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Originally published marzo 20, 2007
Early in my career, I had a job interview where the manager asked one question – what makes for a good business decision? At that moment, the phone rang and the manager took the call, so I had a minute or two to think about my answer. I decided to dispense with a sophisticated answer and just tell him what my parents always taught me. That is, a good business decision allows us to win today, a better one allows us to win tomorrow, and the best decision is one that allows us to change the game so we win every day. For the next hour, we just talked about examples of good and bad decisions we had made and good and bad decisions we had seen others make.
I got the offer. Wonderful boss. Thankless job.
The factors that make for good, better and best business decisions have a lot to do with the factors that make for good, better and best performance measures. Business performance follows business decisions. Performance measures essentially fall into three levels of effectiveness. At the bottom are measures that simply monitor what happened. Above those are measures that steer us to make the right decisions today. And at the top are measures that give us the opportunity to transform the organization. In effect, the best measures are those that allow us to change the game.
Healthcare provider organizations measure a wide variety of activities and results from a wide variety of perspectives. Measures exist to monitor, steer and/or transform clinical quality, clinical results, operational activities, costs and results, access and outreach efforts and results, marketing efforts and results, recruiting, staffing and development efforts and results, and research efforts and results, just to name a few. And, of course, there is always the job of the chief financial officer (CFO) to make sure that the organization can perform all of these activities, achieve all of these results and still make a buck.
For the past twenty years, I have worked with executives, managers, professional and operational people, analytical people and support people across a number of industries and a number of business functions. Of all of the people I have met, the CFO of a healthcare provider organization may have the most challenging job and may very well be the one who can benefit most from business intelligence applications and capabilities. The key reason for this assessment is the sheer complexity of the job to not only analyze and report organizational results, but also to steer performance for today and transform the organization for the future. For a number of reasons that I will describe shortly, if you can make it as a CFO of a healthcare provider organization, you can probably make it anywhere.
The demands on the CFO are immense. Business intelligence can help.
Key Challenges for Healthcare Provider CFOs
Organizations in every industry have unique idiosyncrasies that increase the complexity of managing the firm’s finances. Healthcare provider organizations, including hospitals, clinic and physician groups, long-term care facilities, home care operations and so forth, seem to have them all. Consider this list:
The combination of these complex environmental components makes measuring success highly challenging. It is this backdrop of complexity that makes business intelligence that much more critical to the CFO.
Good Performance Measures: Monitoring the Healthcare Provider Organization
Most of the traditional financial measures used by healthcare provider organizations have been around for nearly a century, such as revenues per adjusted patient day, expenses per adjusted patient day, average length of stay, FTEs per adjusted occupied bed, days from discharge to final bill, etc.
In addition, the traditional financial measures used by CFOs across most industries have been around since the late 1600s, when the Spanish Mint first developed the concept of debits and credits to better track gold shipments. Examples include days cash on hand, days in accounts receivable, debt service coverage ratio, collection rates, quick ratios, long-term ratios, gross margin, EBITDA (earnings before interest, taxes, depreciation and amortization), etc.
For the most part, these measures are used to keep the ship on an even keel. There have been additions to both categories of monitoring measures (i.e., healthcare finance and general finance) over the years. And, at times, one or more measures may get extra attention in response to temporary situations (e.g., cash may get attention this year, but margins may get attention next year, and case mix may get attention the following year). But overall, they have proven pretty durable and have remained fairly stable.
One reason for their durability is that most of the traditional monitoring measures are required by government regulatory bodies. Tax reporting requirements are the biggest culprit.
These measures do suffer from two key problems, however. First of all, they are all backward looking, or as W. Edwards Deming said regarding inspection as a quality management method – it is the equivalent of driving a car using the rearview mirror as your guide. A collision is imminent.
The second shortfall of traditional monitoring measures stems from the first. In other words, while they may imply action and state the impact in financial terms, they do not tell the entire organization what to do to correct the situation, let alone improve it. This translation of financial results into the actions each person should take is often left up to the individual (in situations of really bad leadership), or translated by each department or function of the company individually (in better, but not optimal, situations).
These measures are, however, essential to the organization’s success; and this is one area where business intelligence can help the CFO. Chief financial officers have long been interested in visibility to the formal financial measures drilled down a number of different ways in order to root out problems such as pockets of excess costs, overlooked sources of revenue or capital that is tied up in nonproductive resources.
In some cases, having this capability can even have a critical, survival impact. For instance, if cash flow is in danger, it can be very insightful to be able to see cash flow sources and uses not only by formal business units and facilities, but also by service line, by payer, by facility type and even by patient and patient grouping. This data can be used to tap into sources of cash that are slow moving as well as identify cash users who are moving too fast, causing a cash shortage.
