Wednesday, January 30, 2008

Business Development vs. Budget: Is There a Difference?

Because CHRISTUS is on a July 1 to June 30 fiscal year, January is the beginning of our formal budgeting process. As I reflected on this process for FY 09 (July ’08 – June ’09), our 10th anniversary year, I felt the need to compare our old methodologies of budgeting to our new processes, which require an intense focus on business development in order to create business literacy.

In a lecture last week to a large audience of health care administrators and financial officers, I recalled the metrics I used over 20 years ago to make sure that operations were sound. I indicated to them that although I used traditional data and measurements for the budgeting process and for evaluating our monthly financial performance, in reality, I depended on two daily measurements which included, 1. how many cars were in the parking lot, and 2. how much aspirin was sold in our outpatient pharmacy.
These measurements were truly the best indicators for our volume of outpatient and inpatient traffic, which paralleled our growth in revenue and--because of our cost reimbursement--drove our bottom line. This bottom line, then, of course, determined our variance to budget which in those times of cost reimbursement was usually positive.

Of course, managed care reimbursement and DRGs were the two major reasons why these measurements were no longer useful and, in fact, could give you a false sense of security. Both payments for managed care patients and DRG reimbursements incentivized hospitals to get patients out quickly, and therefore a packed parking lot and high aspirin sales began to become the indicators for less positive financial performance.

This, then, was the stimulus to really cause the financial planning model to move from traditional budgeting to intense business planning. What, then, are the differences?

Budgeting, in the traditional sense, is mainly driven by past history. Based on, for instance, the last five years of history for the rise in inpatient volume, the following year is predicted, and generally incorporates an average increase based on the prior five years’ performance. Traditional budgeting also utilizes prior revenue statistics, i.e., the revenue for an ambulatory visit or the revenue for occupied bed and then multiplies this revenue by the increased volume that is projected and gives you a sense of the growth in revenue that you might expect. However, because of the changes outlined above, and based on our experience over the last five years, it is clear that past history is no predictor of future performance. And consequently, these traditional formulas no longer work.

This was never clearer to us than looking at our FY 07 financial performance when, in fact, our actual volumes were approximately 5 percent below our budgeted volumes. It was quite clear that this would result in a much lower bottom line than was projected. This was made even worse by the fact that expenses often rise parallel to revenue growth, and when the latter does not occur, the first will even cause a greater deterioration in one’s bottom line, which was our exact experience.

To prevent this, then, business development and business planning have to be the new methods of predicting financial performance. Business development requires us to be disciplined sufficiently to do a service-line analysis which takes into consideration the evolving technologies which we have described on prior blog posts as being the major motivation to move many of our inpatient services into the ambulatory care setting. Business development requires us to stay extremely current, and even futuristic, in predicting what governmental reimbursement and reimbursement from private insurers will do to these various service lines over at least the next budget year, but hopefully over several forthcoming years.

In addition, business development requires one to trend environmental changes, economic changes and utilization changes, all of which will be significant predictors of how health care will be utilized and paid for by future patients.

Business development also requires us to do careful analysis of revenue and expenses, both in the current year and several years forthcoming, in order to determine the ultimate return on investment of both our operational and capital expenses.

And finally, business development entices you to take a long-term look at your capital and operational budgets as far out as 10 years--particularly when one invests in facilities and large pieces of capital, which often depreciate over a seven-to10-year period and therefore must create value for this period of time if they are expected to enhance one’s business literacy.

Yes, we can pine for the “good ol’ days” of using the parking lot and aspirin sales to predict our future. They have served us well, but if utilized today in a traditional budgeting process, they will only continue to give us a false sense of security. The traditional methods of budgeting must be replaced with the new, more focused and data-driven analytical processes embraced in business development.

Wednesday, January 23, 2008

CHRISTUS Health on the Leading Edge

Two articles published in the November/December 2007 journal The Corporate Board reaffirms once more than CHRISTUS Health is on the leading edge of benchmark governance practices.

