Top Ten Financial Measurement s for a Healthcare Organization If you can t measure it, you can t manage it. By Sheri Blaho 5272 S. LEWIS, SUITE 100 TULSA, OK 74105 918.496.1600 TOLL FREE: 877.496.1600
If you can t measure it, you can t manage it. Finance professionals in the healthcare organizations are faced with the need to improve patient care while reducing operating expenses. Historically, the majority of key measurements within a healthcare organization was drawn from the revenue cycle billing software with little or no regard to the management or measurement of expenses. Other than a close eye on Accounts Receivables, the balance sheet was seldom reviewed routinely. These Top 10 measurements will only increase in importance as the healthcare reforms continue to evolve. The firms that measure all areas of the business will be the healthiest and most prepared for the economic changes ahead. These critical data components historically reside in two places within a healthcare organization: Ø Revenue Cycle Management(Practice Management) Software Ø Financial Accounting Software The best reporting tools are creating data warehouses or marrying information across these two software systems to gather the most critical KPI s for healthcare organizations. # Measurement (Location where data resides) 1 Receivables Management Average Days Outstanding (Practice Management Description Collecting Patient Payments: In recent years, the entire health care industry has become more aggressive in their collection practices. With the ever-rising costs associated with health care, it is extremely important to the livelihood of any facility to get the maximum reimbursement which largely relies on patient payments. Managing the revenue cycle efficiently is no easy task and requires your constant attention. Each phase of the Revenue Cycle - from the moment a patient is scheduled for an appointment until the time payment is received from the insurance company - is equally important to maximizing insurance reimbursements. Page 1
2 Expense Comparison Actual to Budget 3 Current Ratio The best way to handle rising operating costs is to monitor them and then develop a plan to cut costs. Three areas that can add up to thousands of dollars in savings per year include office supplies, medical supplies and office equipment. Establish a budget by department and stick to it. Assign a manager for each functional area that reviews the expenditures against actual on a routine basis. This means the manager will need access to the numbers and supporting documents for each purchase. Many accounting systems today provide drill down ability that will allow appropriate staff members easy access to this type of documentation. Back to accounting 101! All too often these simple measurements are not included in the monthly or quarterly reviews. These are the pulse of financial health. The current ratio is a liquidity ratio which estimates the ability of a company to pay back short-term obligations. This ratio is also known as cash asset ratio, cash ratio, and liquidity ratio. A higher current ratio indicates the higher capability of a company to pay back its debts. 4 Debt to Equity Ratio The debt-to-equity ratio, is a quantification of a firm s financial leverage estimated by dividing the total liabilities by stockholders equity. This ratio indicates the proportion of equity and debt used by the company to finance its assets. Page 2
5 Revenues by Key Metrics (Practice Management 6 Expenses by Key Metrics 7 Gross Profit by Key Metrics 8 Profit-to-earnings ratio Revenues by patient, bed, staff member, payer, service type Most statistical information in a practice is collected and stored as part of the billing process. Revenues by location and or facility Revenue Cycle Software. Many practice management software packages allow for easy graphical presentation of revenues to quickly determine trends and areas of greatest potential for improvement. Key performance metrics such as statistical counts of procedures, patients,, by staff member, by payer, by facility are gathered stored in the Practice Management Software and never measured against the associated expenses, only the associated revenues. Measuring expenses against critical stats is equally important as measuring revenues against stats. While increasing revenues is governed by the marketing and various agencies, costs can be controlled by the organization to increase profits. The statistics will need to be married to the associated expenses which typically reside in two different systems. This can be accomplished with a data warehouse or some more sophisticated reporting tools. Once the data has been collected for measuring expenses against critical statistics, it will also be available to determine gross profit by stats. This is the ultimate measurement as it blends revenues, direct expenses and key statistics. This will provide a true picture of all operational elements of the organization. The profit-to-earnings ratio is determined by dividing the profit (before + distributions and taxes) by the net operating revenue. It indicates a firm s effectiveness in delivering services. Page 3
9 Net revenue per employee 10 This-Year to Last-Year Expense Comparison The single highest cost in any practice is labor. The net revenue per employee is calculated by dividing the annual net operating revenue by the number of employees. It is useful in forecasting a realistic range for future annual net operating revenue. Measuring net revenue per employee by revenue type will provide critical insight into areas of a practice that are the most effective. The number of employees could be housed in your data warehouse, however many financial packages allow for some minimal statistical information to be gathered and stored within the financial system. Keep an eye on all expenses, watching trends as a percent of total expense and as a percent of revenue. Some expenses, like office supplies, should remain level regardless of revenues. Other expenses, like medical supplies should trend up or down with revenue. If revenue is down and medical supply expense is up, take a closer look. Page 4