Financial Performance Analysis: One Health System’s Journey So Far

October 26, 2014

At CentraCare Health in Minnesota, CFO Greg Klugherz is helping to lead an organization-wide financial performance initiative

Greg Klugherz joined CentraCare Health in 2008 as vice president and CFO of CentraCare Health and St. Cloud Hospital. Klugherz, a certified public accountant, is responsible for the finance and treasury functions, as well as the revenue cycle and admitting functions at St. Cloud. CentraCare Health encompasses a 489-bed community hospital in St. Cloud, located 65 miles northwest of Minneapolis-St. Paul, as well as five critical-access hospitals. The health system employs 250 doctors and mid-level professionals.

CentraCare has been a beta site partner with Strata Decision Technology, a Chicago-based company focused on analytics, especially in the financial arena. HCI Editor-in-Chief Mark Hagland spoke with Klugherz on Oct. 21, as he was participating as a presenter in the Executive Leadership Symposium, a daylong conference sponsored by Strata Decision Technology and held at the Swissotel in downtown Chicago. Below are excerpts from the interview with Klugherz.

Tell us about your organization’s financial planning analytics work, including your partnership with Strata Decision Technology.

We’ve had various sources available to us over the past few years, as we’ve initiated and then advanced our work in analytics around financial performance. We had a cost accounting system available to us with a vendor that had sunsetted and left the industry. We looked at an array of available software vendors when we learned that our previous vendor was sunsetting its product. In fact, we had already been a Strata customer for years with their capital planning suite, but then we decided to add them comprehensively for budgeting and financial planning. We went live in January of this year with their full suite of products.

What have been the key challenges you’ve been trying to face in your ongoing initiative in this area?

We got started with a more organized, energetic pursuit of cost reduction in the way that larger organizations have. They’re looking at ACA [Accountable Care Act] impacts, as well as general cost issues that are being acted on by employers through their insurance company agents. And we came to realize that it’s going to be difficult to continue revenue growth multiples year after year going forward, and that would hit us in terms of seeing not much economic growth within a few years from now, and not many new people moving to our area, as well as being manifested in reimbursement increases slowing or even becoming decreases; as well as through our own pursuit of value. We expected all those things to conspire to reduce revenue growth dramatically in the coming months and years. In fact, we expected that it was unlikely that those growth multiples would match the unmanaged inflation we would experience on the expense side, so we came to the conclusion that we needed to intervene.

What kinds of things have you done?

We established a set of goals, and created infrastructure to support that set of goals. We did a launch of our initiative. And part of that was that we brought this message out to the entire organization regarding our the scenario we were projecting around costs and reimbursement going forward, and our challenge had been that our margins had been pretty good until now. So we laid out the case, and declared that this was our truth, our future, and therefore we had to act, and we put this in front of the staff, and told them we needed to seek financial improvement—both on the cost savings side and on the revenue enhancement side. And we’ve received over 1,200 ideas from our health system staff, which have led to our selecting 142 ideas we’ve implemented, and which we’ve put a monetary value of $11.5 million on. Essentially, what we did was to create an electronic suggestion box, and solicit ideas. Many have come from our managers themselves, and all the others have come from line staff and clinicians, from every single department, including housekeeping, for example. And all the ideas we selected for implementation, we gave a timeline of no longer than a year to execute.

Here’s how the process went: any individual who had an idea could put it forward, and the individual would pick an assigned, responsible leader, who would evaluate whether that idea was feasible or not.

How is analytics facilitating all this work?

It definitely is facilitating it. What we’ve seen so far we believe will be transformational for us. We had to create a method to record and report on these things, so we first created a rudimentary database. And about that time, I had a conversation with Dan [Michelson, CEO of Strata], who mentioned Liz [Kirk, vice president, cost solutions, Strata], who had led a very large program at Northwestern Memorial [Hospital in Chicago]—she had been director of operating excellence. So we got connected with Liz at the time we were just getting started, and I was interested in how others had achieved success, and Liz was interested in helping. And it seemed that every CFO I met at every conference was doing cost reduction, but none had the appropriate IT tools; they had other tools. And Dan was ready with this. And that led to our being offered the opportunity to be a development partner, and that’s been going on now for nine months. And we’ve seen improvements in staffing to demand and cost of variation, sometimes called waste.

How are you and your colleagues looking at issues around variation, in its many forms?

We’ve been looking at variation for some time now, with a variety of different tools. Among other methods we would look at information coming from our purchasing group; sometimes, the supply cost element could be analyzed through that lens. We also have been getting benchmarking information around cost from the Advisory Board Company. And we’ve looked at variation that encompasses clinical elements as well. But in terms of physician performance, we found that illuminating the variation itself was not enough. You actually have to get more granular with the data, and you have to show physicians how they rank against others, and the variation in their own cases, and bring forward a credible plan to reduce overall variation.

So you have to get significant buy-in from the physicians in terms of their performance around cost, efficiency, etc.?

Yes, and a credible data platform is essential to that.

And doesn’t all this also require physician champions to advance the process among the practicing physicians?

Yes, it does. And in our case, we early on found that our physician leaders who already had started out as enthusiastic have had to influence their colleagues. They’ve not just had to present the data to their colleagues, but also to declare why we should care about our performance. It’s been easier with the emergence of the Triple Aim concept and the spread of the volume-to-value concept, to move forward in this direction. And that’s going to intensify, with the build of high-deductible health plans. There’s consumer interest and press interest in costs, and in hospitals’ indefensible charge master. Given all those elements out before the public, it becomes an easier case. The doctors are no longer isolated anymore.

Do you have any metrics to share yet?

We don’t have any actual performance metrics yet—we just got the first view of the cost of variation six weeks ago. So we haven’t endorsed any projects off that yet, but we have other initiatives with performance markers. But the data has been run through, and it has identified, coincidentally, $11.5 million in cost of variation that could be eliminated if we moved the high-cost providers down to the median, across all dimensions—length of stay, cost of supplies, etc. It gets down to a more granular look. The initiatives ranged from over a half-million dollars in one area… The top 20 opportunities we’ve identified so far have equated to more than $8 million.

What would your advice be for other CFOs looking to pursue similar initiatives?

Liz gave me a graphic that talked about mindset, toolset, and skillset. We had a definite mindset, we had some level of skill, but didn’t have the tool. And in order to succeed at the levels we need to, you really need all three of those sets. That’s why we’re optimistic about what’s going to be delivered. Two without the third will limit your success, but all three together are powerful.