What Should Hospital Leaders Expect From a CFO?

An article in this past week’s Becker’s Hospital Review, based on interviews with hospital chief financial officers, caught my eye and then boiled my blood. Here’s the bit that upset me:

"Another factor that has helped [the health system] improve its overall operating performance is by making sure that every leader at the health system is working to identify ways to improve their department's numbers. "

So, you might ask, what’s wrong with that quote? Indeed, it’s standard, banal, administrator-speak. But promoting the idea that hospital execs and managers should focus on improving "their department's numbers” is, in my opinion, pretty problematic.

Running a hospital should never be about improving numbers. The numbers are tools, more specifically estimates of performance. As with all estimates, there’s a gap between each number and the thing that it’s measuring. This gap can be exploited, and in my experience it’s constantly being exploited at all levels of management.

Here’s a simple illustration based on my own experience: Imagine a hospital IT department, representing maybe 5% of the hospital’s overall costs. Now, imagine that the CFO and CEO decide to give annual bonuses to the CIO and the IT managers, contingent on their departmental spending staying under budget. Sounds pretty reasonable, right? In my experience, almost all managers in that situation will consistently hit their full bonus, no matter how aggressive the target is. How do that do that? Simple. Just cut spending on the labor side. That open position for a cybersecurity analyst? Just drag your feet on filling it, or hire an inexperienced person whom you can get at a lower rate. That support position for training doctors and nurses to use the EHR? Cut that position too. There are all kinds of ways an IT manager can reduce spending by reducing service to the organisation. After which the IT manager walks away with their “performance” bonus while the organisation suffers.

I could come other with other examples, but you get the idea. Middle managers and executives alike have lots of ways to "improve" any particular financial number without improving actual performance, simply by compromising in other areas that aren’t being measured, or by borrowing in some form against the future. And I’m not even mentioning here the myriad ways in which creative managers sometimes just shift money around in order to make certain numbers look better than they actually are. For a hospital to perform well, all managers need to be aligned with the success of the full organisation, and not simply be incentivised to hit a set of departmental numbers.

So how might a hospital or health system CFO create a system that drives real performance, and not just the appearance of performance? More broadly, what should other healthcare leaders expect from their CFO?

First, the hygiene functions:

1. Integrity of the system, i.e. financial controls. Whether due to mistakes or theft, it’s critical to make sure that every dollar coming in or out of the system is accounted for. Monitoring departments in a consistent, predictable way helps ensure that problems are caught and surfaced as quickly as possible. Not just criminal or dishonest behaviour, but also poor management.
2. Integrity of payor and vendor relationships, to make sure that external entities meet contractual obligations.
3. Monitoring cash flow and ensuring adequate short term reserves.

Next, the strategic functions:

1. Calculating costs at the level of individual services. Very few hospital CFOs can accurately tell you how much a particular medical or surgical service actually costs, because few have done the difficult work of activity-based costing. It’s one thing to know how much you spent on nursing, or on janitorial services, or on medications; it’s quite another to know how much total resource you spent per heart failure admission or psychiatric emergency room visit.
2. Improving understanding of the numbers. Help managers and executives to make smarter tradeoffs by making the long-term consequences of their decisions more transparent.
3. Providing a common numeric language for leaders across the organisation to more effectively collaborate on collective goals.

Finally, the Uber-strategic function:

1. Measure community impact. The fundamental purpose of a hospital is to serve the health needs of a community. A secondary purpose is to employ members of that community. I’d love to see CFOs contribute to meaningful community impact reports that go way beyond things like charity care (the accounting of which can be quite problematic). Such reports should include measures of cost control from a patient's perspective, the “trade balance” of money flowing into and out of the community as a result of the hospital’s activities, the contributions to the local labor market, and prevention of financial toxicity to patients, such as medical bankruptcies and use of collection agencies.

I’ve probably missed a few functions, but these are the ones that come to mind for me. The job of a healthcare CFO is a hard one. Doing the job well requires a skillset beyond what’s needed to be CFO of most other kinds of organisations. The sooner we’re all explicit about what we expect from that job, the sooner we can get going on fixing the hospital-based portion of the US healthcare economy.