Growth Strategies | September 27, 2012 | CFO.com | David Rosenbaum

Why is a finance director involved in what seems to be operational minutia? Because operations drives finance.

But all hospitals share the same problem: an aging population.

“With an older population,” says Josh Gray, managing director of the financial leadership council of The Advisory Board Company, a health care and educational consultancy, “you get a higher proportion of medical as opposed to surgical care. Older people have fewer surgeries, and medical care is reimbursed more poorly than surgery. This places incredible pressure on hospital margins while costs are increasing.” (And they are. According to a recent New York Timesinvestigation, Medicare reimbursements to hospitals were $1 billion more in 2010 than five years earlier.)

Hospital margins are already grocery-store thin. At 2%, Jordan Hospital’s is relatively robust, with a total 2011 surplus of a little over $4 million on net patient service revenues of $194 million. But Jordan Hospital is part of the Jordan Health System, which also includes 50-doctor Jordan Physician Associates, Cranberry Hospice, and a wellness center. As a whole, the Jordan Health System’s margin was under .5%, and its surplus was $900,000.

And as hospital revenue streams shift from fee-for-service to what the Advisory Board’s Executive Director Zachery Stillerman calls “risk-based services,” CFOs must develop “different business processes and tracking mechanisms.” It is, says Stillerman, “a huge challenge.”

Beyond Fee-for-service
Instead of insurers paying providers on a transactional, fee-for-service basis, under the ACA their payments increasingly will be based on the care of individuals, a process-based system.

Jordan, for example, became one of 27 national Medicare Accountable Care Organization in April 2012. That means, says Robbins, “we have contracts with a handful of insurers to manage the care of buckets of patients. We have a budget for these patients. For example, we have a contract with Tufts Health Care for the hospital care of 800 enrolled Medicare beneficiaries. Tufts comes up with a budget for their care. We have to manage within that budget.”

Under the terms of the new Medicare Shared Savings Plan, if Jordan spends less on the Medicare-eligible recipients in its ACO (determined by a defined base year, with the additional requirement to report on 30 patient quality indicators that will be used to determine future improvements), it keeps a percentage of the savings. For the first three years, if the hospital exceeds the base year level, it will continue to be reimbursed at traditional Medicare rates. After that, it will be “at risk,” as future reimbursements, says Robbins, “will be contingent upon the achievement of improved patient quality outcomes as compared to the base year.”

In order to reduce that risk, Robbins needs to know “what services are being offered to patients, what’s being used to excess, where physicians are operating out of bounds of reasonable utilization rates.” That is, she needs to get operational.

To do that, she needs the cooperation of Jordan’s physicians, and a single view of the truth, a single view of the patient.

Transformation through Technology
To help get that single view (or something approaching it), in 2010 Robbins implemented PowerHealth OnDemand’s new business intelligence product. PowerHealth OnDemand is a software-as-a-service analytics and business performance system, deployed at Jordan Hospital since 2007, that allows hospitals to pull information from their legacy systems and slice and dice it – no easy task.

“The health-care information system world is made up of many different modules,” says PowerHealth OnDemand chief executive officer Paul Evans. “There are distinct silos, and bringing it into one source is a huge problem. Furthermore, hospitals have to combine third-party systems – clinical, physician management, insurance systems – with revenues and costs and electronic medical records” to get a single view of the patient.

Once that single view is achieved, it can help hospital finance executives figure out profitability and margins. “Let’s take orthopedics,” Evans says. “Having a view of what the costs are for implants in each procedure, plus the labor (nurses, physicians, and staff), allows you to know how much money you’re making or losing on a knee transplant and whether that’s a business you should be investing in.”