Practice Economics

Healthcare Changes Under Affordable Care Act Raise Concerns for Hospital Chief Financial Officers


The changes launched by the Affordable Care Act are upon us and have created considerable trepidation among many in healthcare, particularly our chief financial officers (CFOs). The CFOs’ core responsibilities include financial planning, contracting, and setting budgets. Although finance teams and clinical leaders sometimes feel like they are speaking different languages—and, in fact, many physicians couldn’t pick their hospital’s CFO out of a police lineup—successful healthcare systems bridge that gap, enabling clinical and finance leaders to work together toward common goals.

It’s easy for us doctor types to be leery of our hospital’s financial team. If you’ve ever been in direct conversation with your CFO, you may have found the discussion was packed with terms like “EBIDA,” “capital allocation,” and “operating margin,” and seemed to imply that the organization is prioritizing its bond rating over its composite PSI [patient safety indicators] performance. But the truth is that our finance teams are frustrated, too. In fact, they are more than frustrated—they are scared.

They really haven’t been sleeping well lately. They’d feel better if doctors could try to see the world that they see. A CFO’s core responsibility is ensuring a responsible, long-range financial plan that meets the needs of their hospital stakeholders—to paraphrase Tom Wolfe paraphrasing astronaut Gus Grissom, “no bucks, no Buck Rogers”—and that responsibility got a lot harder in 2014. By understanding their perspective, we clinicians should be able to take actions that result in better care of our patients today—and ensure a sustainable hospital that can take care of patients tomorrow. So that we can better empathize with our green-visored colleagues, here are a few of the thoughts going through their heads as they toss and turn at 3 a.m.

Change Is All Around

There are many urgent pressures on hospital, physician, and healthcare revenues. Keep in mind that a hospital’s costs in terms of pharmaceuticals, equipment, and labor (the average hospital has nearly 60% of its cost in labor) are not really going down to offset that revenue loss. While we’ve become uncomfortably familiar with RAC audits, value-based purchasing, the sustainable growth rate, and sequestration, I’d suggest that these revenue challenges pale in comparison to the insomnia created by the rapid rise of healthcare consumerism. Lost, or at least buried, in the stories about ACA politics, coverage of the uninsured, website malfunctions, and dropped insurance plans is the fact that the nature of insurance is changing.

Although offerings like medical savings accounts and high-deductible plans have been around for years, they are increasingly mainstream, because the plans offered through the insurance exchanges, which have surpassed the seven million mark in enrollment as of the time of this writing, all carry substantial patient commitments. The great majority of these plans—81% through February—are either “bronze” or “silver” level—and keep in mind that the average “gold” plan, in covering 80% of anticipated expenses, leaves patients with higher commitments than most large-employer group plans probably do. From that standpoint, they require patients, doctors, and hospitals to manage healthcare differently than they have in the past: We have to be mindful that patients are paying more of the “first dollar.”

The problem, from a CFO’s perspective, is at least twofold: First, a lot of patients don’t pay the portion of their bill for which they are responsible. Many doctors, hospitals, and healthcare systems are moving toward more assertive and up-front collections for non-emergency care; unfortunately, at best, we don’t do a very good job and, at worst, we create an uncomfortable space where we either channel the practices of collection agencies or leave much-needed funds on the table. As the deductibles, co-pays, and co-insurance obligations rise, so do the uncollected accounts. Our advocacy for patients increasingly requires us to be better stewards of their resources.

The second insomnia-inducing aspect of consumerism is transparency of pricing. As the exchanges move to create a “”-like approach to selecting an insurance plan, a similar transformation is occurring in how payers—and, with the spread of plans with higher patient obligations, patients themselves—are looking at how we set prices for everything from MRIs and laboratory services to hospitalization and physician charges. While we as individuals are used to price transparency in purchasing consumer goods, the third-party payment system in healthcare has insulated us, and our hospitals, from the consequences of the market system. (Please note, dear reader: I’m not defending either the past practices or current policy. I’m simply diagnosing why your CFO has black circles under his or her eyes.)

So, prices are increasingly published and available for comparison shopping by both insurers and individuals with those high deductibles or co-insurance amounts. As charges hit their pocketbooks, there is good reason to believe that patients will be “brand loyal” only to the point where they stop appreciating value. Systems with a reliable advantage in pricing (think: academic medical centers) run a great risk of losing business quickly if they cannot demonstrate value for those prices. Hospital-based physicians have been in the position of being the “translators” of value-based care—by always advocating for measurably better care, we help both our patients and our organizations.