The key is to take the data already being used by the organization for formal reporting purposes and provide the ability to drill down, up and sideways in ways that have not been used before.
Better Performance Measures: Steering the Healthcare Provider Organization
Very few people in any organization have direct control over the financial resources of that organization. Most people do not touch the money. The majority of the decision makers in healthcare provider organizations have control over (or at least intimate knowledge of the pulse of) nonfinancial measures, such as patient volumes, admissions, occupancy rates, staffing levels and staffing mix, process and procedure timings, supplies purchases, practice and procedure variations, etc.
Each one of these and potentially hundreds of other nonfinancial measures can be translated into the dollar impact (positive or negative) on the organization. Nonfinancial measures drive financial success. This translation task typically falls to the CFO and his/her team, and it is one area where CFOs can benefit greatly from business intelligence.
Business intelligence capabilities offer the financial team the ability to forecast revenue based on patient volume trends and patterns. It provides information to better plan labor costs based on staffing level and mix requirements (regulatory and nonregulatory). It is used to combine data to uncover problem areas such as service lines that are consuming too much capital, but that provide little in the way of profitability.
Using business intelligence effectively in support of financial analysis and financial management to help decision makers steer the organization requires two key practices. The first is two-way translation. As stated earlier, most decision makers do not deal in measures stated in dollars, but in other non-financial measures. One key unit of measure for the chief medical officer, for instance, is people counts. Counts of people in patient panels. Counts of patients admitted, seen, treated. Counts of diabetes patients in A1c control by clinic, by physician, by gender, etc. Counts of physicians by specialty with certain educational qualifications. This is how the CMO manages his/her world. In counts, not dollars. Using this example, it is therefore essential to be able to translate from people counts into dollars (CMO to CFO), as well as from dollars to counts (CFO to CMO).
The second business intelligence practice is comprehensive drill-down capabilities. One of the key sources of performance failure in healthcare provider organizations (or any organization for that matter) is the misalignment of performance targets and performance results measurements from the top to the bottom of the organization. If a dashboard or a scorecard is created at the executive level and no corresponding drilldown is supported at the director level, manager level and operational staff level, then how can those successive levels of people be expected to perform appropriately? What does a hospital wing administrator do, for instance, with information at the corporate level on cost overruns? What action does he/she take? What units of measure will give this person insight into decisions that will help the corporate situation? Occupancy rates? Staffing ratios? Staff mix versus patient mix?
The ability to steer decisions by people up, down and across the organization that contribute to the success of the entire organization is what business intelligence can support. But it takes two-way translation of measures and the ability to link these measures throughout the organization to be successful.
Best Performance Measures: Transforming the Healthcare Provider Organization
I once worked for a CEO who said that if you measure your success the same way as you always did, then your organization will be the same as it always was. Admittedly, this is a takeoff of Albert Einstein’s quote on the definition of insanity. Nevertheless, it is true. In order to transform your organization, new measures of success are essential. These new measures must not only help the organization monitor results, nor can they only give instructions as to what to do today. They must tell each person in the organization three things:
The CFO is in a prime position to introduce these new measures of success and to link them to existing financial measures to ensure that the organization becomes lighter, brighter, faster and stronger.
Most healthcare provider organizations have four pillars in their strategic plans – patients, practices, capabilities and growth. And there are a number of new measures that are gaining traction in organizations worldwide to not only guide actions today, but also to link them to the rest of the organization and to the results of the organization as a whole.
Measuring the “strategic contribution” of every resource – tangible, intangible, financial, human, etc. – along these four pillars is the best way to not only make successful performance repeatable, but also to change the game in the organization’s favor. This is true both financially and non-financially.
It is essential to the success of the organization (long-term, short-term, financial, nonfinancial) to investigate and develop these new measures, to link them across the organization and to tie them together from top to bottom.
The job of the CFO in a healthcare provider organization is a highly complex one, and it is one that can be improved greatly through the use of business intelligence capabilities to slice, dice, sort and sum both the financial data as well as the nonfinancial data used to measure and manage organizational performance. The key to success in improving the provider firm’s performance is to determine what level of measurement is appropriate (i.e., good, better, best) and then use the data the firm already owns to get the entire organization working toward the same goals.
That is the promise of business intelligence – to provide information at the level of the organization that is relevant to and actionable by each person receiving it, while ensuring that it is linked all the way up the chain to the strategic intent of the organization. In short, to measure every decision in terms of how well it contributes to the provider’s strategy.
This is what transforms organizations. This is what can transform your organization.
Thanks for reading!
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