In the first article, titled “Non-Financial Metrics and Boards,” the author indicates that corporate boards are increasingly recognizing the value of both financial and non-financial performance metrics. At this time, more board members are more sophisticated in their use of financial information, and are often not provided consistent, high-quality non-financial information. The article concludes by stating that this non-financial information is often that which provides the greatest insight into what ultimately affects the long-term sustainability and growth of their business.

With regard to this article, CHRISTUS Health, since its inception nine years ago, has supported the development and implementation of a Balanced Scorecard, which has clearly defined metrics with goals updated annually. These metrics, driven by our mission and our four Directions of Excellence, advocacy and philanthropy, are reviewed at all board meetings at both the system and regional business units. By using metrics driven by national benchmark and industry-wide comparisons, governance has a clear sense of where CHRISTUS Health ranks in relationship to the “competitors.” And the article agrees with our published data in that “sooner or later your non-financial performance and action plans to improve have to translate into tangible, financial returns.

The second article, “Developing a Global Board Room,” begins with the statement, ”…as the U.S. economy becomes even more deeply part of the greater world economy, American boards have lagged behind in building global expertise.” It continued by stating that “…all companies operating in international markets could benefit from having at least one international executive director with relevant skills and experience on the board.”

With this knowledge in mind, particularly stimulated by the Future Task Force II recommendations, a Mexican national, Pedro Martin, was added to the CHRISTUS Health system board in 2005. And since its inception, the CHRISTUS Muguerza regional board has had American representation. Being “ahead of the curve,” we believed that international board representation would fulfill the following goals:

• By bringing a richer set of experiences, a foreign director increases the diversity of thought on the board, and should provide for a more robust discussion;
• A foreign director should know his or her home markets, and likely others, in much more detail and have a clear understanding of the facts;
• The director should provide access to new and different resources and networks, particularly political;
• He or she can inform the board on best practices in corporate governance in other geographies.

We clearly have found these reasons to justify international representation, which has also enhanced CHRISTUS Health’s cultural competency.

Tuesday, January 15, 2008

Optimizing CHRISTUS Health’s Performance

Based on some discussions at the recent meetings of the CHRISTUS Health Board of Directors, it seems appropriate to articulate the Senior Leadership Team’s approach to optimizing performance. Utilizing our Journey to Excellence, we have attempted to answer the right questions which should result in positive performance trends over time and ultimately facilitate the achievement of excellence – the CHRISTUS Health vision. These eight questions include:

1. Has CHRISTUS Health clearly established what is important?
Journey to Excellence
Sponsoring Congregations’ Goals
Board Goals

2. Has CHRISTUS Health determined expected performance levels for all four Directions to Excellence and other critical success factors?
: Benchmark metrics have been determined and in place since the formation of CHRISTUS. These are reviewed and updated annually.

3. Has CHRISTUS Health developed a balanced measurement system?
: CHRISTUS Health has used a balanced scorecard since its formation, which is also used by all regions and business units.

4. Has the current CHRISTUS Health performance been assessed?
: The performance measurements are reviewed monthly, and improvement plans are continuously refined to attempt to move the scores from good to great. The measurements are shared with all levels of governance.

5. Has the business case for performance improvement been clearly established?
: Our data has been studied for the last eight years, verifying that clinical service and patient satisfaction improvements drive improvements in business literacy (financial operations).

In addition, capital budgets have been driven by the sum of depreciation and operational margins and philanthropic donations.

Capital constraints have been put into place during periods when operating performance is not satisfactory.

6.Are departments/ functional areas aligned with the CHRISTUS system’s organizational performance expectations?
: All regions and business units have goals which support the four Directions to Excellence.

Pay-at-risk is driven by annual metrics from the four Directions to Excellence.

The “success sharing” program for Associates is driven by the clinical and service quality goals.

7. Are priorities for process improvement identified?
: The monthly CAP calls review the action places and progress year-to-date.

