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The evolution of the CFO
CFOs are playing an increasingly pivotal role in driving change in their companies. How should they balance their traditional responsibilities with the new CFO mandate?
Podcast transcript
Sean Brown: If you wanted evidence that the only constant in life is change, then look no further than the evolution of the CFO role. In addition to traditional CFO responsibilities, results from a recent McKinsey survey suggest that the number of functions reporting to CFOs is on the rise. Also increasing is the share of CFOs saying they oversee their companies’ digital activities and resolve issues outside the finance function. How can CFOs harness their increasing responsibilities and traditional finance expertise to drive the C-suite agenda and lead substantive change for their companies?
Joining us today to answer that question are Ankur Agrawal and Priyanka Prakash. Ankur is a partner in our New York office and one of the leaders of the Healthcare Systems & Services Practice. Priyanka is a consultant also based in New York. She is a chartered accountant by training and drives our research on the evolving role of finance and the CFO. Ankur, Priyanka, thank you so much for joining us today.
Let’s start with you, Ankur. Tell us about your article, which is based on a recent survey. What did you learn?
Ankur Agrawal: We look at the CFO role every two years as part of our ongoing research because the CFO is such a pivotal role in driving change at companies. We surveyed 400 respondents in April 2018, and we subsequently selected a few respondents for interviews to get some qualitative input as well. Within the 400 respondents, 212 of those were CFOs, and then the remainder were C-level executives and finance executives who were not CFOs. We had a healthy mix of CFOs and finance executives versus nonfinance executives. The reason was we wanted to compare and contrast what CFOs are saying versus what the business leaders are saying to get a full 360-degree view of CFOs.
The insights out of this survey were many. First and foremost, the pace of change in the CFO role itself is shockingly fast. If we compare the results from two years ago, the gamut of roles that reported into the CFO role has dramatically increased. On average, approximately six discrete roles are reporting to the CFO today. Those roles range from procurement to investor relations, which, in some companies, tend to be very finance specific. Two years ago, that average was around four. You can see the pace of change.
The second interesting insight out of this survey when compared to the last survey is the cross-functional nature of the role, which is driving transformations and playing a more proactive role in influencing change in the company. The soft side of the CFO leadership comes out really strongly, and CFOs are becoming more like generalist C-suite leaders. They should be. They, obviously, are playing that role, but it is becoming very clear that that’s what the business leaders expect them to do.
And then two more insights that are not counterintuitive, per se, but the pace of change is remarkable. One is this need to lead on driving long-term performance versus short-term performance. The last couple of years have been very active times for activist investors. There are lots of very public activist campaigns. We clearly see in the data that CFOs are expected to drive long-term performance and be the stewards of the resources of the company. That data is very clear.
And then, lastly, the pace of change of technology and how it’s influencing the CFO role: more than half of the CFO functions or finance functions are at the forefront of digitization, whether it is automation, analytics, robotic processes, or data visualization. More than half have touched these technologies, which is remarkable. And then many more are considering the technological evolution of the function.
Sean Brown: In your survey, did you touch on planning for the long term versus the short term?
Ankur Agrawal: Our survey suggests, and lot of the business leaders suggest, that there is an imperative for the CFO to be the steward of the long term. And there is this crying need for the finance function to lead the charge to take the long-term view in the enterprise. What does that mean? I think it’s hard to do—very, very hard to do—because the board, the investors, everybody’s looking for the short-term performance. But it puts even more responsibility on the finance function in defining and telling the story of how value is being created in the enterprise over the long term. And those CFOs and finance executives who are able to tell that story and have proof points along the way, I think those are the more successful finance functions. And that was clearly what our survey highlighted.
What it also means is the finance functions have to focus and put in place KPIs [key performance indicators] and metrics that talk about the long-term value creation. And it is a theme that has been picked up, in the recent past, by the activists who have really taken some companies to task on not only falling short on short-term expectations but also not having a clear view and road map for long-term value creation. It is one of the imperatives for the CFO of the future: to be the value architect for the long term. It’s one of the very important aspects of how CFOs will be measured in the future.
Sean Brown: I noticed in your survey that you did ask CFOs and their nonfinance peers where they thought CFOs created the most value. What did you learn from that?
Priyanka Prakash: This has an interesting link with the entire topic of transformation. We saw that four in ten CFOs say that they created the most value through strategic leadership, as well as leading the charge on talent, including setting incentives that are linked with the company’s strategy. However, we see that nonfinance respondents still believe that CFOs created the most value by spending time on traditional finance activities. This offers an interesting sort of split. One of the things that this indicates is there’s a huge opportunity for CFOs to lead the charge on transformation to ensure that they’re not just leading traditional finance activities but also being change agents and leading transformations across the organization.
Ankur Agrawal: The CFOs of the future have to flex different muscles. They have been very good in really driving performance. Maybe there’s an opportunity to even step up the way that performance is measured in the context of transformation, which tends to be very messy. But, clearly, CFOs are expected to be the change agents, which means that they have to be motivational. They have to be inspirational. They have to lead by example. They have to be cross-functional. They have to drive the talent agenda. It’s a very different muscle, and the CFOs have had less of an opportunity to really leverage that muscle in the past. I think that charismatic leadership from the CFO will be the requirement of the future.
Sean Brown: You also address the CFO’s role regarding talent. Tell us a bit more about that.
Ankur Agrawal: Another really important message out of the survey is seeing the finance function and the CFO as a talent factory. And what that means is really working hand in hand with the CEO and CHRO [chief HR officer] over this trifecta of roles. Because the CFO knows where to invest the money and where the resources need to be allocated to really drive disproportionate value, hopefully for the long run. The CHRO is the arbiter of talent and the whole performance ethic regarding talent in the company. And the CEO is the navigator and the visionary for the company. The three of them coming together can be a very powerful way to drive talent—both within the function and outside the function.
