Before the advent of health care reform, the work overseen by a hospital chief financial officer was relatively consistent from year to year. Despite an overall reimbursement and clinical model that is about as complicated and confusing as it gets, and despite regular changes in such areas as patient volume, payer pricing and labor expenses, the framework for how the system operated never required a significant overhaul.

That was then.

As providers and payers test new care and payment models, financial management also is getting a dramatic makeover. “We’re in a major transformation, because the business model is,” says Kathy Hanley, CFO for ProMedica, based in Toledo, Ohio.

The shift not only is changing internal financial operations, but also is requiring added external work as financial department staffers explain the changes to clinicians and operations personnel.

“I think it’s a significant time for financial executives,” Hanley says. “It’s not just looking at your history and assuming that’s what will be your future.”

The scope and pace of change will depend on how far along a hospital is in adopting the tenets of health care reform. But even for organizations that got out ahead of the curve, some adjustment is inevitable when it comes to how capital is allocated and how finances are managed.

Framing the issue:

  • Running the finance department of a hospital or health system, while never an easy endeavor, used to carry a certain degree of predictability. Those days are over as a result of health reform.
  • Changes in financial management will be necessary because of the added risk that hospitals are taking on, different cash flows resulting from adoption of new clinical and reimbursement models, and a shift of emphasis to outpatient care from inpatient care.
  • Large amounts of capital will be needed to fund the costs associated with population health management, a major new imperative for health care providers.

“There probably isn’t any type of hospital organization that’s going to be able to avoid the impact of the change,” says Jason Sussman, managing director for Kaufman, Hall & Associates. Hospital executives need to focus both on what form their new care model ultimately will take and on how to manage the transition while getting there.

If an organization veers in a completely new direction — for example, if it assumes all of a patient’s risk — the CFO’s responsibilities will need to follow. “At a certain point, if you’re taking on 100 percent risk, you’re an insurance company, and your hospitals are cost centers,” Sussman says. “That is a significant change for capital planning and financial planning.”

Getting from Point A to Point Z

Arriving at that next stage is going to take some tricky maneuvering. Financial managers currently operate in two worlds: A portion of hospital services is still being paid for under a strictly fee-for-service model even as different models of performance-based reimbursements are tested and adopted.

The changeover will take more than a flip of a switch. “You’re not going to go from zero to a hundred,” Sussman says. “You’re going to go from zero to three, to five, to seven and, at some point, there is a tipping point.”

As hospitals move deeper into population health management, patient volume likely will be reduced. Their new mission is to keep people healthy, to treat them at home or in ambulatory facilities and, when possible, to prevent discharged patients from having to be readmitted.

The implications for financial managers are huge. “We’ll see more investment requests in population health management programs and infrastructure, because in 2015 and 2016, we’re going to assume more financial risk for groups of individuals, with payers and employers,” says Tricia Nguyen, M.D., executive vice president for population health at Texas Health Resources in Arlington, and president of the Texas Health Population Health, Education & Innovation Center. Until now, “our investments have been around making a diagnosis and treatment,” she says. “In an ACO, we need to be more proactive in engaging the patients or members or individuals in our community in staying healthy. That means investment in tools, resources and infrastructure.”

ACOs integrate the clinical side with the financial side. Texas Health Resources will be doing that across service lines for all individuals, from the healthy to the chronically ill, Nguyen says. Capital investments are needed to create the infrastructure to manage those populations.

The added investment in technology and support can be disruptive to a hospital’s normal process of capital investment. Andrew Ziskind, M.D., a managing director for Huron Consulting Group, says hospitals are seeking to formally optimize their assets in the wake of the expanded demand for capital. “It’s really asset optimization in the broadest sense of the word,” Ziskind says. “It’s not just physical assets, it’s also location and distribution of clinical programs, it’s the number of beds in different locations. It’s the whole breadth of the clinical delivery system from facilities and other capital, like CT scanners, all the way through to clinical programs.”

Catholic Health Initiatives is in the midst of transforming its clinical focus as part of the changes taking place in health care. The system has doubled capital spending on non-acute care points of service, with the goal of delivering care as efficiently as possible, says Nick Barto, senior vice president of capital finance for the system.

CHI’s target is to receive 65 percent of its revenue from non-acute care by 2020, up from its current 54 percent and from less than 50 percent a few years ago.

Different rates of speed

An often-overlooked aspect of health care’s transformation is that it is taking place at a different pace in different markets. A hospital’s management team not only has to deal with the question of what to change, but also how quickly to do so based on local conditions and whether reimbursement will keep up with the changes.

“It’s tempting to talk about the nation as a single trend, but the most striking thing is that there are really dramatic differences in individual markets,” Ziskind says. “What we are finding is significant variability, and that puts the CEO and the leadership team in a real dilemma. Very often, there’s a clear sense of the needed direction, yet concern that if the organization moves too quickly, there could be an adverse financial impact.”

