For integrated health system Group Health Cooperative, the path to growth leads through more effective, agile planning. Chief financial and administrative officer Ric Magnuson tells how his organization took creative steps to overcome budgeting complexity.
Steve Player: Can you give me some background about your organization?
Ric Magnuson: Sure. We're a health plan with a delivery system, an integrated health system, with over $3 billion in revenue and about 9,000 employees. About 90 percent to 95 percent of our revenue comes from health premiums for a variety of different products, from individual and family, to Medicare, to commercial, to Medicaid. We're in every product there is out there.
Many companies are insurers -- they just sell premiums -- and of course there are many hospitals and physician groups, which work with many different insurance products. But we're unique in the fact that we have both the premiums and the delivery system all within our control. We've won several awards and are very much recognized nationally.
We're a co-op, which is a bit interesting and unique. We've been in the spotlight because about a year ago, cooperatives were among the most widely discussed options for healthcare. With the final healthcare reform focusing a lot around providers working together and accountable care organizations, all of a sudden we're really a hot item.
Steve Player: And if you make a profit, it just rolls right on over to the next year?
Ric Magnuson: Right. We're a not-for-profit organization, a 501-3C.
We have about 650,000 members -- people who buy their products through us. About half of the care is received internally within our owned and operated clinics. Throughout the State of Washington, we have 26 different medical centers. What we've chosen to do is everything until you become an inpatient. Ours is basically an outpatient, primary care, specialty care model; we've chosen, over the last few years, to close down and get out of the inpatient business, and we contract for that.
Steve Player: How does your membership look on a trend basis? Is it fairly stable?
Ric Magnuson: We've been growing. I came on board in May of 2007, and about a week or two later, we put together our first strategic plan. We've had business plans, but we've not had a five-year strategic plan. We took about six months, and brought in McKinsey. What the plan called for was really starting to grow the organization, because we'd been losing membership over the 2004-2006 timeframe. We also needed to start to diversify our products. The plan said we're going to grow the organization up to one million members by 2012.
Steve Player: Is there something strategic about the million mark?
Ric Magnuson: Yes, there is. It's a number that gives you better leverage; from a fixed-cost perspective, it lets you start to leverage your economies of scale. If you hit a million, that says you're a player.
We're a regional player, but there's only a handful of organizations like us that are integrated health systems -- meaning we offer the health plan side and the delivery side together -- in the country.
Prior to my time here, the strategy was just to raise rates to cover costs. You can make money that way, but you start to lose your members, and your enrollment starts to shrink. So we were making money in the '04 to '06 timeframe, but we were losing membership. That only works for a period of time.
Steve Player: What role does finance have in evaluating the products and services that Group Health provides?
Ric Magnuson: The actuary and underwriting function, which reports up to me, determines a big piece of that. It's very much a partnership between that function and the health plan sales products folks, making sure that we're balancing both perspectives and that we're creating products that meet market needs while being financially stable.
Steve Player: With all the industry issues coming at you, it seems you're right at the vortex of what's happening in healthcare.
Ric Magnuson: Yes. The advantage of our model is we get the premium, and we can then decide how best to use those dollars. If you're a hospital, or a pure physician operation, what you're incented to do is just keep bringing more patients through, generating revenue that way. But our incentive is to take the premium dollar and use it in the best way to improve the health of a member, and that may or may not mean that they come in for a service, or it may mean that we do a lot more preventative things. We can do a lot of things that are preventative, that are good for the long run, that most providers wouldn't do because they can't make money from them.
But it's also complex. We're regulated by two different worlds. There's a strategic advantage, but there's that complication also.
As healthcare reform has been unfolding, we're finding that we have to dedicate a lot of time and energy to understanding the state and federal rules and regulations. We've got more people working on that, and more administrative costs. It's been a real challenge. And we're just at the beginning; it's going to be rolling out over the next several years.
Steve Player: As a nonprofit, how do you plan? What's a good financial year for you?
Ric Magnuson: We're shooting for a three percent margin. We need to generate cash for capital, for bricks and mortar, for equipment, for IT, for all kinds of things.
Steve Player: So you're the same as any commercial company; the only difference is the profit you make gets poured right back into the business.
Ric Magnuson: Right. We don't have shareholders.
Steve Player: Your shareholders are your members.
Ric Magnuson: Yes. And the community.
Steve Player: Strategically, how are you trying to position finance within Group Health?
Ric Magnuson: The short version is, we're moving the team to become advisors to operations versus just bean counters. You can crank out numbers, but until you can really help interpret them, there's not really much value add there. We want finance to become much more of a support, or a consultant, to the organization.
