The latest nonprofit hospital financial medians report from Moody's Investors Service illustrates the challenge — and the opportunity — facing health care financial executives. Preliminary FY 2011 data show improvement in median revenue growth to 5.3 percent from 4.5 percent. But that's still well below the 7.0 to 9.2 percent annual figures seen in the decade before the financial crisis. And with the proportion of gross revenues from Medicare and Medicaid rising rapidly, to 56.5 percent in 2011 from 53.9 percent just two years earlier, prospects for future growth are slim.

The figures confirm Moody's long-term negative outlook for hospital sector finances, according to Moody's analyst Sarah Vennekotter, who authored the report.

The good news? The 213 acute-care hospitals and single-state health systems Moody's analyzed held expense growth to 4.9 percent, resulting in an increase in median operating margin to 2.6 percent from 2.4 percent in FY 2010, and operating cash flow margin to 9.5 percent from 9.4 percent. However, costs rose just 4.5 percent in 2010, Vennekotter noted. The rebound suggests that achieving cost reductions in the 15 to 20 percent range that many believe will be necessary to remain viable in the next decade will be difficult.

To meet the challenge, today's CFOs are broadening their role far beyond traditional financial reporting and revenue cycle functions, says Todd Nelson, who heads development of education programs for senior executives and accounting at the Healthcare Financial Management Association. Pay-for-performance and bundling payments for hospital and nonhospital services have transformed hospital operations, clinical quality, physician practice costs and community health outcomes into make-or-break financial issues.

"Financial executives are not just saying 'Here are the numbers' anymore, they are working on ways to improve them with constituencies including operations, clinical personnel, strategic planners and IT,"Nelson says. "Engaging the entire executive team in process improvement is where the truly excelling financial executives spend a lot of their time. This transforms the CFO into a much more visible leader in the organization.

HFMA education now focuses on developing communication and collaboration skills to lead change. Technical skills, including structuring physician relationships, formal process improvement, developing IT decision support and modeling financial outcomes across the continuum of care, are also in demand. "A lot of the skills in actuarial science lie in the insurance industry, and now hospital financial executives are learning them or bringing them in,"Nelson says.

Sharing skills and information across the C-suite is essential to substantially improve care quality and efficiency, says Thomas C. Dolan, president and CEO of the American College of Healthcare Executives. "To be able to work together and collaborate, the CFO needs some basic clinical background, just as the CNO and CMO need business skills."

Collaborating for improved quality and lower costs

Linda K. Burt | vice president of finance and chief financial officer, Methodist Health System, Omaha, Neb. | Burt joined MHS in 2008 and oversees financial, treasury and revenue cycle functions throughout the system, which includes 460-bed Methodist Hospital and 112-bed Methodist Women's Hospital in Omaha, and 118-bed Jennie Edmundson Hospital, Council Bluffs, Iowa. In the decade before joining MHS, she was chief financial and compliance officer at Saint John's Health Center, Santa Monica, Calif., and CFO at Ancilla Systems, Hobart, Ind., and Rockford Health System, Rockford, Ill. after holding financial positions at several Chicago-area hospitals.

One of the biggest changes is that I am now responsible for clinical documentation. We spend a lot of time on severity of illness and risk of mortality, not only because these are important to physicians, but because they are important for reimbursement as we move toward pay for performance.

Another area is value analysis. In the past, a lot of organizations had value analysis, but the programs functioned low in the organization, with the director of purchasing focused on supplies. Now we do value analysis for all nonlabor expenses across the entire system and the steering committee is made up of C-suite executives. There are seven teams, and each has a committee and a team leader. Yearly cost reduction targets were set and we have monthly meetings to review progress and share new ideas for cost savings. An audit conducted by the finance department helps to ensure they are true cost reductions and not something that just sounds good. It took about six months to set it up with help from an outside consulting firm. In the 18 months we have been meeting, we have cut about $14 million in expenses.

We are working with a competitor to reduce costs and improve our position in the new health care environment. To that end, we have formed a joint ACO. The ACO's medical management committee has several physician working groups developing clinical protocols that will benefit our patients and contribute toward cost reductions with or without the ACO. The work groups are reviewing evidence-based protocols from multiple sources, including other countries and organizations. Intermountain Health has been very willing to share their protocols. Our health system purchased software that allows us to monitor clinical performance on a risk-adjusted basis and drill down to an individual-physician level. The software enables us to review resource utilization as well as quality outcomes. The clinical protocols adopted by the ACO can be entered into this system to track physician compliance.

I spend a lot of time with physicians these days. I have had to learn new skills and do a lot of listening. You have to understand the clinical processes so you can relate them to the financial processes. You have to understand where the physicians are coming from to design systems and technology that they can use.

Beyond information to business intelligence

James J. Heilsberg | chief financial officer, chief information officer and facility planner, Whitman Hospital & Medical Center, Colfax, Wash. | Heilsberg has been CFO for 21 years at Whitman, a critical access facility in eastern Washington, near its border with Idaho. Whitman was one of the first rural hospitals to adopt electronic health records and was among the first group recognized as meeting Stage 1 meaningful use requirements.

What has changed over the years is how information is used. It isn't just information that we report anymore; it has to be used for business intelligence. For example, the electronic health record, which we first installed in 1995, has affected how work is done. It is not a time saver, it is a time creator. But in exchange for the time we invest, we get information that was never available before. Now we can combine cost, time and outcomes and see the true value of the work we do.