And the finance-function leaders expect CFOs to play a really important role in talent management in the future and in creating the workforce of the future. And this workforce—in the finance function, mind you—will be very different. There’s already lots of talk about a need for data analytics, which is infused in the finance function and even broader outside the organization of finance function. The CFOs need to foster that talent and leverage the trifecta to attract, retain, and drive talent going forward.
Sean Brown: Do you have any examples of successful talent-development initiatives for the finance function? And can you share any other examples of where CFOs, in particular, have taken a more active role in talent and talent development?
Ankur Agrawal: An excellent question. On talent development within the finance function, a few types of actions—and these are not new actions—done very purposefully can have significant outsize outcome. One is job rotations: How do you make sure that 20 to 30 percent of your finance function is moving out of the traditional finance role, going out in the business, learning new skills? And that becomes a way where you cultivate and nurture new skills within the finance function. You do it very purposefully, without the fear that you will lose that person. If you lose that person, that’s fine as well. That is one tried-and-tested approach. And some companies have made that a part of the talent-management system.
The second is special projects. And again, it sounds simple, but it’s hard to execute. This is making this a part of every finance-function executive’s role, whether it’s a pricing project or a large capex [capital-expenditure] and IT project implementation. Things like that. Getting the finance function outside of their comfort zone: I think that’s certainly a must-have.
And the third would be there is value in exposing finance-function executives to new skills and creating a curriculum, which is very deliberate. I think technology’s changing so rapidly. So exposing the finance function to newer technologies, newer ways of working, and collaboration tools: those are the things I would highlight as ways to nurture finance talent.
Priyanka Prakash: Just to add onto that. A lot of the folks whom I talked to say that, very often, finance folks spend a large chunk of their time trying to work on ad hoc requests that they get from the other parts of the business. A big opportunity here is in how the finance function ensures that the rest of the nonfinance part has some basic understanding of finance to make them more self-sufficient, to ensure that they are not coming to the finance function with every single question. What this does is it ensures that the rest of the organization has the finance skills to ensure that they’re making the right decisions, using financial tools.
And secondly, it also significantly frees up the way that the finance organization itself spends its time. If they spend a few hours less working on these ad hoc requests, they can invest their time in thinking about strategy, in thinking about how the finance function can improve the decision making. I think that’s a huge sort of benefit that organizations have seen just by upscaling their nonfinance workforce to equip them with the financial skills to ensure that the finance team is spending time on its most high-value activity.
Sean Brown: Is this emphasis on talent focused only on the finance function? What I am hearing from your response is that it’s not just building up the talent within the finance function but embedding finance talent and capabilities throughout the organization. Is that right?
Priyanka Prakash: Absolutely. Because if you take an example of someone who’s in a factory who wants to have an investment request for something that they want to do at a plant, they will have to know the basic knowledge of finance to evaluate whether this is an investment that they need or not. Because at the end of the day, any decision would be incomplete without a financial guideline on how to do it. I think that the merging of your other functions with a strong background and rooting in finance can improve the quality of decisions that not just the finance function but other teams and other functions also make in the organization.
Sean Brown: Priyanka, your survey touches a bit on the topic of digital. What did you learn there?
Priyanka Prakash: Sure. This is one of those things that everybody wants to do, but the question that I’ve seen most of my clients struggle with in the initial phases is, “Yes, I have the intent from the top. There is intent from the finance and other teams on how to become more digital, but how do you actually start that process?”
There are four distinct kinds of technologies or tools that finance teams, specifically, could use in enabling their digital journey and transformation. CFOs have way too much on their plates right now. What this essentially means is that they need to invest time and a lot of their thinking into some of these newer, more strategic areas while ensuring that they keep the lights on in the traditional finance activities. The biggest tool that will enable them to keep the lights on as well as add value in this new expanded role is to take advantage of automation, as well as some of the newer digital technologies that we see.
There are basically four types of digital stages that we see as finance functions start to evolve. One is using automation, which is typically the first step. For example, “How do I move from an Excel-based system to an Alteryx one? How do I move from a manual transactional system to something that’s more automated, where my finance teams don’t have to invest time, but it happens in the background with accuracy?” That’s step one.
The second thing that we see as a result of this is you have a lot of data-visualization tools that are being used. This is very helpful, especially when you think about the role of FP&A [financial planning and analysis]. “How does my FP&A team ensure that the company makes better decisions? How do I use a visualization software to get different views of my data to ensure that I’m making the right decisions?”
The third one is, “How do I use analytics within finance? How do I use analytics to draw insights from the data that I might have missed otherwise?” This could be something in forecasting. This could be something in planning. But this could also be something that’s used when you compare your budget or your forecast. Your analytics could really help draw out drivers of why there’s a variance.
And fourthly is, “How do I then integrate this advanced-analytics philosophy across the rest of the company?” What this means is, “How do I integrate my finance and traditional ERP [enterprise-resource-planning] systems with the pricing system, with the operations, and supply-chain-management system? How do I integrate my finance systems with my CRM [customer relationship management]?” Again, the focus is on ensuring that the whole database is not this large, clunky system but an agile system that ensures you draw out some insights.
Sean Brown: Some have suggested the CFO is ideally suited to be the chief digital officer. Have you seen any good examples of this?
Ankur Agrawal: There were examples even before the digital technologies took over. In some companies, the technology functions used to report to CFOs. There are cases where CFOs have formally or even informally taken over the mandate of a chief digital officer. You don’t necessarily need to have a formal reporting role to be a digital leader in the company. CFOs, of course, have an important role in vetting expenses and vetting the investments the companies are making. That said, CFOs have this cross-functional visibility of the entire business, which makes them very well suited to being the digital officers. In some cases, CFOs have stepped up and played that more formal role. I would expect, in the future, they will certainly have an informal role. In select cases, they will continue to have a formal digital-officer role.
Sean Brown: It sounds like, from the results of the survey, the CFO has a much larger role to play. Where does someone begin on this journey?
