Executives need information to run their health care organization. I talk to CEO’s all the time about their challenges, and I have put the broad challenges into the following categories simply to apply some framework:
I consistently get the following feedback: I don’t have the financial leadership support I need; I need information; the board needs to be educated about the complexities of our organization; I am not even comfortable that the monthly information is accurate; cash flow seems to be low; we frankly have no idea if the billing department is doing a good job; any financial surprises in the near future may cause some pretty big problems for us, but we don’t really know; the results from the annual audit don’t correlate with monthly data I receive and I have no idea why; we think we’re fine, and then the audit comes along and the results are remarkably worse; we receive offers to sign capitation contracts, and yet we don’t know how to evaluate them; and many, many more comments like that.
I think it’s possible for you to know what you don’t know. Over the next several months, I’m going to offer a series of articles to give some tips, feedback and pointers on several of the challenges you are facing. I’ll address topics such as board governance and education, strategic planning, financial reporting best practices, business office best practices, technology, billing and collections, financial management, contracting, evaluating lines of business, and cash management.
This month, I’m going to start with a topic that is a major challenge to many Chief Executive Officers (CEO’s): board oversight and education. This is a common challenge that I frequently encounter with organizations.
Board members are typically voluntary members, recruited to the health care center for various skill sets they may have. As a general rule, the board of directors is responsible for overseeing the planning and direction of the health center, oversight of legal and ethical compliance matters, and ensuring resources and plans are in place to have an effective operation. This latter component is especially accomplished by hiring the CEO to carry out the management of the organization.
CEO’s want their volunteer board members to better understand the business but time is tight during board meetings, and the business is complicated. So how to make the complicated simple in a short time is a big challenge. Certain members of the board may participate in certain subcommittees such as finance/audit, compliance, etc. Members of these committees will likely dive deeper into understanding keys to success.
I’ve found board members first need to understand the various components of the reporting package: the statement of financial position (balance sheet) and statement of activities & change in net assets (income statement & change in retained earnings), and statement of cash flows, along with the important metrics and line items to pay attention too. This being a broad article, I’ll not go into the details but I do find that I often need to explain in basic terms the basics of each statement, what they mean, differences between accounts receivable (A/R) and revenues, etc.
After a financial statement 101 training, the issues that cause the most complexity usually involve liquidity and working capital, revenues and their connectivity to visit and encounter activity, along with collections.
I’ll talk in a future article about managing revenue and A/R valuations, but board members need to understand the key drivers of success. As an aside, I’m often asked about industry benchmarking, which I do think is important, and is why I’m in process of rolling out some benchmarks for health care providers, but I also always emphasize that benchmarks need to be studied in context. It’s important for health centers to develop their own target metrics that will help them measure results compared to their goals. For example, I’ve seen certain health centers target certain metrics such as “days cash on hand” or “days sales in accounts receivable” in accordance with their strategic objectives, even when their targets varied from industry benchmarks.
Certain key drivers include knowing the health center’s cash position (days cash on hand), working capital, how long it takes for average claims to be paid, revenues by service line (in “total” and “per visit”) as well as visits/encounters by service line. I usually also advise reporting on monthly cash collections, as this will give you some correlation to revenues and A/R. Other important matters that make a difference in month to month results include number of days the organization was open for the reporting period. Number of clinic days can make a 5-10% swing in activity and revenues in any given month. Additionally, I think it is imperative for organizations to understand their margins by department and/or service line. Correlating with cash flow and financial results, it is important for boards to be educated on issues such as staffing, productivity, compliance matters. Of course, if the health center has incurred debt, it is imperative for the board to understand how the paydown of debt is impacting cash flows, along with the health center’s standing relative to any financial covenants in place.
When presenting to boards and committees, it will be important to assess the most effective way to convey these matters. I’ve found that charts and graphs help board members visualize the story being conveyed in the metrics. Members of the finance committee may want to see more details, and they may actually want to see “the numbers”.
I could go on and on about topics to cover in board meetings. Running a health center is a complicate venture. It takes time but as the title of the article suggests, it is imperative for board members to “learn” what they likely did not know when they first joined the board. I’m currently the president of a non-profit organization in my community. I’ve been on the board for over 10 years. I’ve personally spent time learning the keys to success for that organization by listening to many, many presentations and soaking it in one meeting at a time. I’ve worked with many clients over the years, and I am convinced the more the board of directors is given the right information, the better management and the board are able to work together to steer the health center in the right direction.
Karl spends his time thinking about ways to help organizations with sound financial decisions.
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