Specific focus is given to discussing improvement plans for those areas not attaining or sustaining their goals at the “excellent” level.

8. Are appropriate tools and methods used to bring about successful change and improved performance?
: CHRISTUS Health uses a select number of tools, and uses “crosswalks” to make sure they are integrated sufficiently to accelerate the Journey to Excellence. These tasks primarily include:
•External surveys including Joint Commission, including U.S. and international lab, rehabilitation, community benefit and trauma centers.
•Journey to Excellence in the four Directions and the “must haves” that are known to create success in each.
•Magnet status for nursing
•State quality awards
•Malcolm Baldrige National Quality Award
•Six Sigma
•Toyota production system/ lean management

I have talked previously about the importance of external surveys, the four directions on the Journey to Excellence, Magnet status for nursing and the state quality awards mentioned above. Hence, you will fine below a brief summary of Six Sigma and lean management tools, which are being utilized in our revenue cycle and supply management programs, and the Malcom Baldrige National Quality Award, which we hope to apply for as a system some time between 2009 and 2011.

About Six Sigma

Origin: Six Sigma was developed by Motorola in the early 1980s as a means to eliminate defects in the manufacturing process and ultimately improve customer satisfaction.

Core Tenet: Six Sigma is a data-driven quality improvement methodology that is designed to eliminate variation from a process. To achieve Six Sigma quality, a process must produce fewer than 3.4 defects per million opportunities.

Key Components: The major components in the Six Sigma improvement framework are: define, measure, analyze, improve and control.

The Process: Six Sigma requires significant leadership commitment because of the executive education mandates and extensive employee training and orientation framework. Organizations must select and train managers as Black Belts – employees with extensive knowledge and training in Six Sigmas who work full-time directing Six Sigma projects. Projects are carried out by Green Belts, employees who manage projects from conception to completion. Yellow Belts are employees who are trained in Six Sigma techniques but have not yet completed a Six Sigma project. Six Sigma projects averaged about five or six months from conception to completion.

Benefits: Six Sigma helps eliminate variation, thereby reducing the likelihood of errors, streamlining processes and ultimately reducing costs.

Challenges: Implementation is resource-intensive, requiring significant financial investment and employee commitment. Availability of personnel and long project cycle times can limit the number of projects that are undertaken at a given time. The investment of training Black Belts, etc., can alienate some employees who don’t feel part of the process.

Best Applications: Six Sigma can be applied to almost all hospital processes, including medical error reductions, business operations, patient case management and patient satisfaction.

For more information, visit

About Toyota Production Systems/Lean Management

Origin: The development of the Toyota Production System (TPS) began after World War II as a means to improve quality and streamline processes.

Core Tenet: TPS is a business philosophy that seeks to improve quality and efficiency by identifying and eliminating waste (“muda” in Japanese) from processes. TPS identified seven common types of waste defects, including excess motion, inappropriate processing, overproduction, transporting unnecessary inventory and wait times.

Key Components: The basis of lean management is determining the value of a given process by breaking it down and identifying the value-added steps and the non-value-added steps. By eliminating non-value-added steps, processes become streamlined and more effective. A central element is “stop the Line,” which allows any employee to stop a process when a defect is identified or suspected. By fixing mistakes early in the process, the final product will have zero defects.

The Process: Lean management begins by identifying so-called value streams within an organization. These processes support principle services, such as an emergency room visit or an inpatient stay. Mapping out the process as a whole helps identify where improvements can be made. This is done by bringing together involved individuals for a kaisan, an intensive four- or five-day event that analyzes the process and implements change. Individual roles and responsibilities or expectations are outlined at the end.

Benefits: TPS allows for quick identification and improvements. Successful lean implementation can have a positive impact on throughput, cost, quality and productivity.

Challenges: Implementing lean requires workers to identify waste in the jobs they perform regularly, a task that may draw initial resistance. Leadership commitment is critical to break down traditional silos within the organization because many processes are carried out or affected by multiple departments.

