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Affected More Than Infected: The Importance of Financial Literacy in the COVID-19 Era

Philip Clothiaux and Aaron Savage and and on September 24, 2020
Blog Healthcare Transformation

For perhaps the first time, the financial decisions of health systems have affected everyone in the organization on a personal level. Senior leaders are making difficult decisions and frontline staff are saving lives, while the people who stand behind both are facing mass layoffs and furloughs.

Health Systems have deployed their clinical response to COVID-19. With the immediate safety of the community accounted for, the conversation has turned to recovery from the financial and operational impact of the crisis.

Some hospitals will need to merge or be acquired to survive and remain competitive in their markets. All will have to cut costs further and realign their operations. Success will depend on administrators, physicians, and all employees understanding and supporting a strategy centered on tough financial decisions.

Strategy success and financial success have always been connected. And if your people don’t grasp your financial picture and their place in it, you can’t advance a dynamic, winning strategy. In times of economic distress and accelerated change, this interconnectivity becomes clear.

Health systems’ finances are as complex as the diseases they treat. While the clinical response to the pandemic has pulled medical and management teams together, a lack of financial understanding is poised to pull organizations apart, or at the very least, slow the recovery.

A CFO client recently said to us, “Money problems are solved by the decisions that are made by our people. Are we educating them in a way that will allow them to make the right decision?”

At Root, we know the most effective way to help people comprehend what is happening – and how they make it happen – is through interactive and immersive visuals that combine hard data and artistic flair. We break down complicated concepts and engage people in the financial story through dialogue to create accountability for how their efforts directly affect financial performance. Within this experience, we can layer in financial concepts to meet people where they are.

Health System receives $200 million federal support under the CARES Act stimulus package, postpones non-urgent treatments and eliminates 500 administration positions.
Health System tells its bondholders it has $3 billion in investments it could liquidate within three days and signs a letter of intent to acquire another hospital.
Furloughed employee: “I thought you were broke.”

Layer 1: The Flow of Money

First, we ensure every person understands the basic economic model of the health system. The visual depicts a snapshot in time that represents the start of a budget cycle, showing sources and uses of money. Pulling data from the statement of cash flows, the P&L, and capital planning, it addressed the following questions:

  • What are our sources of money?
  • Where do we spend money?
  • What do we do with the money that is left over?
  • How do we reinvest in our community?

Taken together, these questions reveal how the health system builds and manages a budget – and establish a foundation on which we can layer more detail.

Layer 2: Levers and Drivers

Next, we explore the factors – both in and outside of our control – that create variability in sources of money, how the system spends money, and ultimately, how much money is left to reinvest into operations and strategy. This is where we introduce how management prioritizes expenses, develops budgets, and manages earnings.

While most people understand the high operating expenses of a hospital, they often don’t see how funds are prioritized and how decisions are made, including:

  • What needs to get funded immediately?
  • What money has been already allocated?
  • What expenses can be controlled?

We help connect the work each person performs to the revenue – or lack of revenue – it creates by exploring:

  • What is the variability in our sources of money?
  • Where is the majority of the profit generated?

Layer 3: Interdependencies

  • How does quality affect reimbursement?
  • How does market share affect contracting rates?
  • How do increases in scale decrease cost?
  • How does profitability affect bond rating?
  • How does bond rating impact day-to-day decision making?

Most importantly, the health system has to tie all these ideas back to its ultimate purpose: providing the community with the highest quality of care. Without money, the system can’t deliver on its mission.

Conclusion

At Root, we know that people will tolerate the directives of their leaders, but ultimately, they will act on their own conclusions. Making these conclusions personal to everyone in the organization will determine whether a strategy will be successful.

As health systems shift from crisis response and begin to execute strategies that center on financial and operational recovery, leaders must focus on winning the hearts and minds their colleagues. This is only accomplished by providing them with a sense of clarity, control, and confidence in the future that comes with understanding the strategy and the finances. If you agree, let’s chat.

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