This article was originally published by Medika Life.
The health system’s Chief Financial Officer (CFO) role has never been more critical. CFOs face multifaceted challenges, ranging from increasing cost pressures to evolving patient care delivery models. As nuanced as healthcare has become, lessons can be learned from ancillary and complementary industries.
Health system CFOs across the country face a unique quandary. Operating margins remain low, staffing shortages restrict services, industry-wide buying power is waning, organizational credit ratings are at risk, and inflation rapidly affects reimbursement and patient affordability. From the CFO’s point of view, it is prudent to look toward other industries and adopt a holistic approach to managing their organizations’ financial health.
The following seven habits can be employed by health system CFOs leading through turbulent economic times:
The pandemic disrupted traditional operations, requiring a departure from established norms. In this post-pandemic era, CFOs must acknowledge that returning to the pre-pandemic status quo is not feasible. Rising labor costs and supply chain challenges in the face of capped payor contracts demand fresh strategies. Relying solely on traditional approaches and partners in this new environment will not work. To remain effective, CFOs and their operational leaders must lead their organizations in adapting to the new post-pandemic reality.
Non-clinical departments often struggle to inspire clinicians, but CFOs can bridge this gap by strategically connecting clinical goals with repurposed savings from overhead departments. Healthcare leaders should embrace innovative cost-saving approaches, such as considering non-clinical spending as a strategic category of costs to negotiate. CFOs can funnel those savings back into the clinical environment, easing pressure on physicians and nurses and enhancing patient care. An annual habit of exploring non-clinical spending to fund clinical initiatives can pay off for both resources and morale.
The age-old adage “volume is everything” in healthcare may not go away entirely, but it is evolving. CFOs increasingly steer their organizations toward cost-efficient practices rather than merely focusing on volume growth. Shifting performance measures from volume to efficiency is worthwhile, even if it is a departure from traditional thinking. This habit is needed as the industry acknowledges the importance of cost-effective care delivery—and the value within risk-based payment programs.
Technological solutions typically rely on business cases and aim to provide essential tools for modern operations. However, this technology assessment must go beyond adoption and implementation. The true value lies in the execution of the solution and the insights gained from its use and performance. Sound systems require good data to meet their potential. As an example, a national home goods retailer conducted an RFP and needs assessment for its 1,200-truck delivery fleet. The organization derived information to extend the contract with a current vendor. The negotiation resulted in over $1.8M in savings through invoice credits, cash retention bonuses, and contracted cost savings. Most notably, the negotiation never disrupted distribution. The habit of “focus and finish”—connecting technology with non-tech performance measures—ensures that insights are effectively translated into actionable strategies. The discipline to perform a rigorous “look back” analysis on major technology investments is essential to achieving the promised ROI.
There is a world of insights and opportunities beyond the healthcare industry. Although healthcare is unique compared to other industries, there are insights and lessons to be learned from looking at how business is conducted outside of healthcare. For example, wouldn’t a hospital want to know what the local university pays for groundskeeping in the same city? What about bank processing and other financial fees? In one case, the CFO of a big-box retailer looked beyond the industry for insights and saved over $10M by uncovering overcharged credit card processing fees that had slipped past their internal process for more than four years. With this information, the CFO and team negotiated a refund of the fees and all credit card agreements.
Knowledge sharing across industries can be valuable for all organizations. The habit of expanding a network of partners and collaborating with businesses outside the industry can provide fresh perspectives and solutions, which ultimately benefit the health system’s financial performance.
CFOs should embrace the habit of challenging industry norms and targets. It’s a requirement to push change management boundaries in pursuit of effective solutions. One industry norm worth challenging is the singular reliance on group purchasing organizations (GPOs) to aid in spend analysis and negotiations. With GPOs addressing only 25% of non-clinical spending, there is an excellent opportunity to address cost savings in these categories. Unlike direct clinical spending, health systems compete with all industries to secure optimal non-clinical product and service contracts. Leading companies outside healthcare often devote more time and resources to secure better contracts. Continually setting the bar higher—to renegotiate contracts, adopt cutting-edge technology, or pursue innovative partnerships—can drive tangible results and transform the financial trajectory of health systems, no longer leaving money on the table.
Non-clinical cost allocation, akin to investments in a personal portfolio, requires constant monitoring and adjustment. CFOs should adopt a proactive habit of managing non-clinical costs that consume approximately 20% of revenue. By acknowledging the dynamic nature of healthcare finances, CFOs position their organizations for financial success. Also, the CFO can no longer assume that existing structures and partners are sufficient to control these non-clinical costs. Research shows that 75% of non-clinical spending falls outside GPO and procurement contracts. With today’s financial challenges, this leaves a gap in controls that must be addressed. The habit of managing non-clinical costs proactively pays off.
Proactive management of costs has been proven to result in favorable contracts and significant savings in both annual direct costs and signing bonuses. This outcome was demonstrated by a discount retailer that conducted an RFP and needs assessment with their 10-year incumbent Warranty provider. The proactive assessment resulted in a more favorable contract with higher vendor engagement and training support from a new vendor. Beyond the service value, the resulting savings were $4M in annual direct costs and a $4M signing bonus in the contract’s first year, with the new vendor covering all transition costs.
Today, the role of a health system CFO extends beyond traditional financial management. CFO leadership requires a blend of strategic vision, adaptability, and innovative thinking about benchmarking and managing change. CFOs who embrace these seven habits can navigate the healthcare industry’s challenges in a post-pandemic economic climate, foster financial resilience, and ultimately contribute to enhanced patient care, organizational success, and highly competitive service delivery.
Special thanks to co-author Mark Van Sumeren, who has more than 40 years of experience in healthcare strategy, operations, and supply chain management. As the General Manager of the healthcare practice at LogicSource, he spearheads cost-savings initiatives within nonclinical healthcare supply chains. Previously Mark held senior executive positions at Owens & Minor, Ernst & Young, and Detroit Medical Center, collaborating with major integrated delivery networks and academic medical centers to enhance operational efficiency and supply chain practices.
About the Author
David Kirshner
Managing Partner, LogicSource
David Kirshner serves as managing partner for the healthcare practice at LogicSource. He previously served as CFO for several healthcare organizations, including the University of Rochester Medical Center, Boston Children’s Hospital and Lifespan Health System.