Best Applications: TPS/ lean management can be applied to many types of processes within a hospital, from administrative functions to direct patient care.

Visit for more information.

About the Malcolm Baldrige National Quality Award

Origin: The Malcolm Baldrige National Quality Award, created in 1987, is handed out by the U.S. National Institute of Standards and Technology. It recognizes organizations for performance excellence in six categories: manufacturing businesses, service businesses, small businesses, educational organizations, health care organizations and nonprofit organizations.

Core Tenant: Baldrige is a results-oriented performance management system with a basis in measurement, analysis and knowledge.

Key Components: The Baldrige health care criteria are a set of 18 performance-oriented requirements that are divided into seven categories: leadership; strategic excellence; focus on patients, other customers and markets; measurement, analysis and knowledge management; workforce management, process management and results.

The Process: Applying for the Baldrige Award is a two-step process. Organizations must first submit an eligibility certification package to the Baldrige National Quality Program, followed by an award application package. The applications are reviewed by the board of examiners and scored on a 1,000-point scale. Each organization receives a feedback report at the end of the review process. The examiners select organizations for site visits based upon their scores. Depending on the quality of the applications and the results of the site visits, a winner may or may not be selected.

Benefits: Extensive leadership requirements help ensure leadership involvement and buy-in. The program can help organizations align resources with performance improvement methodologies, such as Six Sigma.

Challenges: Adopting the Baldrige criteria requires extensive cultural change. The self-examination and continuous monitoring and reporting bring transparency to an organization, which may result in some push-back from staff.

Best Applications: Baldrige is a framework for an organization’s performance management system, overseeing all aspects of organizational performance.

For more information about the Baldrige Award, visit

To reach the CHRISTUS Health Journey to Excellence goals and sustain them for each and everyone who enters our doors and turns their lives over to us requires that all 28,000 Associates and 9,000 physicians in the CHRISTUS family declare excellence a necessity and not a luxury. We must live in a CHRISTUS culture that will not let us slow down until we reach excellence in carrying out our sacred work in the CHRISTUS Health ministry.

Wednesday, January 9, 2008

Future Planning

I recently returned from three days in New Orleans with the CHRISTUS Health Futures Task Force II. Part of the purpose of this group is to reflect on the importance of and various types of planning which must occur in a health care system that is undertaking a Journey to Excellence.

After reflecting with this group, it is clear that planning for health care fits into three major categories: short-term, mid-term and long-term. It was reassuring to me that CHRISTUS has incorporated all three into its toolbox, and I would like to discuss them with you.

Short Term is the planning that one must do in a complex organization when an unexpected crisis occurs. It requires the leadership team to assemble an appropriate, knowledgeable group of individuals who can quickly and clearly express what the crisis is, but more importantly, develop rapid solutions for addressing the crisis and creating normalcy as quickly as possible. A key illustration of this kind of crisis would be a major quality-of-care case which received local and even national notoriety. Like the Tylenol poisoning which gained national attention, these occur unexpectedly and must be dealt with in an expeditious and transparent manner.

The hurricanes, which recently closed five of our hospitals, was certainly a crisis and created outcomes that far exceeded what we anticipated in our disaster planning. As the electricity and air conditioning were quickly terminated along with all our fresh water supply, the action plans to care for critically ill patients in rooms reaching 102 degrees required the ultimate and best short-term planning. Fortunately we were successful, and reopened all five hospitals within a week.

Mid-term planning is a much more common type of planning, which in our organization is represented by three-year rolling strategic planning. We are now beginning our 10th cycle of this planning as we enter our 10th year as CHRISTUS Health.

Three-year rolling planning means that the plan year that we are in, such as this year (FY 08), has in reality been looked at twice before. It was the “third year out” in 2006, and therefore we did our best to identify what the “quicksand” areas in 2008 might be. By quicksand, I mean we predicted things that could occur, but they were “soft” in many spots. They could have created instability if they occurred, and in some instances, would have caused the “sand to shift.” Therefore, what we expected needed to be redefined as we moved into the second year.