Steve Player: How hard has it been to get people to adopt that approach?
Ric Magnuson: Oh, I've had to herd people. Part of what we're doing here is changing the culture. People operated in their own silo areas and didn't want to work as a team – I'm talking about my direct reports – and now we're bringing them together and helping everybody understand that they're here to help support the broader organization.
And they're finding that they like it. It's been part of a whole new management system we've been putting in here, and our people have been very supportive of it. Like other organizations in healthcare -- and something similar is probably is true in other industries -- we have a lot of leaders who have come up via the clinical path, not the business path or the financial path. Now they're running big parts of the business, and they really need a finance expert helper to work with them because they haven't been schooled in that area.
Steve Player: What are your top initiatives in finance?
Ric Magnuson: What we're trying to do is keep our costs flat, meaning every time we want to do something new, we drive it through improvement, as opposed to adding new resources. When I first came here, basically the philosophy was that you had to get everything into your budget. Once it was in your budget, you spent it. It was a government sort of mindset. And if you wanted to do something new, you just added more resources.
What we're pushing for is to drive improvement so that you can take on new work. You have to look at your key business processes and say okay, which ones can I start to improve? Where's the waste in those processes, where can we take out some costs? That's what we've started to do within our business and within finance. We're in a learning stage on that.
Steve Player: And you're attacking it from a Lean perspective?
Ric Magnuson: Very much so. When our board approved our strategic plan in 2008, we also made the decision as an organization to go full speed into using Lean, to help us to deploy the strategic plan and take waste out of our system across the whole organization.
Steve Player: What was your experience with Beyond Budgeting? When did that come onto the stage?
Ric Magnuson: About two years ago. We'd seen what a couple of other organizations had done, what Park Nicollet Health Services had done, and we started to think that through. We started moving into it in the fall of '08, and then in '09 we did a parallel track with the old budgeting process, moving beyond budgeting in a sort of quarter-over-quarter, continuous-improvement mode. And then in 2010 we went full speed into no-detail budgets.
Steve Player: Did you eliminate your budget completely?
Ric Magnuson: We eliminated the detail. We have a high-level plan, but we don't have the detailed budget below that.
We were not that different from a lot of other organizations; we probably spent thousands and thousands of hours every fall going through the game. As I mentioned earlier, we have 9,000 people working here, and we would budget by line item, person by person. People would do it down to minute detail, and then they would just plug a number when they had to make it work.
We educated our board, got them comfortable, educated our leaders, and said, "What we really want you to do is go drive improvement in your areas and not be spending countless hours on a budget that's wrong. Take that time and drive towards improvement." And what we did then was a six-quarter look-back and a six-quarter roll forward, so we're constantly planning and seeing how we're doing.
Steve Player: So a six-quarter rolling forecast?
Ric Magnuson: Yes. We've varied a little bit on that. We go out to the end of the next fiscal year, always; sometimes that's five, six, or seven quarters, depending on where you're at. We set targets and goals at the organizational level. We're two years into it, and I don't think we've lost one thing by giving up that detailed budget; instead, we've allowed people to spend time doing things that are adding more value to the organization.
Steve Player: How did you get that set up and sold throughout the organization, and to the Board of Directors?
Ric Magnuson: We did it by running them parallel in 2009; we did a traditional budget, as well as the high-level one. We also gave all of our managers and leaders all the old items and tools that they had, but then we gave them new tools and resources, and started to focus them in new ways: "Look at how you're performing; look at your performance today compared to last month." It was a 12-month dual process that gave people that comfort. And we had great support from our board after we helped them see it was all part of the Lean improvement journey -- taking the waste out, setting goals, and trying to achieve those goals.
We had a few managers and leaders in the organization that just thought we were crazy and didn't know how you could not have a budget. Now they all get it, and they're very happy they don't have to do that detail anymore.
We've had great support from our leadership team, too. About the end of last year or early this year, my boss finally said, "We don't have a budget, do we?" Like it hit him all of a sudden. No, we don't. And even once in a while, I myself go "oh wow."
Steve Player: Did you have to make system changes to make this happen, or were you able to do it with your existing setup?
Ric Magnuson: We did it with our existing systems. It's simple. You don't need fancy systems to do this stuff.
Are we all the way there? No. We got the initial push out last year, and now what we need to do is take it to the next step in 2011.
Steve Player: And what is the next step?
Ric Magnuson: Well, some of our managers and leaders are still trying to figure out how in the world you're supposed to manage with this, and what their indicators are. At the organizational level, we have basically two metrics that we can roll everything up to. But when it goes down to the department level, they're still asking "Okay, so what are you holding me accountable to?" and working on that. So we have to help them on that a little bit more in the next phase.