A number of factors contribute to market variation: the degree of hospital-physician alignment, the payer environment and the level of provider competition. Financial managers are creating models and forecasting the impact of those changes, but uncertainties remain.

Texas Health Resources officials are working to manage the transition relatively swiftly, and the system already is seeing reduced inpatient visits and more outpatient care. “Our ability to assume full clinical and financial risk — nearly like a payer — will need to happen in the next two to three years,” Nguyen says.

THR assumes some form of risk for about 120,000 lives. Looking ahead, the system anticipates being able to manage about 2 million lives, Nguyen says.

It also has to expand its patient population significantly to make up for the lost business that results from improved population health management.

At ProMedica, performance-based contracts make up only about 1 percent of business — not including its owned insurance company. However, anticipated growth in those contracts is boosting its investment in infrastructure. “A lot of the work in that arena is around population health, because the performance-based business clearly is going to continue to grow,” Hanley says.

These new types of contracts also may disrupt cash-flow expectations, because calculating the performance takes time. That could delay a portion of the payment or, in some cases, reduce the amount to be paid.

For example, an upside-only, shared-savings contract may call for payments based on the traditional fee-for-service approach, but also contain a performance-based component that is paid later.

“If that’s part of your cash flow as a hospital, but you’re not getting it when you provide service, or you are getting it 45 days from when you provide service, you’re now waiting between six and 18 months from when you provided the service to get the associated incentive payment,” says John Harris, principal with DGA Partners, a health care management consultancy.

That payment, even if 1 to 2 percent, could be significant relative to a hospital’s operating margin, particularly as the use of performance-based reimbursement increases.

Models that are risk-based on the downside, such as those using capitation, may improve a hospital’s cash flow, Harris says, because the payments tend to be more immediate. Any savings essentially will be captured right away.

He also notes that any providers that become insurers likely would face capital requirements to back up the insurance that would eat into their cash.

The shift in reimbursement and care models also means that new expertise is required for some hospitals and health systems. CHI has assembled a team to evaluate its performance-based contracts. “We have a significant managed care group led by ex-insurance executives who work on those contracts and gives us the certainty we need to take them on,” Barto says.

Those without existing experience in managing health risks will have to acquire it.

“Historically, on the hospital side, we didn’t deal with actuaries unless you were self-insured,” says Rick McWhorter, senior vice president of finance for Texas Health Resources. “Now we’re finding that to manage populations, bundled payments or some other revenue model, getting to that underlying pricing requires a whole different set of skills that traditional hospital CEOs probably don’t have.” 

Technically ... it’s a big problem

Most health care financial executives probably didn’t expect to learn so much about information technology. That was before they started overseeing billions of dollars in health care IT, largely as a result of the electronic health records bonus and penalty provisions of the American Recovery and Reinvestment Act of 2009.

Some chief financial officers complain that EHRs have not lived up to their expectations and that the implementation of the new systems is creating secondary challenges.

Tricia Nguyen, M.D., executive vice president for population health at Texas Health Resources in Arlington, and president of the Texas Health Population Health, Education & Innovation Center, says EHRs in their current form are not up to the task of population health management, which relies heavily on the ability to collect, manage and analyze data.

“That’s a false promise over the last couple of decades about EHRs being able to change how care is delivered,” Nguyen says. Today’s EHR is an electronic documentation system, she says, when what is needed is the ability to analyze patients and care with both outcomes and claims data.

In a survey of health care provider executives, a little more than 50 percent said population health management technology was an important part of their organization’s innovation strategy, but only about 23 percent said they were making any progress with technology. The 2013 Healthcare Provider Innovation Survey, conducted by HIMSS and health IT innovation company Avia, found that while close to 45 percent believe predictive modeling is important to their innovation strategy, less than 15 percent had made any progress in that area.

Nguyen estimates that EHR vendors are three to five years away from offering products that can adequately handle the needs of population health management. “I don’t think we could wait that long,” she says.

That means many health systems will have to invest in additional systems to jump-start population health management.

Another challenge facing financial managers concerns new revenue-cycle management technology to run alongside EHR systems. Executives have to be certain that revenue-cycle management systems are capturing all the correct clinical information, says Nick Barto, senior vice president of capital finance for Catholic Health Initiatives, Englewood, Colo. From a cash-flow perspective, “I’d say [that’s] the biggest challenge for the industry,” Barto says.

Back to Basics

To assist hospital financial executives in their work amid the transformation of the health care field, the American Hospital Association has published a guide called “Navigating the Gap Between Volume and Value,” which out- lines steps hospital financial executives should take to ensure they’re ready for the new era.

“Because there’s so much going on, and because there are so many changes, what I often see is that managements are getting distracted from doing the basic work, the basic foundations,” says Jason Sussman, managing director for Kaufman, Hall & Associates, who co-wrote the report.

The report, produced with assistance from Hospitals in Pursuit of Excellence and the Health Research & Educational Trust, includes processes to get started, set baseline financial projections and test both current and planned strategies.