Variation in Care

Perhaps most befuddling to our CFO friends are the variations in costs, outcomes, and clinical processes that seemingly similar patients with seemingly similar problems incur. Wide variations might occur based on just about any parameter, from the name of the attending physician to the day of the week of admission. Of course, at times, this variation could be explainable by, say, clinically relevant features that are simply not adjusted for, or the absence of literature to guide decisions. But, all too often, no reasonable explanation exists, and underneath that is a simmering concern that wide variations reflect failure to adhere to known guidelines, uneven distribution of resources, and “waste” deeply embedded in the healthcare value stream.

Less widely understood to clinicians is that, from the CFO’s perspective, the movement toward “value over volume” and risk-bearing systems such as accountable care organizations (ACOs) requires healthcare organizations to think like insurance companies. They must be able to accurately predict clinical outcomes within a population so that they can assess their actuarial risk and manage appropriately. Wide variations in care make those predictions less valid and outcomes more unpredictable, greatly raising the stakes for an ACO or other risk-bearing model.

From the CFO’s perspective, a key advantage to the move toward systems directly employing physicians is that a management structure can be created to decrease this variation; however, I’d question whether many physician groups, much less employed-group practices, have the appropriate management culture or the sophistication with data to do this effectively.

The Cost of Recapitalization

Most of the hospitals I’ve worked in are a jumble of incrementally newer additions built on a decades-old core facility. Clinicians tend to see the consequences as patients see them: not enough private rooms, outdated technology and equipment, poorly integrated computer and health IT systems, and inadequate storage for equipment. Your CFO certainly sees these same things, but has the additional challenge of trying to keep up with the demands for new facilities and capital purchases while maintaining the older physical plant and preserving the long-term financial strength of the organization. Even though roofing, HVAC, and new flooring are rarely as sexy as a new surgical robot, it won’t do much good to invest in that new OR equipment if the roof is leaking. And healthcare construction is really expensive, even more so because of entirely appropriate requirements that renovations bring older structures up to modern codes.

In the healthcare world, these expenses are formidable. Hospitals, like other businesses, sometimes borrow money to fund projects—particularly new construction projects. Nonprofit hospitals can be attractive to lenders because of their tax-advantaged nature. But, like our personal credit ratings, a healthcare system that enters into the bond market has specific metrics at which lenders look carefully to determine the cost of such lending, such as payer mix, income margin, debt ratios, and earnings before interest, depreciation, and amortization (EBIDA). And that’s where we come full circle to that latest conversation with the CFO.

So in order to preserve the ability to meet the needs of stakeholders, our friends in finance need to make sure a long-range plan is in place that continues to fund operations, growth, and ongoing maintenance, including the ability to borrow money when appropriate. Going forward, thriving healthcare organizations will have to be consumer-minded and successful in managing the risks of population health. The uncertainty created by the exchanges and transparency, and the inability to accurately gauge and manage the risk of adverse outcomes, has our CFO colleagues pleading with us for a prescription that will ease their restless nights. Here’s how we can help:

  • Focus on working with your group to measure and minimize variations in care processes and outcomes among patients and doctors;
  • Be mindful that in a value-based world, CMS and insurers now look at both inpatient and outpatient utilization and costs, and we need to do the same in our transitional care planning; and
  • Be conscious that our prescriptions for care are increasingly impacting patients’ wallets, so we need to articulate and demonstrate the clinical value that underlies each decision.

In Sum

The next time you or your nocturnist is admitting that nth patient at 3 a.m., consider that your CFO may also be wide awake, struggling with his or her own version of a management challenge. As physicians who practice in hospitals, which are perhaps the most costly environments in the healthcare world, you and your colleagues may be well positioned to help make your hospitals more efficient, to better manage and improve those outcomes, and to help identify and prioritize the most pressing capital needs.

In short, just what the doctor ordered for your CFO to finally get a good night’s sleep.

Dr. Harte is president of Hillcrest Hospital in Mayfield Heights, Ohio, part of the Cleveland Clinic Health System. He is associate professor of medicine at the Lerner College of Medicine in Cleveland and an SHM board member.

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