekly, monthly, quarterly and annually, and some metrics hold more weight than others.

Hospital and health system CFOs said the most pertinent metrics they watch are operating margin (65 percent) and days cash on hand (60 percent). Several other high-value benchmarks include payer mix (37 percent), admissions (35 percent), days in A/R (33 percent) and operating cash flow margin (19 percent).

7. Most hospital investments in 2014 will be put toward health IT and physician recruitment. According to survey results, healthcare finance executives will continue to emphasize capital investments in two primary areas: physicians and health IT.

About 71 percent of CFOs said physician recruitment would be a top-three investment in 2014. Sixty-seven percent also said health IT (namely, electronic health records) would top the list of capital spending.

The emphasis on bricks and mortar continues to dwindle, as less than 40 percent of CFOs said new/replacement facilities would be a top-three investment priority.

Other areas of planned investment included alternative facilities like ambulatory surgery centers, expansion of service lines, sustainability/greening, quality and infection control measures and M&A activity.

8. Only 54 percent of CFOs believe their hospitals are mildly or very prepared to take on population health and accountable care structures. The healthcare system is undoubtedly on track to gravitate away from a fee-for-service system and toward one that pays for value and focuses on the health of a defined population. However, many CFOs feel their feet are in two different boats right now.

When asked how prepared they believe their hospital is to take on population health management and accountable care structures, only 54 percent responded with "very" or "mildly." Broken down further, only 15 percent said they were "very" prepared, compared with 39 percent who are "mildly" prepared. More than a quarter (29 percent) said they were "somewhat behind the curve" or "not prepared at all."

9. Finance executives are working harder to integrate with the clinical house. Although physicians and nurses traditionally have not shared a lunch table with CFOs and finance professionals, the two sides are increasingly willing to find away to "merge" their knowledge.

Almost one-third of CFOs said they make it a daily priority to be involved with their organizations' clinical staff and patient quality/satisfaction elements. The remainder said they are "pretty" or "somewhat" involved with those areas.

More Articles on Healthcare CFOs:
Why Timing is Key: St. Mark's Medical Center's Debt Refinancing Success
CFO Roundtable: How Will 3 Major Changes for the Year Ahead Impact Finances?
Excited About the Road Ahead: Q&A With Mercy Health CFO Patrick Kowalski

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