Kaufman Hall Report Finds CFOs Feeling Unprepared for the Budgeting Challenges Ahead
The Chicago-based Kaufman Hall consulting firm this month released a new report, entitled “2020 Healthcare Financial Outlook: Performance Management Trends and Priorities.” Authored by Jay Spence, David Palkoner, and Kristopher Goetz, the report examines some of the very serious challenges facing the CFOs and other financial leaders of patient care organizations nationwide, as they attempt to cope with the pace of change, especially around reimbursement and operational costs; and the survey on which the report is based has found that 87 percent of respondents say cost reduction is among the most important financial performance activities for their organizations, but also that 76 percent are seeing resource constraints impacting effective financial planning and analysis in their organizations.
The report was based on a survey conducted online during September and October, with 120 senior healthcare finance leaders responding. Among the survey respondents, 27 percent are working in health systems with 10 or more hospitals; 38 percent are in health systems with 2-9 hospitals; 23 percent work in single-hospital organizations; 6 percent work in medical groups; 1 percent work in health plans; and 5 percent, in other types of organizations.
The report’s authors were Jay Spence, vice president, healthcare performance management solutions, with Kaufman Hall Axiom Software; David Palkoner, vice president for Kaufman Hall’s healthcare performance improvement solutions; and Kristopher Goetz, a senior vie president in Kaufman Hall’s strategic and financial planning practice, concentrating on performance improvement.
Three key areas of findings emerged in the authors’ analysis—around identifying and managing cost reductions, becoming more agile, and understanding the impact of clinical outcomes on financial performance.
With regard to identifying and managing cost reductions, the authors found the following:
> The need to identify and manage cost-reduction initiatives is a top priority for financial performance improvement activities.
> Finance leaders lack sufficient tools to identify cost-improvement opportunities.
> Few organizations have a cost accounting system in which leaders have a high degree of confidence.
With regard to agility, the authors noted that:
> Many finance leaders lack confidence in their ability to adjust quickly and easily to changing business circumstances.
> Budgeting cycles continue to grow longer.
> Finance leaders show a heightened interest in improving operational budgeting and forecasting.
> Rolling forecasting is gaining in popularity as a complement to organizational budgeting cycles.
And, with regard to clinical outcomes, the authors noted that:
> Financial health and quality of care are the top core dimensions being managed by hospital and health system leaders.
> Few organizations are prepared to use clinical measures to impact financial results.
> Better analytics and reporting to support decision-making is a top priority for improvement.
“The need for better cost identification and management has been a consistent theme since 2017, when we began our annual healthcare financial outlook survey,” the authors wrote at the outset of the report. “An important part of this effort is finding and realizing opportunities to reduce costs. More broadly, however, legacy hospital and health systems face the need to transform costs. Current service offerings must be delivered as efficiently as possible to preserve margins under tightening payment pressures; free up resources for investment in new technologies, sites of care and care delivery models; and address changing demand and new competition within the healthcare marketplace. The need to identify and manage cost-reduction initiatives has been the top priority for healthcare finance leaders since the first year of our survey. However, a lack of sufficient tools – including cost accounting systems in which finance leaders have confidence – is hampering their ability to drive the transformative changes to cost structure required in today’s environment.”
In speaking with c-suite leaders at hospitals and health systems, the authors found that:
> 87 percent of respondents say that identifying and managing cost-reduction initiatives is among the most important financial performance management activities for their organization.
> 76 percent say that resource constraints are affecting effective financial planning and analysis in their organization.
As the authors noted, “These two data points underline the need for cost transformation. High costs act as a drag on organizational efficiency, tying up resources that could be deployed elsewhere, including in analytical tools and costing systems that enable improved cost management. The imperative for cost reduction in existing services and operations is widely recognized. At the same time, finance leaders say that they do not have sufficient resources to effectively transform financial planning and analytical activities. Our survey results indicate that the problem of limited resources is growing: 76% cited resource constraints as an issue this year, compared to 70 percent in 2019 and 66 percent in 2018.”
Furthermore, the researchers found that only 36 percent of respondents have a high degree of confidence in the accuracy of results from their existing cost accounting system.
As for agility, only 24 percent of respondents reported themselves being “very confident” in their teams’ ability to quickly and easily make adjustments to strategies and plans, in the event of business circumstances changing. And only 14 percent believe that their current financial planning processes and tools make them “very prepared” to manage the financial impact of evolving payment and delivery models; that figure was essentially unchanged from the results of 2019 (13 percent) and 2018 (15 percent).
Of course, with all of the changes and disruptions taking place in healthcare nowadays, the budgeting process in hospitals and health networks is being affected. Indeed, 50 percent of respondents to the survey reported budgeting cycles lasting six months or longer from initial rollout to board presentation, up from 37 percent in 2019 and 27 percent in 2018. And one of the reasons is that initial assumptions going into the process will often be outdated by the time that budgets are published.
The report contains numerous other survey findings, including the fact that only 14 percent of respondents consider themselves “very prepared” to use clinical measures to impact financial results. That said, 69 percent of respondents are looking to improve reporting and analysis to support decision-making in 2020. That represents their top priority among their priorities for financial planning and analysis improvement in 2020, followed by operational budgeting and forecasting, and cost management and efficiency.
Shortly after the report was released, Healthcare Innovation Editor-in-Chief Mark Hagland spoke with Kermit Randa about its findings. The Atlanta-based Randa is the CEO of Kaufman Hall Software, the software solutions division of the Kaufman Hall organization. Below are excerpts from that interview.