Priyanka Prakash: Going back to the first point that we discussed on how CFOs should help their companies have a more long-term view, we see that this transformation is specifically here to move to more digital technologies. It’s not going to be easy, and it’s not going to be short. Yes, you will see quick wins. But it is going to be a slightly lengthy—and oftentimes, a little bit of a messy—process, especially in the initial stages. How do we ensure that there is enough leadership energy around this? Because once you have that leadership energy, and once you take the long-term view to a digital transformation, the results that you see will pay for themselves handsomely.
Again, linking this back with the long-term view, this is not going to be a short three-month or six-month process. It’s going to be an ongoing evolution. And the nature of the digital technologies also evolve as the business evolves. But how do you ensure that your finance and FP&A teams have the information and the analytics that they need to evolve and be agile along with the business and to ensure that the business responds to changes ahead of the market? How do we ensure that digital ensures that your company is proactively, and not reactively, reacting to changes in the external market and changes in disruption?
Sean Brown: Priyanka, any final thoughts you’d like to share?
Priyanka Prakash: All that I’ll say is that this is a very, very exciting time for the role of the CFO. A lot of things are changing. But you can’t evolve unless you have your fundamentals right. This is a very exciting time, where CFOs can have the freedom to envision, create, and chart their own legacy and then move to a leadership and influencer role and truly be a change agent in addition to doing their traditional finance functions, such as resource allocation, your planning, and all of the other functions as well. But I definitely do think that these are very exciting times for finance organizations. There are lots of changes, and the evolutionary curve is moving upward very quickly.
Sean Brown: Ankur, Priyanka, thanks for joining us today.
The new CFO mandate: Prioritize, transform, repeat
Amid a raft of new duties for CFOs, our survey suggests that finance leaders are well positioned to lead the C-suite agenda by championing transformations, digitization, and capability building.
Responses indicate that the opportunity for CFOs to establish the finance function as both a leading change agent and a source of competitive advantage has never been greater. Yet they also show a clear perception gap that must be bridged if CFOs are to break down silos and foster the collaboration necessary to succeed in a broader role. While CFOs believe they are beginning to create financial value through nontraditional tasks, they also say that a plurality of their time is still devoted to traditional tasks versus newer initiatives. Meanwhile, leaders outside the finance function believe their CFOs are still primarily focused on and create the most value through traditional finance tasks.
How can CFOs parlay their increasing responsibility and traditional finance expertise to resolve these differing points of view and lead substantive change for their companies? The survey results point to three ways that CFOs are uniquely positioned to do so: actively heading up transformations, leading the charge toward digitization, and building the talent and capabilities required to sustain complex transformations within and outside the finance function.
Changing responsibilities, unchanged perceptions
The latest survey results confirm that the CFO’s role is broader and more complex than it was even two years ago. The number of functional areas reporting to CFOs has increased from 4.5 in 2016 to an average of 6.2 today. The most notable increases since the previous survey are changes in the CFO’s responsibilities for board engagement and for digitization (that is, the enablement of business-process automation, cloud computing, data visualization, and advanced analytics). The share of CFOs saying they are responsible for board-engagement activities has increased from 24 percent in 2016 to 42 percent today; for digital activities, the share has doubled.
The most commonly cited activity that reports to the CFO this year is risk management, as it was in 2016. In addition, more than half of respondents say their companies’ CFOs oversee internal-audit processes and corporate strategy. Yet CFOs report that they have spent most of their time—about 60 percent of it, in the past year—on traditional and specialty finance roles, which was also true in the 2016 survey.
Also unchanged are the diverging views, between CFOs and their peers, about where finance leaders create the most value for their companies. Four in ten CFOs say that in the past year, they have created the most value through strategic leadership and performance management—for example, setting incentives linked to the company’s strategy. By contrast, all other respondents tend to believe their CFOs have created the most value by spending time on traditional finance activities (for example, accounting and controlling) and on cost and productivity management across the organization.
Finance leaders also disagree with nonfinance respondents about the CFO’s involvement in strategy decisions. CFOs are more likely than their peers to say they have been involved in a range of strategy-related activities—for instance, setting overall corporate strategy, pricing a company’s products and services, or collaborating with others to devise strategies for digitization, analytics, and talent-management initiatives.
Guiding and sustaining change
Our latest survey, along with previous McKinsey research,2 confirms that large-scale organizational change is ubiquitous: 91 percent of respondents say their organizations have undergone at least one transformation in the past three years.3 The results also suggest that CFOs are already playing an active role in transformations. The CFO is the second-most-common leader, after the CEO, identified as initiating a transformation. Furthermore, 44 percent of CFO respondents say that the leaders of a transformation, whether it takes place within finance or across the organization, report directly to them—and more than half of all respondents say the CFO has been actively involved in developing transformation strategy.
Respondents agree that, during transformations, the CFO’s most common responsibilities are measuring the performance of change initiatives, overseeing margin and cash-flow improvements, and establishing key performance indicators and a performance baseline before the transformation begins. These are the same three activities that respondents identify as being the most valuable actions that CFOs could take in future transformations.
Beyond these three activities, though, respondents are split on the finance chief’s most critical responsibilities in a change effort. CFOs are more likely than peers to say they play a strategic role in transformations: nearly half say they are responsible for setting high-level goals, while only one-third of non-CFOs say their CFOs were involved in objective setting. Additionally, finance leaders are nearly twice as likely as others are to say that CFOs helped design a transformation’s road map.
Other results confirm that finance chiefs have substantial room to grow as change leaders—not only within the finance function but also across their companies. For instance, the responses indicate that half of the transformations initiated by CFOs in recent years were within the finance function, while fewer than one-quarter of respondents say their companies’ CFOs kicked off enterprise-wide transformations.
Leading the charge toward digitization and automation
The results indicate that digitization and strategy making are increasingly important responsibilities for the CFO and that most finance chiefs are involved in informing and guiding the development of corporate strategy. All of this suggests that CFOs are well positioned to lead the way—within their finance functions and even at the organization level—toward greater digitization and automation of processes.
