Good morning. Health care CFOs are concerned about profitability, while not compromising on delivering high-quality and affordable care. Traditionally, they’ve relied mostly on cutting costs, but that may be changing.
Deloitte Center for Health Solutions has surveyed CFOs annually since 2020. In prior years, cost reduction was consistently named one of the top three organizational priorities. However, cost reduction ranked last among the top priorities and concerns of finance leaders in 2024, according to the latest survey. (The top three are the economy, cybersecurity, and the impact of the upcoming U.S. presidential election.)
The majority of finance chiefs surveyed are focusing on improving their organization’s operating margin, Deloitte found. “I was pleasantly surprised to see CFOs setting ambitious financial improvement targets for the near term,” Tina Wheeler, vice chair, health care sector leader at Deloitte LLP, told me. A third of CFOs surveyed are aiming to improve their operating margin by three or more percentage points over the next three years, she said.
The health care industry has been experiencing a period of low profitability, with operating margins of 1% to 4%, on average, in the past five years, according to Deloitte. So CFOs meeting aggressive margin targets is, “a much-needed goal,” Wheeler said.
The firm recommends “operating margin transformation levers” that CFOs should consider using across four major categories—strategic growth, revenue growth, cost reduction, and capital deployment.
Wheeler also said there are four overlooked opportunities for margin improvement:
—Adding new products and services and discontinuing offerings that do not add financial value.
—Forming alliances. "Organizations risk slower growth and poorer performance if they operate alone," she said. Value-based partnerships, along with market-based alliances provide opportunities to codevelop products and services, expand customer reach, and increase revenue.
—Outsourcing and offshoring opportunities. For example, outsourcing administrative functions.
—"Doubling down" on digital and AI technologies.
“While cost reduction is no longer the dominant focus for margin improvement initiatives, it is still an important part of the portfolio for both health system and health plan finance leaders,” Wheeler said.
The main lever for cost reduction is building an efficient workforce, she said. “This will continue to be important as many health care organizations are grappling with employee turnover and burnout coupled with increasing labor costs,” she said. Emerging technologies, like generative AI, can be useful for workforce management strategies, “potentially leading to substantial cost savings,” she added.
Have a good weekend.
Sheryl Estrada
sheryl.estrada@fortune.com
The following sections of CFO Daily were curated by Greg McKenna
