Providing strategic financial leadership for integrated delivery systems

Healthcare Financial Management, July, 1998 by Don N. Kleinmuntz, Catherine E. Kleinmuntz

Changes in the current healthcare environment, such as the transition to managed care and increased competitive pressure, have challenged financial managers in organizations of all sizes to find ways for their organizations to furnish high-quality care at low cost. One response to these pressures has been the formation of integrated delivery systems (IDSs). While IDSs provide many advantages, including increased access to capital and greater ability to invest in information technology, their large size and complexity also create financial management challenges.

In addition to their traditional financial responsibilities, system CFOs need to ensure that information available for decision making within these organizations is timely, relevant, and reliable. The CFO has an important opportunity to exercise a strategic leadership role, guiding IDSs forward and anticipating rather than merely responding to market changes.

In Reinventing the CFO, Thomas Walther and his coauthors present an in-depth examination of the role of CFOs.(a) Drawing on discussions with hundreds of CFOs from many industries, the authors argue for urgent changes in how finance departments are organized and managed.

Corporate finance departments have been slow to move beyond their traditional roles of routine financial transaction processing and reporting toward more strategic management. This shift, however, is necessary for two reasons. First, traditional financial functions increasingly can be accomplished through automation and outsourcing. Second, in the past few years, the accounting profession has recognized that though financial reports based on generally accepted accounting principles remain useful, they also have inherent limitations that necessitate the development of new information sources to aid strategic management.(b)

Although these concerns apply to all healthcare finance departments, including those in stand-alone hospitals and smaller healthcare organizations, the need for change is most acute in IDSs. Senior management and corporate boards of IDSs increasingly are turning to broader sources of information that allow them to monitor business processes and assess future risks and opportunities. If the IDS finance department focuses exclusively on financial reporting, these decision makers will turn elsewhere for their information, and the department's value to the organization will decline. The finance department can expand its role, however, if it develops new value-added services that directly meet decision makers' needs for broader information.

Meeting IDS Information Requirements

In a 1997 report, the American Institute of Certified Public Accountants (AICPA) urged accounting professionals to find ways to deliver more useful information to decision makers.(c) The report suggested that to effectively manage more diverse types of information, system CFOs need to consider the information's source, reliability, relevance, and context. By adopting the AICPA's perspective and focusing on these four information characteristics, system CFOs can redefine their role as managers of information that supports both the financial and strategic goals of the IDS.

Source. The information necessary for effective IDS management may be either financial or nonfinancial, historical or prospective, and derived from either internal or external sources. Healthcare managers already have begun to recognize the value of combining financial information and clinical data with externally generated information on utilization trends and patterns. Construction of financial and clinical data repositories that allow an organization to track patients across the continuum of care will streamline the task of information collection from disparate sources.

System CFOs also should pursue a strategy of strengthening business performance measurement processes in a way that recognizes these diverse information sources. Increasingly, organizations are recognizing that traditional financial measurement systems provide an incomplete picture of business performance. Many banking, insurance, manufacturing, communications, energy, technology, and retailing businesses are developing "balanced scorecard" measurement systems.(d) These systems combine financial performance measures with nonfinancial measures that focus on whether the organization is developing effective customer relationships, enhanced capabilities, and improved processes. The goal is to identify measures that are leading indicators of future financial performance.

An effective scorecard fully reflects the extent to which business units are aligned with an organization's strategy. This is essential in not-for-profit IDSs, where performance objectives are tied to a mission in which financial return is only a means to achieving the organization's tax-exempt purpose. Furthermore, patient outcome and satisfaction measures have become key drivers to competitive success, as large employers and managed care networks seek information regarding the quality of care delivered by providers.