Job description finance director

Lowell W. Johnson, MBA, FACHE, is chief financial officer of Providence Health System, a not-for-profit integrated delivery system with 21 hospitals, 13 long-term care facilities, and 15 assisted living facilities operating in Alaska, Washington, Oregon, and California. The organization's HMO and PPO plans cover 400,000 members in Oregon.

Johnson began his career in health care in 1974 as director of health finance for the State of Illinois. Since then, he has served in numerous leadership positions, including partner and assistant national director of health care for Touche-Ross in the 1980s. In 1998, he assumed his current position with Providence.

HFM: Can you give us a brief description of your responsibilities at Providence Health System?

Johnson: Providence Health System is a $3.5 billion faith-based healthcare delivery system. We have 15 regional service areas operating in Alaska, Washington, Oregon, and California, and we are the dominant provider in 11 of those regional service areas. Our core business is acute care.

I like to describe my position as CFO as "the five-C job." The first "C," that is, my primary responsibility, and the first responsibility of any CFO, is to count. By that I mean, are the financial statements accurate? Are they timely? Do they contain useful information for management? Can that information be used to bench-mark internally, and can we use it to benchmark ourselves with other organizations around the country?

My second "C" responsibility is control. This includes strategic financial planning, our annual budgeting function, and regular monitoring of financial variances. Each fiscal year we develop new financial forecasts, prepare operating and capital budgets to implement those strategic financial plans, and undertake financial corrective actions as performance requires.

My third responsibility is to create capital. In today's highly competitive healthcare marketplace, access to capital will determine which organizations survive and thrive. Managing cash on a daily basis across a system and maximizing potential return is one necessary aspect, but a second, equally important function is the ability to borrow money when it is needed and to take advantage of opportunities in the marketplace.

The fourth role of the CFO is to counsel, and to my mind, this is the main value-added function of the CFO. I would hope every CFO would actively seek to be involved in this role. Executive management teams and governance bodies look to us to be their strategic business advisors. We have both a duty and an obligation to ensure financial input is collected on all the issues that are being considered by our organizations.

Fifth, and finally, we contribute. At Providence, our management team and all of our employees are actively involved in the larger communities we live in and serve. We expect and encourage each employee to do more than just work for Providence. In addition to serving on several outside boards, I am active in fund raising for a number of local charities and my local church. I think every healthcare CFO absolutely must be active in their communities.

HFM: Would you make any distinction between your position and those of your counterparts who are employed by for-profit systems?

Johnson: First, I must acknowledge that there are many similarities between not-for-profit organizations like Providence and those that are for-profit. It is the mission of both types of organizations to provide high-quality, cost-effective care with the resources available. Both types provide significant amounts of charity and uncompensated patient care. And both strive to have the largest share of the markets they serve.

What differentiates an organization like Providence is the role faith-based care plays in our decision-making process. Whenever Providence faces a significant issue, a major factor in determining our corporate position is the answer to the question, "What do faith-based teachings have to say on this topic?" That includes church teachings, the traditions and values of our sponsors (the Sisters of Providence), and our individual faith-based beliefs and values.

Providence likes to say "mission and margin." We are a faith-based organization, but also a hard-nosed business. I believe we may make and implement decisions that "do the right societal thing" a little more often and a little more willingly than our for-profit counterparts, but they are certainly excellent providers of care.

HFM: Is there ever a conflict between a faith-based mission and the need to be a hard-nosed business?

Johnson: Certainly But therein is the value of an ethical decision-making process, one that will lead us to an answer that weighs and reflects the business side--the margin, if you will--with the mission. And we do say both margin and mission are critical to our success.

HFM: What financial initiatives are your greatest priorities?

Johnson: To answer that, I first point out that under Providence president and CEO Hank Walker's leadership, the organization functions as four regionally based, operating and implementing companies, one in each of the four states in which Providence has a presence. And they do not operate identically in all ways. Each organization is driven by its local market. For that reason, I operate what we call the Office of the Chief Financial Officers. There is a chief financial officer for the organization in each state, and we try to work together and collaborate in developing financial policies and strategic financial approaches.

There are five very specific financial targets that we share across the four regions. The first is to maintain an average net income after expenses of 6 percent. We are not there at the moment, but we had it in the 1980s and the early 1990s, and we believe a net income of 6 percent is absolutely essential to sustain long-term operations, to remain financially viable, and to continue the level of care we insist on at Providence.

Target two is for net income from operations to contribute at least half of that 6 percent. That is a target that we're driving for in 2001.

Our third goal is to incorporate more sophisticated financial software that will allow us to improve our ability to use the financial data we collect--to be better able to "count," to use the point I made earlier.

Fourth, we're implementing a new IT system for strategic financial planning and decision making. It should prove particularly valuable for decision making with respect to capital allocation and bring into play many more factors than simply return on investment. It also should allow us to quantify all our mission activities, not just financial return.

The final priority initiative is to grow cash. Our days-cash-on-hand level is not where we want it to be, so we are being very careful with our capital spending and increase days-cash-on-hand to be where our peers with AA credit-rating status are.

HFM: So you're recognizing that efforts in both cost control and revenue growth are important targets. Is one area more important than the other, and how do you determine the correct balance?

Johnson: That is a very good question. With Providence, the situation differs across each of the four regions. In Washington, for instance, our cost-per-adjusted-admission is already in the lowest quartile of hospitals in the state. The Washington organization is a very production-efficient one, so there we are focusing on product and pricing strategies that will provide us with a rate of return that can achieve the 3 percent net-operating-income margin I mentioned earlier.

In Alaska, our revenues are higher, but our costs are higher, too, so we are looking more closely at the cost side of the equation. Our Oregon region seems to be balanced, and is meeting the 6 percent average-net-income target, with more than half of that coming from net-operating income.

HFM: Does the degree to which Providence functions as an integrated delivery system have a bearing on the equation? We often hear that integrated delivery systems have difficulty finding the success factor.

Johnson: Unfortunately, Providence could be the poster child for both success and failure in integrated delivery. Our Oregon region is fully integrated. We operate both acute care and nonacute care delivery models. We have a very large employed physician group and we have what is the second-largest health plan in the state of Oregon. Two of our hospitals have been ranked in the top 100 nationally.

In contrast, in 1998, we gave up on our integrated delivery system efforts in Washington, and it was extremely painful. We had to sell our health plan at a huge financial loss. We have downsized our employed physician group and are concentrating on acute care delivery. Integrated delivery works wonderfully in Oregon; we couldn't make it work in Washington.