Insights from The Lab

Hospital Finance Management

Hospital Finance Management: Case Studies in Lean Finance Transformation Projects

It’s a strange paradox: As accounting grows more precise, it becomes less relevant. All of that “precision noise” makes it incredibly challenging to implement a lean hospital finance management and transformation, especially if you’re running a network of hospitals with shared finance-group operations.

In this article, we’re going to cull some down-in-the-weeds details, as well as some big-picture takeaways, from The Lab Consulting’s numerous lean hospital management engagements with different hospitals and networks, as we’ve helped them to implement non-technology improvements to guide their lean finance management transformation efforts.

Lean hospital finance management transformation: It isn’t brain surgery

It comes as a perennial amazement to us that hospitals can routinely accomplish such complex miracles as brain surgery. They can scan the soft tissues of the human body with microscopic precision. But they can’t get a handle on the line items clogging up their general ledger like so much cholesterol.

We see this all the time as we help hospital management to lean out their finance operations. We’ll see a profusion of general-ledger line items with maddeningly similar yet confusing names, such as:

  • General Supplies
  • General Non-Reimbursable Supplies
  • Office Supplies
  • Other Supplies 001
  • Other Indirect Supplies
  • Other 3rd party Supplies
  • Supplies
  • Supplies 006

In one lean hospital management project alone, we found over 40,000 line items. (And that’s nothing: we recently helped a bank which had 250,000 line items!) All this “false precision” can be traced to unclear roles and responsibilities of reporting and reconciliation.

The same thing happens, incidentally, in business departments: “Administration,” “Administration 001,” “Admin Other,” etc. Which begs the question: Where is the value?

Getting the stories straight in lean hospital finance management transformation

Don’t get us wrong. All these mysterious line items, and departments, have their roots somewhere. And certainly you’ll be able to find the person in Location A who wanted to expense a certain item differently than the person in Location B, and give you their reason for doing so. But that won’t drive lean hospital finance management transformation.

What we’ve found, especially in hospitals with shared-services finance operations (or aspirations to such a state) is that the real value resides in only a small fraction of the items. Certainly, you can collapse all the accounts to simplify them. And that’s a laudable longer-term goal. But sometimes it’s more efficient to simply focus on the small percentage that does matter; for one hospital system we worked with recently, fewer than one percent of the accounts contained 90 percent of the expenses! Similarly, categories like “capital spending” simply don’t change very frequently; how often, after all, do you build a new hospital? So why slow down your financial planning and analysis by, say, considering that factor every month?

War stories from the battlefront of lean hospital management and finance transformation

The CFO at one hospital which The Lab worked with sought to meet cost-reduction targets and increase the organization’s capacity to deliver valuable financial analysis by centralizing operations. They started with accounts payable (AP), supposedly the easiest function to bring to the corporate shared-services office.

But their plan backfired. When they centralized, they failed to standardize the work, improve finance processes, cut cost and transform into a lean finance operations hospital. Consequently, one-off reconciliation at the regional hospitals forced each to retain dedicated accounts payable staff. AP staffing actually increased by 10 percent.

Part of the problem was that the hospital didn’t so much centralize people as it did activities. When you consider that, say, one hospital worker might spend 40 percent of her day on AP, what happens to the 60 percent of “left-behind” activities when she gets centralized?

Similarly, one hospital system, when looking to centralize, asked their dispersed finance operations employees to make a list of all their activities… and that list topped 3,500. Clearly, you can’t centralize all those activities. Deciding which parts to cut, which to keep, and which to move, is a delicate operation… like surgery. The Lab helped this hospital system to understand the finance activities that could be centralized vs. those that should remain at the hospitals during the lean hospital management project. A good guideline: Centralize the transactional, leave behind the value-added.

Lean finance transformation in hospital management: Bottom line results

Working with The Lab, hospital systems have been able to implement hundreds of lean finance transformation improvements, none of which require new technology or investments therein. Example include:

  • Reducing one-off reports via standardization of the content across the different hospitals. This lean hospital management effort alone has reduced one-off requests by 70 percent.
  • Standardized lean finance data definitions eliminate 80 percent of financial reconciliation work! The Lab typically makes this happen in as little as two weeks.
  • Lean hospital finance operations process improvements reduce the nearly one-third of their days that staff spend on reconciliation and error correction. This frees up the FP&A (financial planning and analysis) team to work as a trusted partner to the different lines of business, rather than drowning in unnecessary data. Best of all, The Lab can make this happen in as little as 90 days.

Projects like the lean finance management transformations in the hospitals we’ve noted above typically span controllers, capital budgeting, FP&A, accounts payable, payroll, and tax functions. And the results can be eye-opening. For one recent engagement, The Lab was able to help a hospital system to reduce operating costs by 20 percent, while saving nearly $14 million a year, and boosting capacity by more than 25 percent. The entire engagement paid for itself in hard dollars in just five months; by the end of the first year, it had actually paid for itself fivefold.

Our next article will bring you even more lean finance transformation insights; it’s set in the world of insurance. But before you read it, ask yourself: Does your hospital network need a better way to reduce costs and get a better handle on its lean finance transformation? Contact The Lab to learn more: In one 30-minute phone call, we can show you how we can make all this happen with no new technology, implemented in just six months, and backed by a self-funding, money-back guarantee.

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