Currently, though, few finance organizations are taking advantage of digitization and automation. Two-thirds of finance respondents say 25 percent or less of their functions’ work has been digitized or automated in the past year, and the adoption of technology tools is low overall.
The survey asked about four digital technologies for the finance function: advanced analytics for finance operations,5 advanced analytics for overall business operations,6 data visualization (used, for instance, to generate user-friendly dynamic dashboards and graphics tailored to internal customer needs), and automation and robotics (for example, to enable planning and budgeting platforms in cloud-based solutions). Yet only one-third of finance respondents say they are using advanced analytics for finance tasks, and just 14 percent report the use of robotics and artificial-intelligence tools, such as robotic process automation (RPA).7 This may be because of what respondents describe as considerable challenges of implementing new technologies. When asked about the biggest obstacles to digitizing or automating finance work, finance respondents most often cite a lack of understanding about where the opportunities are, followed by a lack of financial resources to implement changes and a need for a clear vision for using new technologies; only 3 percent say they face no challenges.
At the finance organizations that have digitized more than one-quarter of their work, respondents report notable gains from the effort. Of these respondents, 70 percent say their organizations have realized modest or substantial returns on investment—much higher than the 38 percent of their peers whose finance functions have digitized less than one-quarter of the work.
Unlocking the power of talent
The survey results also suggest that CFOs have important roles to play in their companies’ talent strategy and capability building. Since the previous survey, the share of respondents saying CFOs spend most of their time on finance capabilities (that is, building the finance talent pipeline and developing financial literacy throughout the organization) has doubled. Respondents are also much more likely than in 2016 to cite capability building as one of the CFO’s most value-adding activities.
Still, relative to their other responsibilities, talent and capabilities don’t rank especially high—and there are opportunities for CFOs to do much more at the company level. Just 16 percent of all respondents (and only 22 percent of CFOs themselves) describe their finance leaders’ role as developing top talent across the company, as opposed to developing talent within business units or helping with talent-related decision making. And only one-quarter of respondents say CFOs have been responsible for capability building during a recent transformation.
But among the highest-performing finance functions, the CFO has a much greater impact. Respondents who rate their finance organization as somewhat or very effective are nearly twice as likely as all others to say their CFOs develop top talent organization-wide (20 percent, compared with 11 percent). Among those reporting a very effective finance function, 38 percent say so.
Looking ahead
It’s clear from the numbers that CFOs face increased workloads and expectations, but they also face increased opportunities. In our experience, a focus on several core principles can help CFOs take advantage of these opportunities and strike the right balance:
- Make a fundamental shift in how to spend time. To be more effective in their new, ever-expanding roles, CFOs must carefully consider where to spend their time and energy. They should explore new technologies, methodologies, and management approaches that can help them decide how and where to make necessary trade-offs. It’s not enough for them to become only marginally more effective in traditional areas of finance; they must ensure that the finance organization is contributing more and more to the company’s most value-adding activities. It’s especially important, therefore, that CFOs are proactive in looking for ways to enhance processes and operations rather than waiting for turnaround situations or for their IT or marketing colleagues to take the lead.
- Embrace digital technologies. The results indicate that the CFO’s responsibilities for digital are quickly increasing. We also know from experience that finance organizations are increasingly becoming critical owners of company data—sometimes referred to as the “single source of truth” for their organizations—and, therefore, important enablers of organizational transformations. Finance leaders thus need to take better advantage and ownership of digital technology and the benefits it can bring to their functions and their overall organizations. But they cannot do so in a vacuum. Making even incremental improvements in efficiency using digital technologies (business intelligence and data-visualization tools, among many others) requires organizational will, a significant investment of time and resources, and collaboration with fellow business leaders. So, to start, CFOs should prioritize quick wins while developing long-term plans for how digitization can transform their organizations. They may need to prioritize value-adding activities explicitly and delegate or automate other tasks. But they should always actively promote the successes of the finance organization, with help from senior leadership.
- Put talent front and center. Since the previous survey, CFOs have already begun to expand their roles and increase their value through capability building and talent development. But the share of CFOs who spend meaningful, valuable time on building capabilities remains small, and the opportunity for further impact is significant. Finance leaders can do more, for instance, by coaching nonfinance managers on finance topics to help foster a culture of transparency, self-sufficiency, and value creation.
Piedmont now requires 25% advance payment for self-pay patients
Piedmont Healthcare is taking a bold approach in its fight against bad debt: The not-for-profit health system now requires patients who’ll be on the hook for the entirety of their bill to pay one-quarter of it before they can receive non-emergent services.
Atlanta-based Piedmont launched the advance payment policy this month. It requires uninsured, self-pay patients and those with high-deductible commercial policies to pay 25% of their bill before they can receive services.
Leaders from Piedmont’s revenue-cycle team told Modern Healthcare in an interview at the HFMA’s annual conference in Orlando, Fla., that the new policy is the latest phase in what has been five years of improved patient education around out-of-pocket costs, including sending patients price estimates—even if patients didn’t ask for them—prior to almost all services.
But they acknowledge not everyone will welcome the change.
“As much as people in healthcare want transparency, they get uncomfortable when you start talking about requirements for things, because requirements mean that a patient may hear ‘no’ to their healthcare,” said Andrea Mejia, Piedmont’s executive director of patient financial care and revenue cycle, “so that gets controversial.”
Like many of its peers, 11-hospital Piedmont shoulders a heavy bad-debt load, or bills that go unpaid that the system expected to be paid, as health insurers increasingly require patients to foot bigger portions of their bills.
The health system’s $250.7 million bad-debt expense in fiscal 2018 was about 8% of its $3 billion in revenue that year—up from 6.5% of revenue the prior year and much higher than the 2% national average the American Hospital Directory calculated in 2017.