What are the most important things for readers to know about what was learned in the survey and report?
I wish I had something super-sexy and cool to say that breaks new ground. But the reality is that our healthcare leaders are facing enormous headwinds. They have choppy water and shifting sands—all the metaphors. And it’s relentless. And we talk about this same thing year after year, and the thing that doesn’t get better is how they manage through that change.
It’s a combination of data and the willingness to act that makes a difference. And whether or not people use our solutions—the thing that we’re trying to do is that we’re trying to help people think a little bit more boldly. Obviously, the incremental nature of how they’re approaching things, isn’t killing it. So they’ve got to think a bit more boldly, because the times demand it. There’s a book called The Messy Middle. People talk about what they’re going to do, but rarely talk about the really messy stuff in the middle. We want to help people think through things and act fearlessly. Clearly, people lack the tools to really think through the problems. But if they can think clearly and act fearlessly, they’ll get beyond what they think they can do.
And we do this for higher education and for the financial services industry. And the same challenges are facing leaders in all those industries. And you have to have a data so that you can move more effectively.
How can provider leaders accelerate their work, based on the demands of purchasers and payers, as our healthcare system’s overall costs escalate dramatically? The CMS actuaries have predicted that overall annual U.S. healthcare expenditures will go from the current $3.6 trillion to $6 trillion in the next several years.
Yes, and there’s competition from disrupters coming into healthcare—CVS, Walmart, Amazon, and others. So I think that when you start to think about why value-based payment is moving so slowly, my guess is that since the models aren’t moving fast enough, they’re maximizing revenues where they still can. I think that right now what folks have to do, and we see this, interestingly in other verticals, is people really getting a handle on their costs, so that when it’s time to act, they can move quickly. If they can spend time right now doing the work, even knowing it might not go into production soon, that would help. We see that happening in complex organizations, where they’re developing an information infrastructure for the future.
Isn’t it unfortunate that 54 percent of the survey’s respondents reported that they have insufficient data, benchmarking, and reporting tools, to support cost-control efforts without compromising care quality?
Yes, and 75 percent of c-suite leaders lack the confidence that they can act. And only 14 percent say that they’re prepared, even those with the tools. It’s fairly dire.
What would your advice be for c-suite leaders, given this?
They have to start working smarter using modern technology, not just Excel spreadsheets. The second element in this is the will to act. Kris Goetz, one of the authors of the study, talks about the results management office. What are we trying to accomplish? Put a number on it. Do we have to cut $30 million in costs over the next five years? And how do we do that? If you don’t have a strong financial plan in place, you have a dream. So create that plan. And that will tell you, OK, if reimbursement continues on this path, then this will be the size of our problem. And you need to create energy around listening to the data. The data has to be heard, and unless you can balance that against something real—I’ll tell you, the will to act is important. It’s ultimately the leadership problem. Leaders have to help drive change. People will get energy around concrete goals, but they have to be clear and data-based, and the progress has to be measurable. It’s about change management, but the change comes from people and from the willingness to change. And I would say, how closely have you looked at all the change taking place around you, including disruptive change?
And what we’re seeing in higher education is fascinating. We all hear about the student loan bubble and financing, etc. It’s fascinating to think about the number of large, complex higher education institutions that are acquiring our technologies to help them do financial planning. They’re gearing up for a storm. Healthcare has more data than higher education and have more of a burning imperative. I would ask healthcare leaders, are you leveraging what you have? And you look at hospitals, academic medical centers, and universities, and those are all pretty tradition-bound institutions.
So do you have the data? And how are you using it? I think my challenge is, do you really have resolve around what your destinations are, and do you have the data to help you get yourself there? What if I have to cut $100 million in costs in the next few years?
We found in our survey that only two-fifths of hospital-based organizations have enterprise-wide data warehouses. What does that say to you?
I think you’re right, that is a shocking statistic. We have data everywhere, but often, you can't get to it. And there’s a whole interoperability discussion going on now. But my perspective is that interoperability is crucial. The nature of what we do—five days after a close, I can tell you where any department in your organization is, in terms of success measures. I can tell you about hundreds of thousands of job codes, etc. The budgeting is there. But it’s tying it together, saying, OK, that’s cost data, but how do I combine it with other things? And cost accounting really involves, how much does that staff member cost, that room cost, the supplies cost? So that you really can get cost per procedure, etc. And that 100-percent requires interoperability and getting the data.
And there’s so much work to do. And even among the two-fifths, how many organizations are actually effectively using the data? There remain silos of data. It’s important to pull the data together.
How do you see all of this playing out in the next five years?
I gave a talk not long ago on this, about the fact that the competition we have is not the healthcare organizations down the street, it’s the consumer experience. And five years from now, my 15-year-old daughter is going to be 20, and she’s not going to put up with the nonsense of inadequate service in healthcare. I think that what’s going to happen in five years, and Ken Kaufman’s done a lot of work on this, including on his blog, but the disruption will be driven by the consumers. And I know it’s heresy—but whether it’s CVS or Amazon that starts putting 100-bed hospitals out of business, the patient experience will make things crazy, and the only thing to make things right will be to leverage data and information. Yet what an exciting time for healthcare leadership, if they’re willing to embrace change. They can make huge differences in communities. And people are partnering with Amazon and Google.
