Physicians and finance: Managing the differences is critical to building clinical value

George Mayzell, MD

Steven Berger, FHFMA

Doug McKinley, PsyD

For finance and clinical leaders to work together effectively, they must not only understand but also acknowledge the benefits to be gained from their different perspectives on what constitutes success.

A basic premise of value-based care is that success depends on both physicians and finance leaders bringing their critical skills to the table. To control costs while improving patient outcomes, these leaders must work together to build efficient and effective systems of care.

Unfortunately, this collaboration often must contend with a fundamental point of tension within healthcare: mission versus margin. Although both physicians and finance leaders ultimately share the same objective, they have very different approaches for achieving it. Chief medical officers (CMOs) drive clinical performance to optimize patient outcomes. CFOs drive financial performance to optimize business sustainability.

Many healthcare leaders see this difference as a negative because it can lead to confrontation and often ends in frustration. To avoid these problems, they seek to remove the tension by sidestepping controversies and difficult conversations. This is a mistake. Seeking to avoid discussions of differences is tantamount to not respecting them. It ignores the important premise that a healthy level of tension is essential to high performance in any organization.

Thus, we contend that success under value-based care depends on physician and finance leaders’ ability to manage their differences effectively with a clear understanding of why organizational tension can be a positive. We propose that physician-finance teams who work together with a full recognition of their differences are best able to control costs, improve clinical outcomes and deliver the greatest value for patients. (See the sidebar “The upside of tension” below for additional perspectives on the importance of balancing tensions, as reflected across various industries.)

Understanding the differences: 2 case examples

The following two scenarios illustrate how embracing clinical-financial differences can propel a healthcare organization to delivering greater value.

Scenario No. 1: Learn how to manage differences around cost. Consider that a hospital enters a bundled payment contract for pneumonia, where a key to success is in controlling the cost of inpatient stays for covered patients. The goal is to reduce excess inpatient costs for this population while maintaining or improving patient outcomes.

Note that inherent to this goal is a built-in tension between reducing cost versus improving care. Clinical and financial leaders can choose to avoid the tension, or they can decide to manage it.

Avoiding the tension could mean that physicians refuse to consider that their practice patterns might produce unnecessary costs. It could also mean that finance leaders take a “hands-off” approach to anything that touches on patient care. For teams that choose to manage their differences, the first step is to understand what each group wants from the other.

In general, finance leaders want physicians to engage fully with cost-of-care issues. In turn, physicians want the finance department to provide them with cost information that is simple, understandable, actionable and relevant to their practice.

An all-too-common challenge for finance in this scenario is the lack of access to advanced decision-support capabilities for managing costs, leaving finance leaders without effective cost accounting systems at the labor, supply and physician resource level. Meanwhile, physicians need to see that cost data reflects patient acuity, exacerbating this challenge.

One possible solution is to build finance-physician communication around Medicare-severity diagnosis-related groups (MS-DRGs).

In the pneumonia bundled payment scenario, finance leaders could develop customized reports on MS-DRG 193 (simple pneumonia and pleurisy with MCC). For example, a report can be broken down by admitting physician, and include data on length of stay (LOS), charges, payment and costs (as illustrated in the exhibit below).

MS-DRG 193: Inpatient pneumonia cost and profitability by physician

	Per case average (Mean)
Physician	Cases	ALOS	CMI	Total charge	Actual payment	Variable cost	Contribution margin	Fixed cost	Net income
Green	10	4.80	1.1291	$27,050	$8,512	$3,076	$5,436	$3,487	$1,949
Black	7	4.00	0.7054	$17,779	$1,404	$2,618	($1,214)	$2,896	($4,110)
Rose	6	5.17	1.1291	$28,205	$10,785	$3,410	$7,375	$3,535	$3,840
White	5	2.40	0.7054	$11,428	$2,248	$2,136	$112	$2,624	($2,513)
Brown	5	7.40	1.1291	$30,042	$5,431	$4,165	$1,266	$4,207	($2,941)
Grey	5	7.40	1.1291	$25,596	$5,417	$3,865	$1,552	$3,796	($2,245)
Gold	4	5.25	1.1291	$27,154	$9,862	$3,306	$6,556	$4,017	$2,539
Average	6	5.20	1.0080	$23,893	$6,237	$3,225	$3,012	$3,509	($497)

 

Source: Lumina Health Partners, 2021

While this report relates directly to profitability by physician within an MS-DRG, other physician reports can include readmission numbers, discharge placement data or any other clinical/quality information included in standard electronic health records (EHR) datasets, which are usually extensive.

The value of this approach is that the cost data is already severity-adjusted and normalized within the MS-DRG. Discussions between financial leaders and clinicians should focus on direct variable costs, the major part of inpatient costs that physicians can control. Being provided with this information empowers physicians to work with their peers to examine utilization of supplies, tests and inpatient days. The physicians will see that lower costs often correlate with the same or better patient outcomes.

Finance can help focus this work by examining goals in terms of various cost targets. For example, looking at the MS-DRG 13 exhibit {Design: State location of exhibit}, consider what would happen if four of the seven physicians in this group achieved a direct variable cost per case equal to the mean of their peers? What if they were able to lower costs to the peer best practice level?