Not-for-profit hospitals’ bad debt is projected to increase at least 8% this year as the high-deductible health plan trend continues, according to Moody’s Investors Service.
Requiring upfront payment is relatively common at physician practices. Some hospitals likely employ the tactic, too, but they’re unlikely to publicize such policies, said Jonathan Wiik, healthcare strategy principal with TransUnion Healthcare.
The HFMA’s Fifer said he couldn’t think of examples of other health systems that have implemented blanket pre-pay policies like Piedmont’s, and said he doesn’t think it’s prevalent.
He called it a “major shift” in an industry that’s long been too focused on back-end collection.
UPMC in Pittsburgh earlier this month scrapped its plan to seek pre-payment from out-of-network Highmark Medicare Advantage members once the academic health system’s consent decrees with Highmark end on June 30.
Effect on access
Piedmont’s Mejia said the policy’s potential to dissuade patients from receiving necessary care for serious conditions is “a very legitimate concern.”
The policy raises red flags, said Berneta Haynes, senior director of policy and access with the consumer advocacy group Georgia Watch. She said she fears it could hamper access to care and take away patients’ ability to negotiate. “It does have the potential to become a real impediment for folks seeking healthcare,” she said.
It’s not unheard of for hospitals to create pre-payment rules, said Mark Rukavina, business development manager in Community Catalyst’s Center for Consumer Engagement in Health Innovation. When they do, leaders need to ensure the rules don’t create barriers to care. That means screening for financial assistance, informing patients of the financial assistance policy and making exceptions when necessary, such as for cancer patients.
“These kinds of payments, especially if you’re dealing with larger bills, are certainly going to have a chilling effect on people and their willingness or ability to access care,” Rukavina said.
Brian Unell, Piedmont’s vice president of revenue cycle, said the new advance payment policy allows Piedmont’s physicians to escalate cases to administration in situations where patients need care urgently, such as for cancer treatment.
“That’s been the biggest lesson learned so far and pushback we’ve gotten,” he said.
There’s currently no ceiling amount on what patients could be forced to pay before receiving services, but Unell said the system would probably make an exception if 25% ended up being $2,500, for example. Piedmont discounts its billed charges by 70% for self-pay patients.
Final step in collections
The new policy is the third in a three-phase collection policy Piedmont has implemented since late 2017. The first phase was 15% pre-pay requirement for walk-in visits, including lab tests and X-rays. It did not apply to the system’s urgent-care clinics. Officials said they wanted to implement the policy in few facilities. The second phase expanded the 15% requirement to scheduled services like surgeries.
For policies like Piedmont’s to be successful, they need to have very good relationships with their referring physicians, TransUnion’s Wiik said. The rub tends to enter when physicians argue that their patients aren’t getting medically necessary services, he said.
In Piedmont’s case, the policy also has the unintended effect of competing with its physicians, some of whom have their own pre-payment policies, Unell said.
Wiik argues that if patients were truly unable to pay the bill, the hospital’s financial assistance policy or Medicaid eligibility would kick in.
“Do you have an inability or an unwillingness to pay?” he said. “There’s a difference.”
Policies like Piedmont’s can be tricky, but the benefit is that they find patients who really can pay who may not have otherwise paid, Wiik said.
While one goal of Piedmont’s policy is probably cash flow, the HFMA’s Fifer said his hunch is the primary driver is engaging patients in a conversation about financial responsibility.
Piedmont has increased its same-store, upfront collections by about 500% since 2014 thanks to revenue cycle improvements it has made in that time, Unell said. The health system has also expanded its back-end patient financing options, including moving more toward monthly payments. The system does not offer discounts to patients who agree to pay in a lump sum right away.
Unell described Piedmont’s revenue-cycle work as a journey, and said the system is constantly evolving based on new information.
“None of this is easy,” Unell said, “and by no means do we have it figured out.”
Even Democrats prefer more moderate “Medicare for All”
Allowing people to buy into Medicare is more popular than establishing a single-payer health care system — including among Democrats, according to a recent Navigator poll.
Why it matters: Bernie Sanders made “Medicare for All” a popular concept, but even its supporters have different ideas about what it entails. And more moderate versions have the upper hand.
Ominous sign in ACA case
The 5th Circuit Court of Appeals yesterday added a new question to the high-stakes lawsuit over the Affordable Care Act’s survival: Whether Democratic attorneys general or the House of Representatives have the legal standing to defend the ACA in court.
Translation, from Axios’ Sam Baker: The court is asking whether it ought to kick out the entire pro-ACA side of the case.
- Technically Texas (with a group of other red states) is suing the Trump administration. But the Trump administration says it agrees with Texas’ position.
- Blue states and House Democrats stepped in so that somebody would be arguing the pro-ACA position.
The intrigue: If the 5th Circuit does boot Democrats off of this lawsuit, that would likely mean no one can appeal a lower court’s ruling striking down the entire law.
- As University of Michigan law professor Nicholas Bagley explained on Twitter, it’s not necessarily clear how all that would play out.
- Presumably, the Supreme Court would be disinclined to let a single district court judge have the final say on whether the Affordable Care Act lives or dies. So there would probably be fresh procedural wrangling to revive some kind of appeal.
The bottom line: This could be a bad development for the ACA — or it could end up not mattering much at all, if the court decides Democrats do have standing. But it’s definitely not a positive development for the health care law.
What’s next: The 5th Circuit will hear oral arguments July 9.
THE NUMBER ONE FACTOR IN EMPLOYEE SATISFACTION
Respectful treatment of all employees at all levels was rated as very important by 67% of employees in 2015, making it the top contributor to overall employee job satisfaction for the second year in a row.
8 out of 10 employees who feel disrespected are less committed.
You could use carrots and sticks to energize performance but showing respect is simpler and less expensive.
How to show respect:
I was asked during an interview, “How do you respect your customers when all you need is for them to make a purchase?” My thoughts went beyond customers to respect in general. The word ‘compassion’ came to mind.