I call the second year out the “wet cement year” because it’s much firmer than quicksand and much more clearly delineated, but if in fact something changes or occurs that isn’t correct--like someone walking on the cement--it is still in the state that you can smooth it over and resurface it.

Then we move into the plan year (which is currently 2008), where we add the final catalytic agent and the year becomes hard cement. It is the plan in this year that the budget is designed around and for which the capital allocations are made.

I still periodically hear leaders say that you can’t plan for more than a year in health care. I acknowledge that some of the planning will be crisis planning, and that the three years in the mid-term planning process are very different (quicksand, wet cement and hard cement). However, because three-year rolling planning will always keep three years in front of you, the advantage of this methodology is that by the time the year becomes your plan year, you have reviewed it at least twice before in your planning cycle and have few, if any, surprises.

The final planning is the long-term planning, or “future planning.” We are doing this for the second time in the 10-year history of CHRISTUS.

Future planning is done through various methodologies that aren’t as concrete as three-year rolling planning, but provides an opportunity to develop recommendations which--if reviewed on an annual basis and appropriately incorporated into the three-year rolling planning process--will often create strategies which are on the cutting edge and set the pace for health care innovations. Because this process is so important and unique, I will commit one or two future blog posts solely to the future planning process and keep you appraised particularly on the evolution of Futures Task Force II, which will be an 18-month process with the task force’s recommendations being reported during our 10th anniversary in February of 2009.

Before I close, however, I’d also like to connect the dot to the post I did on creating vision for an organization and how you become a “visionary.” Actually, visioning is really in a sense a very distant planning process, which begins to set the framework for what might occur, around which more definitive planning should be done. For me, visionary planning is done predominately for 10 years and beyond. This gives you the framework for future planning (which usually looks at 8 to 10 years in the future) and then leads to three-year rolling strategic planning, which hopefully will give you the ability to do outstanding crisis planning when and if it is ever required. We connect these dots by creating what we in CHRISTUS call the “umbrella strategy,” which I will also discuss in a future blog post.

Thursday, January 3, 2008

New Year Blessings

Since we just celebrated Christmas and the arrival of 2008, it seems appropriate for us to once again reflect on the blessings the previous year brought. Based on recent conversations with CHRISTUS Associates and physicians, I believe that one of the blessings they hold dear is the opportunity to be a member of the health care profession, particularly part of the CHRISTUS Health family.

I am not surprised about these responses, for I have always believed that those of us who work in health care are a part of the “privileged few” who live in the world today. Whether we work at the bedside delivering hands-on care to our patients, prepare medical records, clean our facilities, process bills, or park cars, we all have the honor and privilege of working in what I have always referred to as a “sacred profession” because we are given an awesome responsibility by our patients who walk through our doors each day, trusting us enough to put their loved ones in our hands. That is why I never believed that excellence in health care is a luxury, but rather a necessity, delivered consistently and predictably to each and everyone who enters any CHRISTUS Health door in the U.S. and Mexico!

The true blessing emanates from the knowledge that at the end of each day, week, year and lifetime, we can pause and know we have made at least one life easier because we have touched them in some way, whether directly or indirectly. We are not doing work in health care, but rather laboring in a profession that often gives back more than we give it. The values necessary to work in health care are identical to the ones we each should have as individuals. Ultimately, the health care profession gives us the ability to meld our personal and professional lives because both need to be driven by the Golden Rule, which is somehow expressed in all religions and supported by even “non-spiritual” individuals—do unto others as you want them to do to you!

A significant question for all as we travel on life’s journey is, “What will our legacy be? What will we be remembered for?” Yes, our greatest blessing in health care everywhere is that our legacy is clear—we have helped others in need!

May the New Year bring to each of you, your families and loved ones a blessed and happy year. And may our world leaders continue work to find peaceful solutions for our conflicts.