An academic medical center in the Midwest used this strategy to reduce costs on its joint replacement service line. The finance department developed a MS-DRG 470 report that drilled down on contribution margin at the patient level. The report showed a clear threshold where decreasing LOS flipped margins from negative to positive. Subsequently, surgeon efforts to reduce LOS led to a significantly improved profitability.

This same approach can also be used in other initiatives that depend on finance-physician collaboration, such as efforts to better allocate labor resources, standard supplies, adopt less costly supply alternatives and reduce clinical variation.

Scenario No. 2: Learn how to manage differences around clinical improvement. Consider in this case that clinical leaders have developed a strategy for improving care for patients with congestive heart failure (CHF). The strategy includes a behavioral intervention to address patients’ personal barriers to medication compliance. The shared goal for clinical and financial leaders is to understand how to fund and operationalize an effective program. But again, each group brings different perspectives to the table, which leaders could choose to avoid or manage.

For finance leaders, avoiding these differences might involve accepting ROI as the only factor for approving or denying the program. Or physician leaders might disregard these differences by refusing to engage with the budget implications of their proposal. But what could they do, instead, to manage these differences?

They could come together for a robust discussion around patient and organizational benefits.

Again, the first step is to understand what each group wants from the other. Broadly, physicians want finance to understand the value proposition in terms of patient benefit. In turn, finance leaders want physicians to understand the budget trade-offs involved and be ready to make difficult decisions.

With the proposed CHF program, therefore, an effective strategy might be for the leaders to work together to develop a business plan for the program that includes both clinical and financial measures of performance. For example, program metrics might include the following metrics:

Clinical outcome metrics

• Readmission rates at 30, 60 and 90 days
• Infection rates
• Complication rates
• Mortality rates
• Rates of unplanned returns to the emergency department or operating room
• Documentation of echocardiogram, stage or classification
• Patient survey ratings and quality of life measures (if available)
• Other relevant clinical metrics reported on the Medicare Care Compare website

Financial performance metrics

• Number of admissions per year
• Cost per case
• Length of stay
• Medicare spending per beneficiary
• Contribution margin (patient net revenue less direct and variable expenses)
• Net margin (patient net revenues less all operation expenses)

A strong business plan with such well-defined success metrics offers several advantages:

• Even if the leadership group determines that the program will lose money, they will be able to quantify anticipated losses and expected patient benefits.
• Leaders will be able to compare the value of the proposed program with that of other care initiatives under consideration.
• If they proceed with the CHF program, the performance measures will help establish accountabilities for program performance.

When assessing such program proposals, it also is important to be mindful of differences in how leaders view the timing required for success. Finance leaders sometimes think of ROI in terms of the hospitalization period, while physicians may be looking at costs and benefits over a much longer time frame.

A focus on innovation

The same approach as described above for a clinical improvement initiative can be applied to healthcare innovation in general. In the current environment, hospitals must embrace innovation to move forward. Yet some finance leaders struggle with the risk posed by new technologies and new delivery models.

One solution is to establish an annual budget for investing in the most promising proposals. Another is to develop a model for calculating innovation risk, including elements such as the following:

• Cost of implementation
• Potential financial upside
• Risk of failure
• Potential for success

An innovation risk model would be subjective, but at least it would allow physician-finance leadership teams to weigh investment alternatives in a sensible fashion.

Such an approach can used in discussions of capital spending. In these discussions, finance leaders want physicians not only to identify the capital items that are truly necessary for providing state-of-the-art care, but also to recognize that financial resources are limited. Physicians, in turn, want a clear understanding of the hospital’s margin. Some physicians tend to focus on the hospital’s gross revenue, which is a misleading number because it does not relate to cash inflows. The question then becomes, “Why can’t this $3 billion enterprise spare $30,000 for my program?”

The solution is to share key information about hospital margin and profitability. Core concepts for physician education include contribution margin and net margin, and making sure clinical leaders understand what profitability really means and whether profit covers recapitalization and other costs. Physicians should receive training on these concepts, so they understand the hospital’s total capacity to invest in capital spending opportunities.

One caution: If finance leaders decide to share margin data, they should do so consistently. Physicians are likely to become cynical if a hospital shares this information only when margins are thin, and then buries the profitability data when business is up.

Partner for value

Overcoming the obstacles to collaboration is a challenge for both clinicians and finance professionals. However, simply trying to side-step the obstacles is to miss an important opportunity. Finance leaders and physicians who learn how to manage their differences can create powerful management teams. These dynamic teams are essential to controlling costs, improving patient outcomes and delivering greater value for patients. 

Troubleshooting physician-finance dynamics

Managing physician-finance differences is more of an art than a science. Here are some practical strategies for managing the inevitable obstacles to effective collaboration.

Problem: Bedside clinicians express interest in being involved in financial processes, but they do not attend meetings set up to discuss financial inputs and outputs.