Compassion feels like respect.
#1. Show respect by acknowledging personal struggle. Some team members have wayward children, others have financial stress, still others struggle with their marriage.
When you learn of a person’s struggle:
- Resist the urge to solve struggles for people. You disrespect the struggle when you offer off-handed solutions.
- Listen with interest.
- Express compassion. “I’m sorry you’re going through this difficult situation.”
- Express empathy. “It must be tough to face this challenge.”
- Offer kindness. “I can’t pay your bills, but is there anything I can do to make today a little better?”
- Show appreciation. “I appreciate your contributions while you’re carrying these personal concerns.”
#2. Show respect by acknowledging responsibility. Employees carry important responsibilities. Leading is tough and often under-appreciated.
You show respect when you:
- Appreciate the burden, even if you don’t feel it yourself.
- Realize that easy for you may be heavy to another.
- Notice strengths. “You’re really good at … .”
- Acknowledge progress. “I believe you’re an important factor in the way our meetings are improving.”
Research adds 5 ways to show respect:
- Delegate important tasks.
- Receive advice.
- Provide freedom to pursue creative ideas.
- Take an interest in someone’s nonwork life.
- Stand with people during critical situations.
What makes you feel disrespected?
How might you show respect to team members? Leaders?
Cartoon – Modern Dining
Why is healthcare such an attractive target for private equity?
Thanks to TV shows and movies, we tend to think of
private equity bidding wars as involving fast-growing
Silicon Valley companies. But when Oak Street Health,
a Chicago-based network of seven primary care clinics,
began looking for investors last year, more than a dozen
firms flew to Chicago to court the physicians and most of
them ended up bidding for the group of seven primary care clinics, according to a report in Modern Healthcare.
Oak Street is not alone — almost any independent
physician group of scale these days is likely to be an
attractive target for so-called “smart money,” investors
and their advisers.
Increased regulatory requirements and complexity has led
many independent small groups to “throw up their hands
and decide to sell to or join larger entities,” says Andrew
Kadar, a managing director in L.E.K. Consulting’s healthcare
services practice, which advises private equity groups.
While many such physicians sell to a health system and
become salaried employees, investor-backed practice management groups may have certain advantages, Kadar says. “Each private equity firm has its own approach, but in general they tend to give physicians a continued degree of independence and are willing to invest in new tools and technology.”
What is private equity up to? What attracts these
titans of capitalism to one of the most bureaucratic,
heavily regulated industries in the United States? And
what does the acquisition spree mean for physicians?
Here are five things to know about private equity and
healthcare in 2019.
1. The feeding frenzy is just ramping up
The driving force behind investors’ interest in healthcare
is the amount of “dry powder” in the industry — the term
market watchers use for funds sitting idle and ready to
invest, which McKinsey estimates at around $1.8 trillion
Investors are hungry for deals, and healthcare providers
are an attractive target for multiple reasons:
• The healthcare industry is growing faster than the
GDP. Healthcare is a relatively recession-proof industry
(demand remains constant even during downturns).
• Many providers are currently not professionally
managed, and many specialties remain fragmented.
• Investors see an opportunity to create value by
increasing efficiencies and consolidating market power.
Thus, with many independent providers still competing
on their own, there remains ample opportunity to
roll up practices into a single practice-management
organization owned by investors. “A lot of deals are
making the headlines, but when you look closely you’ll
see that most specialties aren’t highly penetrated yet by
investors,” says Bill Frack, a former managing director at
L.E.K. Consulting who is now leading a new healthcare
delivery venture. “We are still at the beginning.”
2. Investors have various strategies for creating value
Far from the leveraged-buyout days of the 1980s, which
relied primarily on financial engineering to generate
returns, almost all private equity deals today require
investors to find ways to add value to organizations over
the course of their holding period (typically around five
to seven years). By and large, in healthcare they follow
two strategies for doing so.
The most prevalent play is to buy high-volume, high margin specialist groups such as anesthesiologists,
dermatologists, and orthopedic surgeons. The PE
group then looks to maximize fee-for-service revenue
in the group by ensuring that the team is correctly
and exhaustively coding patient encounters (via ICD10) and encouraging physicians to see more patients.
Simultaneously, they work to improve revenue-cycle
management and drive efficiencies of scale into sales
and back-office administration.
Private equity firms may also look to vertically integrate
by acquiring providers of services for which their
specialists were previously referring out. For instance, oncologist groups might buy radiation treatment centers;
orthopedic surgeons might acquire rehab centers;
dermatologists might acquire pathology labs to process
biopsies, and so on.
Investors exit either through a sale to a larger PE group or,
for the largest groups, through an initial public offering.
Consolidating fee-for-service providers “is a very mature
strategy, and there’s not a single specialty you could
name where an investor wouldn’t have an incentive to
[form a roll-up],” says Brandon Hull, who serves on the
advisory council of New Mountain Capital, a private
equity firm that is investing in healthcare, and is a longtime board member at athenahealth.
Hull says investors are starting to take another approach
to creating value — which he argues “is more virtuous
and aligned with social goals.” In this strategy, investors buy up general medicine specialists — such as internal
medicine, pediatrics, or ob-gyns — and then negotiate
value-based contracts from payers.
To succeed under these contracts, investor-backed medical
groups identify the most cost-effective proceduralists
and diagnosticians in their network and instruct general
practitioners to refer only to them; and they work hard
to play a larger role in patients’ health and thus keep
healthcare utilization down. Groups that employ this
approach include Privia and Iora Health. In this strategy,
investors typically exit by selling the organization to a
larger PE group, a payer, or a health system.
Interestingly, groups that pursue the first strategy often
transition to the second – for instance, an efficiently run
orthopedic group might start with a focus on growing
revenue by maximizing fee-for-service opportunities,
but then consider pursuing bundled payments for hip
replacements. Or an investor-backed oncology group
confident in its treatment protocols and ability to keep
operational costs down might accept capitated payments
for treating patients recently diagnosed with cancer.
