Chief financial officers are supposed to be the wardens of hospital and healthcare system assets.
But few CFOs are squeezing maximum value out of those assets. Outside of investor-owned chains and larger not-for-profit systems, return-on-investment, return-on-asset and asset-efficiency measures haven't become familiar tools in the industry.
Ask a CFO for the hospital's operating margin and you'll get a quick reply.
But few can readily recite their asset-efficiency ratios.
"It's one thing we look at," but not as intensely as if the hospital had shareholders, said Michael D. Fichtel, CFO of Children's Medical Center of Dallas. While investor-owned chains are in the business of returning value to their shareholders, not-for-profits don't have the same financial mandate.
Fichtel does seek ways to stretch hospital resources. Children's recently avoided a $1 million expense by adding "doubler chips" to hospital computers, increasing speed and memory, rather than buying all new computers.
Mark Wietecha, a vice president with the healthcare consulting firm of Hamilton/KSA in Atlanta, has noticed that, generally, for-profits pay much closer attention to return on assets. "I was startled at the lack of that in not-for-profit hospitals," he said. Compared with other businesses, "CFOs (in healthcare) aren't really the wardens of the money, and they should be," he added.
That's not to say that not-for-profit CFOs are incompetent custodians of hospital assets. At a bare minimum, most have managed to prevent the value of property, plant and equipment investments from eroding. If they hadn't, industry measures of asset efficiency would have plummeted and many more providers would have landed in bankruptcy court.
Lack of aggression.
But minding the store is one thing; managing the store's assets in a way that will improve service, reduce costs and increase the value of those assets is another. To many industry observers, it appears that too few CFOs, in collaboration with top administrators, are aggressively deploying the healthcare assets entrusted to them.
Blame mission-vs.-margin ambivalence. Investor-owned chains have a fiduciary duty to create shareholder value. But their not-for-profit brethren wrestle with the dual tasks of operating like businesses and fulfilling their charitable purposes.
Increasing shareholder value is not the end goal of not-for-profits, but they clearly need to earn a margin to meet mission, said Michael Hammond, a partner with Shattuck, Hammond Partners, New York.
Healthcare purchasers and payers also bear some responsibility for failing to demand value for dollars invested in property, plant and equipment. As long as buyers focus mostly on cost, and payers such as Medicare reimburse hospitals for a portion of their capital overhead, CFOs won't be motivated to change their habits.
"They all know there are expenses and expenditures that shouldn't be there," said Wayne L. Yearick, a former hospital administrator and consultant to Gulf/Atlantic Valuation Services in Sarasota, Fla. He said federal capital reimbursement policies "are still too lax." In the current fiscal year, Medicare capital payments to hospitals are estimated to be about $6.3 billion.
There's another reason for CFOs' inattention to asset efficiency. "There's been an overfocus on margins," said William O. Cleverley, a healthcare finance and accounting professor at Ohio State University and director of the Center for Healthcare Industry Performance Studies in Columbus, Ohio.
Operating and net-income margins are key indicators of performance. They reveal something about the organization's fiscal health. But they say very little about whether a healthcare system is making the best use of its invested capital.
Cleverley has preached the gospel of asset efficiency for years. It makes more sense to look at the relationship of revenues to fixed assets because "a big part of cost is investment," he said.
One measure of providers' use of assets is called the fixed-asset turnover ratio. It relates the amount of revenues generated by a hospital to its fixed assets. In 1993, the ratio rose to 2.29 from 1.96 in 1989. That means, on average, the nation's nearly 6,000 hospitals produced $2.29 of revenues for every $1 invested in property, plant and equipment.
The fixed-asset turnover ratio reflects hospitals' investments in hard assets, such as land, buildings and high-tech medical wizardry. Home-care and insurance subsidiaries require fewer hard assets. Those operations would be reflected in the hospital's fixed-asset turnover ratio only to the extent that investments in hard assets such as vans, offices and medical equipment are involved.
Interestingly, Cleverley noted that many CFOs have been more diligent in focusing on two smaller components of hospital investment: inventory and receivables.
Efforts to reduce days of accounts receivable have produced measurable improvement. According to Zimmerman & Associates, a Hales Corner, Wis.-based consulting firm, hospitals reported 65.8 gross days revenue outstanding in the first quarter of 1995, the lowest level since 1986. An all-time high of 78.1 days was recorded in the first quarter of 1990.
But the largest component of investment-property, plant and equipment-has gotten short shrift.
The 1994 Almanac of Hospital Financial & Operating Indicators, published by the Center for Industry and Performance Studies, shows that net fixed assets represent an average of 47% of total assets. That average is based on 1993 balance-sheet data for a sample of 400 not-for-profit hospitals compiled by the center.
In decades past, hospitals and health systems spent billions of dollars on hard assets. Capital spending sprees created the vast collage of inpatient facilities that all too quickly is becoming outdated. Integrated, capitated networks require far less inpatient capacity, although more capital will be needed to create insurance products and buy physician practices, clinics and information systems.
Forced to contend with new capital needs amid cost-containment pressures, CFOs involved in creating integrated delivery systems for the next century are seeking to redeploy assets and maximize asset value. They're entering leases when owning buildings doesn't make sense, finding new uses for empty hospitals and dumping underperforming assets.
"The long-term goal is......(building) a more efficient delivery system," said Keith Pitts, CFO of Nashville-based OrNda HealthCorp, which MODERN HEALTHCARE's 1995 Multi-unit Providers Survey ranked the nation's fifth-largest for-profit healthcare system.
Through return-on-asset data churned out monthly, OrNda is seeking ways to maximize asset use in areas where it has multiple facilities. Currently Pitts is beginning to look at consolidating obstetrics programs in Southern California.
Compared with giant OrNda, four-hospital Sentara Health System has far less consolidating to do. But the Norfolk, Va.-based not-for-profit does analyze return-on-investment data before purchasing an asset. "We don't, on a monthly basis, look at asset turnover; that's after the fact. We prefer to do it before the fact," said Richard Hill, Sentara's CFO.
The analysis helped to justify an $8 million investment to renovate and add space at Sentara Bayside Hospital in Virginia Beach, Va., a hospital acquired from Humana in 1991.
After renovations are completed, the acute-care space will be better configured to accommodate outpatients, Hill said.
CFOs need to liquefy and realign assets based on anticipated needs, said Tom McNulty, senior vice president of finance at Henry Ford Health System in Detroit. Five years ago, McNulty hired a real estate expert who understands how to manage hard assets. It's part of the
system's strategy to divest assets "that don't make sense to own," he said.
Last year, Henry Ford sold a parcel of suburban land purchased some 20 years ago. It had invested $1 million to acquire the land believing the notion that the system's market area would move out to the suburbs. Even though Henry Ford might decide to build in that area one day, holding vacant land didn't make sense.
Through the sale of the land, the system recovered its $1 million investment.
Since initiating its real estate program, Henry Ford has saved some $300,000 to $400,000 on brokers' fees it would have paid to lease or create space, he said.
But more importantly, by squeezing more efficiency from its assets, Henry Ford has added roughly 5% to 8% to asset value.
"Return on assets has been very underutilized compared to margins for hospitals," McNulty observed. But if healthcare systems are going to be in the business of health, they must deploy assets in a way that will meet the needs of patients.
"The CFO has to become the business person involved with the business of the business, not the business of the product," he said.