Steve Player: What are those top two metrics?
Ric Magnuson: We've divided the organization into two buckets from an expense perspective. One is what we call "clinical per member per month," and the other is our administrative costs. Basically, we said that our overall administrative costs will be flat year over year, and our target for our clinical per member per month is $327. And what's fascinating is two or three years ago, when we did traditional P&Ls and budgeting, we'd sit down every month and say "supplies are up" or "this is down," and you never really knew if that was good or bad. All you could say was, it was up or down. We now have everybody focused; they know that $327.00 is what we need to deliver our product for.
Steve Player: A target costing kind of approach.
Ric Magnuson: Yes, exactly. You can break that $327.00 down and ask how much of that is primary care, how much is specialty care, how much is hospital care, and then you can look at ways to improve those various components to keep driving that $327.00 toward $326.00.
You know, we're a $3 billion organization, and if you think you can nail down every penny in that, you're wrong. But you can keep asking: How do we keep improving? How did we do last month? Why are we up or down from last month? How did we do quarter over quarter, and why?
We also reformatted our financial statements and took the whole budget off of them. We were typical in the fact that on the left side of our financials, we used to have the current month, actual and budget, and then we'd have our categories going down the middle. On the right side, we had the year-to-date budget, prior year.
Now on the left side we have current month, previous month, and then year over year on the right side, and on the very far right, we just left our plan at the area level so people can use it as a reference. That's it.
We took out depreciation, interest, investments, and put that down below, and we hardly even talk about that now because our mangers don't control that stuff. There are so many things going on with those things that can skew the bottom line but have nothing to do with how the operations are performing. We used to have it all blended throughout our financial statements.
We produce quarterly financials and look at those quarter-over-quarter, year-over-year, and we monitor how things are going that way. We also changed our communications. Every month I put out a communication, and I try to make that an educational tool to talk about how we're doing month-over-month.
Steve Player: Just from the organizational point of view, what do you see as your next set of challenges?
Ric Magnuson: We're just refreshing our strategic plan to 2015, and part of the challenge there is, in the next 12 to 18 months, getting the infrastructure and the organization ready to take that next big leap of growth. On a range of issues from IT systems to core processes, we've just sort of band-aided a lot of things together as we've been changing. Now we've got to take that next step and get the business and the platforms ready to take growth to the next level.
Steve Player: What do you see as your key role as CFO?
Ric Magnuson: I see the CFO as an analyst and advisor. My job, and my team's job, is to be able to analyze and advise the organization. It's not just to crunch out numbers and put the financial statements together. It's also about being able to help advise the board and management.
Steve Player: What was your background prior to joining Group Health?
Ric Magnuson: I was a chief financial officer in Burlington, Vermont for three years. The bulk of my career, I was in Minneapolis with Allina Health Systems in a variety of roles, mostly finance, but also operations --I've gone back and forth, which I definitely think has been an advantage for me.
I started out in healthcare working as a nursing assistant when I was in college, a great part-time job; I never realized that that would lead me down a healthcare path, but it did. I graduated in 1985 and got a job with Blue Cross and Blue Shield in Minnesota because I knew a little bit about healthcare, worked there for two years, and it just went from there. What's been great is that I get the credibility of knowing what's it like to work an eight-hour shift of bedside care, as well as a financial role. They're very different stresses -- the stress of punching in and working hard and working short-staffed, versus the CFO's sort of 24/7 stress.
Steve Player: Made any mistakes along the way?
Ric Magnuson: Oh, yes. If you're not making some mistakes, you're not really pushing yourself, and you're not learning.
Steve Player: Any advice for finance professionals who are just starting out in their career?
Ric Magnuson: What I would say is, and it's been a bit of a motto for me, never say no to an opportunity. Just grab it and go. Down the road it will pay for itself. I mean, I never thought that by starting out working in a nursing home, I'd be sitting here today as a CFO of a big organization, but it was part of a path that's led me here.
Steve Player: Yes, that bedside manner has had to evolve quite a bit!
Ric Magnuson: Right! It's not all going to be handed to you; you've got to push, but there will be opportunities out there for you.
At the same time, the path may not always be clear; especially in the world we're in right now, it's not going to be black and white. It may not always be clear in your head, and you have to be comfortable with that.
But when you're out in front of an audience, you've got to be confident that you know where you're headed and that you can make them believe that you're going in the right direction. That's been especially important these last two years, as we've been changing everything -- processes, systems, and, right now, budgets. You know, there are no textbooks on how to do some of this stuff.
Steve Player: Right, those are still being written, unfortunately.
Ric Magnuson: True!