3. Private equity can be a great deal for physicians
How these deals are structured depends on whether a
specialty group is the first group acquired by investors —
what is known in private-equity lingo as “the platform”—
or whether it’s being added to an existing group, what is
known as a “tuck-in.”
Physicians in the platform practice are often offered
substantial equity and can benefit from the group’s
appreciation — while, of course, being exposed to the risk that
their share-value may decrease if the group fails to deliver on
its intended value proposition. Physicians in subsequent tuckin groups tend to have simpler contracts with a salary base
and added incentives tied to productivity and other measures.
L.E.K.’s Frack says both models can be attractive, but
that a more simple employment model is probably best
suited to most physicians. “I would tell docs that if they
have a strong group of doctors, they don’t have much to
lose. Even if the deal falls flat for investors, the doctors
will likely just be acquired by another investor, and they
won’t be left holding the bag.”
4. Technology underpins it all
A similar private-equity healthcare frenzy in the 1990s failed
spectacularly. One reason for the collapse was that the
technology did not exist for investors to realize back-office
efficiencies and handle the complexity of value-based contracts.
Today, cloud-based EHR and revenue-cycle management
systems harness the power of network effects to help
provider organizations handle complex and unique
payer contracts, improve back-office efficiency through
automation and machine-learning, implement best practices
for care, and quickly onboard the new practices they acquire.
Technology is particularly important for the general
medicine specialist groups looking to win under fee-for-value contracts. “The moment you start to care about
a patient’s entire episode of care, you need a massive
upgrade of your back-end systems, including full
visibility into what’s happening to your patient outside
your office. Now the technology exists to truly achieve
care coordination,” New Mountain Capital’s Hull says.
5. Public perception can be a problem
Even if physicians believe a private equity deal is their
best option, there’s a public relations risk in tying a medical practice to capitalists whose ultimate goal is to earn a return. Most coverage of private equity in mainstream media outlets questions whether investors’ profit motive is bad for patients. Physician associations and medical journals have also raised concerns in a very public way.
Such public skepticism should worry anyone who
remembers the crash of the first private-equity wave in
the 1990s, says New Mountain Capital’s Hull, who ties
that crash to the failure of managed care. “The American
consumer perceived that doctors were getting bonuses
for denying them care; this became the grim punchline
of late-night talk shows, and the whole thing fell apart.”
Frack advises investors and physicians to “monitor
quality data like a hawk, so that the group can counter
anecdotal accounts of bad care.”
Hull adds that savvy investors should take a page from
the many healthcare startups that are laser-focused on building trust with patients, particularly when it comes
to end-of-life decisions and hospice care. “They know
that success in healthcare depends on patients trusting
their doctors to help them make the best medical
decisions,” Hull says.
Positioned to accommodate uncertainty L.E.K.’s Kadar argues out that whatever direction Washington decides to take healthcare, an efficient, professionally managed group practice with advantages
of scale is well-positioned to succeed — and private
equity is one way for physician groups to reach that goal.
“These groups can adapt more quickly than smaller,
independent practices, whether progressives or
conservatives are in power,” he says. As an example,
Kadar imagines a scenario in which Medicare-for-all
comes to pass. “It turns out that most [PE-backed] groups
do very well on Medicare Advantage contracts. If your
group is focused on delivering more efficient, effective care, with strong operations, you’re in a good position no matter what happens.”
Healthcare Reform: “150 million Americans won’t give up their private health insurance to get Medicare for all.” Really?
Former Representative Jim Delaney (D-Md) threw down the gauntlet to the left-leaning attendees at the California Democratic convention on June 2 by challenging Medicare-for-all.
”The problem with Medicare for all, it’s actually really simple, is that it makes private insurance illegal. And 150 million Americans have private insurance, and 70% of them like it according to polling. So if we want to actually create universal health care, we’re never going to do it by trying to get 150 million Americans to give up what they want.”
The crowd booed at first, but then gave him a respectful hearing. Pundit George Will and commentator Charlie Sykes think Delaney has a good point politically. But let’s look at Delaney’s claim through the apolitical lens of this blog.
1. Why Did Delaney make this claim?
Two reasons: He wanted to move the debate over U.S. healthcare from sound bites to substance. And Rep. Delaney wanted to distinguish himself from the rest of the pack of Democrat Presidential contenders and position himself as a moderate on this and other issues.
2. Does Medicare-for-all mean making private health insurance illegal?
Clearly for Sen. Bernie Sanders the answer is yes. But not for any of the other Democrat Presidential candidates, at least not right away. Some like Mayor Pete Buttigieg and entrepreneur Andrew Yang contemplate a gradual path, eventually leading to a single public payer. In Yang’s case, he expects that public health insurance will eventually out-compete private insurance, not that it will be outlawed. Others like Senators Cory Booker and Amy Klobuchar, Governors Hickenlooper and Inslee, and Rep. Eric Swalwell contemplate using public insurance, alongside private insurance, as the means to get to universal coverage, more like “Medicare for all who want it.” This month’s Kaiser Family Foundation poll found that 55% do not perceive that Medicare-for-all would mean abolishing private insurance.
3. How many Democratic candidates advocate Medicare-for-all?
Of the 24 Democrats who have announced their candidacy (25, if you count former Sen. Mike Gravel), 13 advocate some version of Medicare-for-all, but 10 prefer some other approach to achieve universal coverage. Former Vice-President Joe Biden has not put forward a clear position yet. (Sen. Gravel supports universal healthcare “like Medicare.”)
4. What about Republicans?
Many Republicans, including the President himself, have at times given lip service to universal healthcare coverage. Most of them also advocate “protecting” Medicare, in some cases by scaling it back and limiting it. However, the President and Senate Republicans are once again pledging to “repeal and replace Obamacare” with a new plan, touted as “phenomenal” (though no details so far). At first the new plan was promised “in a very short period of time,” then “in next 2 months,” and now most recently “after the 2020 election.” For them, opposition to Medicare-for-all is a political matter of faith, not just a strategy for preserving private health insurance for those who want it.
