Transforming financials into exponential change: look beyond the bottom line, and focus on your organization's complete financial health through effective reporting and data analysis

Healthcare Financial Management, Jan, 2007 by Ken Fisher

How a healthcare organization uses its financial data will greatly affect its performance. Having been a part of several healthcare organizations for 35 years, I've seen two camps emerge related to processing data. The first camp is led by people who ask, "What's the number?" These organizations focus on the bottom line without digging deeper. The second, more successful camp is led by people who say, "Now that we have the number, what are we going to do with it?"

We're all familiar with the definition of accounting--the art of recording, classifying, and reporting financial data for use by leadership in decision making. Skilled accountants can hold up their end of that equation quite handily, but many in leadership positions struggle with how they can use the accounting information to bring about financial and operational improvement.

As healthcare financial leaders, we can perform key management tasks to assist in the application and analysis of financial data:

* Get it right--and soon.

* Make it useful.

* Get it to decision makers.

* Make active decisions with the data.

These tasks may seem simple, but many organizations fail in one or more of these important areas. Boost your organization's financial power by adhering to the following guidelines.

Get It Right--and Soon

Jack Welch, the longtime CEO of General Electric, had the worldwide operating results for GE delivered to his desk by the fifth day of each month. Are you as insistent on having accurate, timely information prepared for your organization? Health care is improving with regard to implementing financial standards; however, it still does not hold a candle to successful organizations in other industries. The financial close for health care is laborious, often involving tracking down invoices and checking over contractual adjustments. I have seen healthcare administrators and controllers matching invoices and pricing claims by hand. Conducting a financial close in such a manner is time-consuming and outdated.

Putting systems in place that resolve the big numbers on the income statement quickly will transform your financial reporting system from one that takes 10 days to find invoices to one where a quick monthly close is the rule, not the exception.

Make It Useful

Just as many organizations employ outdated methods of performing their financial close, the format of financial statements still reflects the 1940s and 1950s, when the hospital income statement first became formalized.

The first hospital where I served as a controller earned 90 percent of its revenue from inpatient services; half of that amount was from daily room charges. Similarly, a substantial portion of the hospital's costs were related to direct patient care. Physicians were still in the habit of admitting patients for diagnostic work-ups, and some patients remained in hospitals for months. The remnants of this style of income statement can still be seen today; just read the American Institute of Certified Public Accountants Hospital Audit Guide for a comparison.

Other industries use a cost-of-goods-sold format for their income statements. This format allows operating managers to focus on cost that moves with sales; therefore, costs must be controlled to stay profitable. Costs that are fixed require an entirely different operating strategy that focuses on the longer term. If health care were to rethink the outdated format of its operating statements, the way that operating or line managers view cost might change.

Get Information to Decision Makers

Financial statements that never leave the accounting department aren't helping your organization. Sending a monthly department performance report to line operating managers in a plain interhospital envelope rarely does any good. Newer, integrated financial systems offer real-time financial information to line operating managers on their desktops. Many organizations do not provide department financial information to line operating managers until the "board package" is complete. Careful review of the information needed to run a department does not include the final top of corporation entry to contractual adjustments, which is often the last entry needed to close the financial statements each month.

Providing line managers with a fully allocated cost performance report is rarely useful. The costs and allocation methods used in these performance reports are dated; as a result, the line manager can do very little to mitigate them. Almost every organization that I work with has the same problem--line operating managers do not know what they have, what to do with it, or how to use it to manage real change.

At one hospital that I work with, a major department director was terminated for a number of issues. After the director left, two years worth of department financial packages, still sealed in their interhospital envelopes, were found gathering dust in the corner of the office. Healthcare organizations need to rethink the quality and timeliness of information that is provided to line managers. Giving the managers the tools to effectively manage their functional areas will improve the organization overall.