James M. Connelly, MBA, CPA, joined Henry Ford Health System, Detroit, Michigan, as senior vice president and CFO in 2000, and almost immediately participated in a systemwide renewal effort designed to focus physicians, clinicians, administrative staff, and other employees on achieving strategic business objectives. The renewal included a three-day, offsite retreat for Henry Ford’s physician and administrative leaders. One positive outcome of the renewal effort was an improved relationship between Henry Ford’s medical group and its health plan, Health Alliance Plan (HAP).

HFM: Can you tell us about Henry Ford Health System and your responsibilities as senior vice president and CFO?

Connelly: Henry Ford Health System is a not-for-profit corporation based in Detroit, Michigan. Its components include Henry Ford Hospital, a 903-bed tertiary care hospital; Henry Ford Medical Group, with 800 physicians and researchers in 40 specialties; Health Alliance Plan (HAP), which serves more than 3,200 employer groups and approximately 568,000 members; Henry Ford Wyandotte Hospital, a 302-bed community hospital; Horizon Health System, a major osteopathic care provider; Henry Ford Behavioral Health, which includes Kingswood, a 100-bed psychiatric hospital; Community Care Services, which offers a variety of services from medical supplies, pharmacy, and dialysis to home health, long-term care, and hospice; and William Clay Ford Center for Athletic Medicine, a state-of-the-art sports medicine facility.

Henry Ford also has two joint ventures, one with Bon Secours Health System for Bon Secours Cottage Health Services, and the other with Mercy Health Services for Henry Ford Mercy Health Network. In terms of revenue, Henry Ford is a $2.5 billion operation.

I am responsible for managing the entire fiscal affairs of the system–capital, financings, financial operations, acquisitions, treasury and investments, real estate, financial business strategies, and rating and regulatory agencies.

HFM: What is your service area and payer mix?

Connelly: Our service area is primarily southeast Michigan, although our specialists draw both regionally and nationally. More than 1 million residents receive care from Henry Ford. The payer mix is 32 percent HAP, 30 percent Medicare, 13 percent Blue Cross/Blue Shield, 6 percent Medicaid, and 19 percent other commercial payers.

HFM: In 1998, Henry Ford reported a $43 million loss in operations. A turnaround operation began in 2000, the year you joined Henry Ford. How is the system’s financial outlook today?

Connelly: In 2000, we had a profit of $33.9 million. Then in 2001 we reported a very sizable loss–$87.7 million. We had to react to the 2001 situation, and we did. In the first quarter of 2002, we reported a system loss of only $5.3 million. For the second quarter, we will report a system profit of $3.9 million.

HFM: What strategies have you implemented to improve HFHS’s financial picture?

Connelly: As we saw the way the financial picture was developing in 2000, we undertook a sizable and significant remediation plan. As we had in the past, we retained the Hunter Group to help us assess the situation and develop an implementation plan for change, which we finished in December 2001. We took a number of steps. We made significant changes in the leadership at Henry Ford Hospital. We reduced the workforce in late January and early February, which is why our first-quarter numbers weren’t as good as our second-quarter numbers. We made changes that relate to improving operational processes and patient access, such as transfer processes between our clinics and hospitals. We’ve put considerable emphasis on reducing supply-chain costs. Last, we’re implementing new billing systems for both the medical group and the hospitals.

HFM: Can you elaborate on the top strategies you’ve implemented?

Connelly: There are four things we’ve focused on: labor, supply, revenues, and infrastructure. Like most healthcare organizations, from a strategic perspective, we need to build growth in our patient volume. To do that, in the short run, we need to more aggressively manage our operating expenses to make sure we’re creating the necessary resources to fund the revenue initiatives.

We’ve been focusing on labor expenses. We have reduced our systemwide labor expense by $40 million a year on a run-rate basis since February.

We also have reengineered a number of our corporate support services, creating an integrated model to serve the provider business units. We have created an integrated structure in finance, human resources, information technology, purchasing, and administration. That has given us, in current dollars, a reduction in operating costs of $15 million compared with a year ago.

Our supply costs year-to-date are flat compared with the prior year. But when you consider inflation, and the fact that pharmaceuticals and medical supplies are up 6 to 7 percent, it means we’ve actually achieved savings. We’re more closely managing supply costs with new, extensive monitoring and control mechanisms. We’re using our existing systems, but we’ve compiled, summarized, and disseminated the information differently, giving the operations management feedback they didn’t have previously. For example, with our systemwide payroll, which approaches $25 million every two weeks, we now provide immediate feedback to the business units. They have complete information on their payroll expenses, such as FTE levels, overtime, and any additional payments and compensation. They’re now able to look at their numbers on a real-time basis. They’re able to manage to their targets more effectively and have been able to reduce costs this year and improve productivity.