5. How many Americans have private health insurance?
Private employer-based insurance covered 181 million Americans in 2017. According to the Census Bureau the full 2017 breakdown is:
- Any insurance at least part-year 295 million
- Employer-based, private 181 million
- Direct purchased, private 52 million
- Government 122 million
(Note: Some individuals had more than one type of insurance during year)
- Uninsured entire year 29 million
6. Are Americans satisfied with their own private employer-based healthcare insurance?
Americans currently rate the “coverage” (69%) and “quality” (80%) for their own individual health plans as “good” or “excellent,” according to a December 2018 Gallup poll.
7. How does this compare with Medicare satisfaction statistics?
For Medicare recipients the ratings for “coverage” (88%) and “quality” (88%) are even better, in the same poll.
8. Do Americans see any downside to having employer-based healthcare insurance?
Many Americans feel locked into their current jobs lest they lose health benefits. This is especially so if they have chronic pre-existing conditions. Fear of losing coverage subtly puts them at the mercy of the employer for wages and work conditions. In addition, employees are shouldering a larger share of premiums and copays with each passing year. A Rand study showed that in the first decade of the 2000s, workers gains in productivity were offset by higher healthcare costs, holding their take-home wages flat. Increasingly, employees are switching to plans with high deductibles and less doctor choice.
Americans also express dissatisfaction with the wider system, even if they are satisfied with their own plans. They rate “coverage” at 34% and “quality” at 55% nationally.
Americans polled by Gallup are especially dissatisfied with costs. Only 58% are satisfied with cost of their own plan, while a low 20% are satisfied with overall cost in the national system.
9. Who are other stakeholders in the healthcare debate besides employees with employer-based insurance?
All Americans have a stake in healthcare reform. But here are some stakeholder sub-groups with special issues:
- small business
- big business
- federal, state and local government employers
- healthcare insurers
- healthcare systems
- healthcare professionals
- other healthcare suppliers (of equipment, drugs, software, subcontractors)
- healthcare academia.
The uninsured are special stakeholders, as well.
10. Which of these stakeholders have the most to lose with Medicare-for-all?
In the first instance, healthcare insurers would be most directly affected. On closer look, I predict that several functions would not change much at all under a single-payer. There would still be enrollments, benefits management, claims processing, chronic disease management, contract negotiation, and customer service. These functions would continue, either in the form of subcontracts with government payers or in the form of direct government employment. Meanwhile, some would say that insurance companies have abdicated their job of true risk management, and have simply become pass-throughs for local health system monopolies and oligopolies. Under Medicare-for-all administrative complexities would be simplified, and inflated profits and salaries would be constrained, with resultant cost savings for the overall system
11. Which of these stakeholders have the most to gain with Medicare-for-all?
Big business and public sector employers probably have the most to gain from Medicare-for-all or other healthcare reform. In 1991, Sam Walton famously railed to his managers, “These people are skinnin’ us alive not just here in Bentonville but everywhere else, too….They’re charging us five and six times what they ought to charge us….So we need to work on a program where we’ve got hospitals and doctors…saving our customers money and our employees money.” Walmart and others like Bezos, Buffet and Dimon’s innovative Haven healthcare management enterprise are taking matters into their own hands out of frustration with traditional insurance’s inability to control healthcare costs and deliver value.
Small businesses also stand to gain much from jettisoning healthcare costs and administrative burdens under a single payer system. Small businesses feel a disproportionate brunt of current high healthcare costs. For them, a single sick employee can jack up their experience-rating. Tracking payments and maintaining regulatory compliance saps valuable administrative time. For these reasons, just 29 percent of small businesses with fewer than 50 employees provided group health insurance in 2016. Many dropped insurance for their employees and referred them to the public exchanges instead.
12. Is Medicare-for-all the end goal for its supporters, or only the means to a further goal?
Democrat candidates base their arguments for Medicare-for-all, or for their alternative approaches, primarily on achieving universal coverage. This is a worthy goal in itself. Having healthcare insurance has been linked to quality of life, life expectancy, worker productivity, and financial security.
But this blog has argued that an even more critical goal is constraining costs. Climbing healthcare costs are consuming an ever-greater share of the GDP, diverting resources from other worthy projects, and stressing household, corporate and public budgets.
This blog, thus, sees single payer as a means to the end of leveraging cost containment.
13. If Medicare-for-all in some form would give government the ability to finally constrain costs, who would be the biggest losers?
Clearly, potentially the biggest losers would be the healthcare industry, from front-line workers to professionals to health system CEOs. However, many could shift into higher-value healthcare activities. Others could transition to equivalent jobs in other service industries. True, a few might need to accept cuts in their bloated incomes. Since healthcare currently comprises almost one-fifth of all economic activity, these transitions should be done slowly. Leaders should do some industrial policy planning to facilitate changes and mitigate disruptions. Having said that, we should keep in mind that healthcare professionals are generally well educated, motivated, adaptable and resourceful, thus able to successfully navigate change.
Conclusion
Rep. Delaney asks a good question: Whether Americans with current employer-based health insurance would trade it for Medicare-for-all. Would they recognize that Medicare gets better quality and coverage ratings than private insurance? Would they view changing to Medicare-for-all as a fair bargain to achieve universal access for all? Do they think that single-payer would give the government leverage to finally constrain costs? Do they recognize that the total cost of healthcare – whether in the form of out-of-pocket payments, paycheck deductions, or new “$30 trillion” healthcare taxes – comes out of their wallets, one way or another?
On the other hand, could a larger public insurer (Medicare-for-all-who-want-it) gain sufficient reach and clout to tame the healthcare tapeworm without a Sanders-style single payer system? This blog will tackle that question in another post.
Now, take action.
HENRY KOTULA 