Understanding the value of what we do is increasingly crucial for many reasons. One is that high patient deductibles mean that individual patients now look at us as an insurer does. They ask, 'Do I want to use you?' based on what we cost, so we end up negotiating with many individuals.

We also face more, and new, competitors. Walmart and others are looking to take a bite out of the hospital business. Ten years ago, we clearly could see the forest for the trees and we knew where we were going. Now the forest has gotten larger and denser, and there are many more trees and not all the trees are equal. That is where business intelligence comes in. What do we do well? What should we leave to our competitors? With whom should we partner to continue to serve our community? How can we spread reduced resources more effectively?

As a small rural provider, I'm not sure we can handle payment change on our own. We will need to partner, but if we pick the wrong partner it may spell the end of the small hospital. We are developing the skill to forecast and model the market. That will help us see how best to use our own resources, see who the best partners are and develop the model that will be sustainable for the long run.

Satisfying patients to improve financial performance

Dave Storm | chief financial officer, St. Anthony's Memorial Hospital, Effingham, Ill. | Storm joined 146-bed St. Anthony's 32 years ago after a career in public accounting led him to hospital accounting. In addition to finances, he heads risk management, health information, information systems and purchasing.

The biggest change for CFOs has been moving from a strictly operational role to one including physician issues, marketing and strategic planning. The CFO is no longer the bean counter, but is more involved in helping the C-suite and management team understand the full financial impact of operational and strategic decisions. It requires an understanding of clinical issues and information technology, and process improvement such as Lean and Six Sigma.

Today the CFO is much more involved in market share and how we grow it. How do we inform physicians of community needs and work with them a little better? Our physicians are independent, so we look at how physician performance affects our reimbursement on readmission and infection rates and share that with them through our quality committee structure. We also have added a chief medical officer. We meet weekly to share financials, productivity metrics, quality indicators and profitability. We meet quarterly to update our goals to ensure proper stewardship of our mission and resources.

The other big change is with consumers. There is more openness and the consumer is more knowledgeable and interested in quality and cost. The CFO has a big role in helping the organization respond to those consumer issues quickly by making cost and quality data accessible. With value-based purchasing and payment based on patient satisfaction, patient perceptions have a big impact on financial performance and strategic market position, and you need to respond to them quickly. All this information is public and consumers use it to pick and choose hospitals and physicians who are doing well.

National strength, local care

Benjamin R. Carter | senior vice president and chief financial officer, Trinity Health, Novi, Mich. | Blaine Petersen, MBA | chief financial officer, Saint Alphonsus Health System, Boise, Idaho | Carter joined 44-hospital Trinity as system CFO in 2010 after five years as chief operating officer at eight-hospital Detroit Medical Center and 20 years at four-hospital Oakwood Health, Dearborn, Mich., including five years as CFO. Petersen joined four-hospital Saint Alphonsus, a Trinity regional system, in 2010 from Tatum management consultants, and served eight years as vice president of finance at Catholic Health Initiatives, Englewood, Colo., and four years as CFO at Holy Cross Hospital, Salt Lake City.

Carter: Today's CFO is expected to look forward and help the organization plan strategically, but with an eye toward maintaining a viable financial position as the organization moves through operating and care delivery model transitions necessary to meet future needs. There has to be a strong working relationship between finance and operations. The two are closely related and I find myself moving back and forth between finance and operations.

Petersen: At the regional level, we used to be much more focused on financial statements and reports. Now those functions are handled by the system on a consolidated basis. Revenue cycle management, patient accounts, investments, IT and supply chain are all shared services at Trinity Health. They really work better when managed on a large scale and we get access to them locally. That frees me from day-to-day transactional issues so I can focus on strategic issues, such as developing relationships with physicians and developing new services.

Carter: I want to echo that last point. High-touch care is delivered locally, so the high-touch element of what we do has to stay local. We try to centralize areas that are more transactional to maximize economies of scale. My ultimate job is to optimize enterprise value by managing the whole portfolio of services, system and local.

Petersen: Having access to Trinity Health's systemwide services and experience also helps us improve care locally. Our physicians employ clinical, evidence-based best practices identified by the system, and we also have been able to move volume to standardized suppliers for some implants and devices for cardiology, and spine and orthopedics. These recommendations to physicians aren't just based on economics, as well as quality and safety.

We are able to dive deep on clinical efficacy for many devices, and can document clinically that a certain device is appropriate in some cases but not others. We don't receive a corporate edict. We spend a lot of time presenting the evidence and we get a lot of input from CNOs and CMOs and physician committees at each hospital. It can be challenging getting doctors in Boise, Idaho, to use the same implant as doctors in Columbus, Ohio, because medical practice varies across the country. But we save money by getting the best price and the best clinical outcomes, and we are better positioned strategically for value-based purchasing.

Carter: Listening to physicians in protocol development and operations design as well as in supply chain decisions is essential because the physicians know where the waste is and how to make the system more efficient. Physician leaders are very much aligned with our system quality and efficiency goals. Many specialists have seen dramatic changes in how they get paid and how much they get paid, so the economic reality is very real to them and they know it is not going away.

We also listen to those on the payer side. The ability to predict actuarially is becoming a required skill. We have to understand risk contracting and delivery costs, and we have much less margin for error in these analyses. It requires us to create better decision support systems, and we work closely with our CIO and informatics departments to improve decision support and get better cost information. We share a lot of information and it is very collegial, but not everything is invented here. So we listen to other systems and we can learn a lot from other industries as well.

Howard Larkin is a contributing editor to H&HN.