Solution: Work through department leaders to engage rank-and-file physicians. For example, the chief of surgery could be enlisted to act as an intermediary in an initiative to control surgical supply costs to credibly emphasize for physicians the value of standardizing supplies and other expenses. Members of the surgical staff are more likely to pay attention to a respected clinical leader on these issues, especially if the leader can meaningfully convey the initiative’s positive impact on patients. One caveat: Providing the leadership intermediary with data that links cost to quality is imperative.

Problem: Finance leaders have created forums for discussion with clinical leaders, but trust between the two groups is not increasing.

Solution: Many finance leaders expect to manage physician discussions through large meetings with dozens of participants. However, large meeting dynamics do not facilitate trust and often undermine it. Finance leaders should have more one-on-one discussions with physician leaders. Small meetings give physicians a greater incentive to show up and more scope to participate. Make sure there is real information sharing and time to allow physician input. This approach enables a true back-and-forth discussion, facilitating the decision to trust and laying the foundation for transparency.

Problem: Finance and clinical leaders agree on shared goals, but work toward these goals often fails to gain traction.

Solution: When progress stalls, it is often because finance leaders have not selected their physician partners carefully enough or have failed to prepare them to engage in financial initiatives.

For example, finance might avoid working with the challenging personalities within the medical staff. The problem is that these personalities often hold the key to making things happen. A better approach would be to identify the key players in the medical staff (no matter how difficult) and strongly engage them in clinical-finance initiatives.

Conversely, finance sometimes avoids working with junior physicians — the idea is that only seasoned physician leaders can sway the organization. Unfortunately, this approach can alienate the medical staff. From the point of view of beside physicians, senior leaders issue “dictates” that add to their workload and do not reflect the realities of the current practice environment.

A better approach in this case would be to selectively recruit junior physicians to participate in shared clinical-finance projects.

At the same time, however, it is important to make sure all physician partners are adequately equipped to lead complex clinical-finance initiatives. Often, the perfect growth opportunity for an up-and-coming physician leader turns into a trial by fire that few can survive. The resulting failure de-motivates other physicians and jeopardizes future attempts to build clinical value.

The finance department can, instead, help cultivate clinical leaders by setting up small workshops for physicians who are interested in financial policies and practices. Senior physician leaders can also play a role by mentoring younger physicians about healthcare business and finance issues. Ultimately, executives should develop a plan for aligning both finance and physician leaders with value-based strategy. The plan should be based on identified knowledge gaps within the leadership team, and it should include training in communication, change management and proven techniques for solving real-world challenges in value-based care.

 

The upside of intraorganizational tension: A common theme among industries, and healthcare’s advantage

Dynamic tensions such as the tension existing between clinical and finance leaders in healthcare are common across many industries.

In many manufacturing companies, for example, the fundamental tension is between the sales department and research and development. This tension can be vexing, but it’s also necessary. A strong development unit is essential to future growth, but if R&D were an organization’s only priority, the organization would eventually run out of money. A strong sales unit is critical to survival, but if sales were the only goal, the organization would eventually stop creating new value.

Other examples are customer satisfaction versus employee satisfaction and excellence versus cost containment. These are tensions that do not need to be resolved. In each case, the two sides can push each other to higher performance. Fundamental differences in an organization are actually a sign of health. Resisting average performance creates tension. Striving for excellence creates tension. For leaders, the key is to learn how to live in the tension and lean into it — not to remove the differences but to manage them.

Healthcare leaders actually have a major advantage over other industries in this respect. In most companies, the ultimate purpose can be ambiguous. Is it customer satisfaction? Product excellence? Maximizing shareholder value? Social stewardship? The unique strength of healthcare is that the purpose of the organization is clear to everyone: taking care of the patient.

The shared purpose of patient care can make it easier to lean into organizational tensions. It enables finance and physician leaders to build trust in each other’s agendas — both want to provide the best care to the most patients. Growing trust leads to greater transparency as physicians and finance leaders become more comfortable that information they share will not be used against them. Increasing transparency sets the stage for shared decision-making around healthcare value. Ultimately, trust combined with robust information allows finance and physician leaders to balance the complex equations of cost, quality and outcomes.

Embedding clinical-financial tensions in the healthcare leadership structure

In the past few years, many healthcare organizations have adopted dyad management structures. These structures are effective not because they erase the differences between clinicians and finance professionals but because they accentuate them in a positive way. This approach is critical for organizations that seek to maximize the healthcare value equation: value = (outcomes + patient experience)/cost. The factors in this equation are often weighted in very different ways by CMOs and CFOs, and a strong dyad management approach can effectively balance the equation.

The role of financial incentives in maintaining dynamic tension

Healthcare organizations that want to maintain productive tension should pay careful attention to financial incentives, ensuring there is alignment between the physician compensation model and the collaborative goals of the organization.

For hospital-employed physicians, the compensation model should leverage base and incentive pay to reward productivity, quality outcomes, patient experience and financial stewardship. Employment agreements should clearly define expectations around physician participation in collaborative initiatives.

For independent physicians,  accountable care organization (ACO) and other shared savings models should be used to reward physicians for achieving agreed-upon outcomes that align with physician needs, hospital needs and patient needs.