The Governance Institute is renewing attention among hospital trustees on hospital finance, recommending that hospital boards set the performance bar high with a highly disciplined and ongoing strategic, financial and capital planning process.
In a new publication set to be released this week, Focus on Finance: 10 Critical Issues for Hospital Leadership, the institute lays out the key steps for guiding not-for-profit hospital leadership through the minefields of healthcare financial management.
I think what this introduces is a way of thinking about the problems in managing complex hospital provider organizations, said the author of the signature document, Kenneth Kaufman, a founder and managing partner of Kaufman, Hall & Associates, Skokie, Ill. There is a heavy dose of corporate finance in this book, and Ive always been a big believer that corporate finance is a mechanism for managing larger problems.
Jona Raasch, president of the San Diego-based Governance Institute, which offers educational and information services to not-for-profit hospitals, said that the 10 critical issues drill into the very same questions that its members ask constantly. These are the kinds of things we hear board members are continually challenged by, she said.
Until recent months when the credit crunch unexpectedly and indiscriminately smacked not-for-profit hospitals that issued auction-rate debt, most boards of directors were arguably focused more on clinical quality and community benefit. Not Kaufman. The book was in process quite a bit before the recent events. In my opinion these are fundamental management issues and they transcend the problem of the moment, he said. However, we were fortunate that events happened early enough in development of the writing that we were able to take into account the implications of the subprime crisis and integrate some of those thoughts and real issues into it.
Actually, finance has always been a critical issue for hospital boards but they were encouraged in recent years to spend as much time on quality as on finance, said Robert Kiely, president and chief executive officer of 183-bed Middlesex Hospital in Middletown, Conn. But it has been brought to the forefront again as demands for capital increase at the same time that there is concern over reductions in Medicare and Medicaid reimbursements. Our finance committee is challenging management to develop plans to address decreased operating resources and increased capital demands, Kiely said. In 2006, the board directed Middlesexs senior management to lift its 2% operating margin to 3%.
Kaufman has been stressing the importance of liquidity and cash for 20 years and if anything we just feel more strongly about it, he said. A hospital boards responsibility in that and every regard is to set corridors of direction. For example, not-for-profit hospital boards should set the credit rating goal for the organization, establish the cash floor, and set operating profitability targets as Middlesexs board has done. Some board finance committees also are rightfully very involved in discussions with chief financial officers over what the capital structure should be. I mean every place we work its finance committee decides the mix between variable and fixed-rate debt, Kaufman said. That influences the risk a hospital is taking, and thats the boards responsibility.
Ten chapters in the book focus on the 10 critical finance issues for boards including why credit ratings matter, finding the right balance of cash and debt, and how much the hospital can afford to spend. In the foreward, Lisa Goldstein, senior vice president and healthcare team leader at Moodys Investors Service, noted that the importance of strong governance and senior leadership cannot be emphasized enough.