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HELP WHERE HOSPITALS NEED IT ®

Community Hospital Blog

February 2016
Three Steps to Help Rural Hospitals Overcome Financial Distress

by Michael Morgan, Director of Due Diligence and Strategic Analysis, CHC

 

An array of issues – from increasing charity care, bad debt and declining reimbursement rates to negative profit margins – create financial distress for rural hospitals. Despite today’s challenging operating environment, many rural hospitals across the country are using a practical approach to grow revenues and control costs.

 

Step 1: AWARENESS

Know the signs and symptoms of declining financial health

 

How does a hospital reach the point of “no return” where closure becomes inevitable? Were there warning signs along the way? Were they missed? Would the outcome have been different if danger signals had been noted and addressed?

 

Discussions around performance, growth and capital stewardship are at the heart of strategic planning for most health care organizations, and even though financial indicators are a harbinger of financial health, “finance” is often considered the responsibility of the chief financial officer or other “financial” folks. Budgeting is usually department-specific.

 

Like car dashboard warning lights, financial warning signs mean it’s time to sit up and take notice. A regular review of the most important indicators related to an organization’s financial health should be a shared responsibility for the entire health care team. Data points to focus in on include:

  • Look at aggregate volume and provider utilization trends. This data can offer a big-picture perspective to leaders and managers across departments.
  • Share operating ratios, including expenses as a percent of net operating revenue focusing on labor, supplies, and purchased services.
  • Examine labor costs relative to volumes. Is the hospital meeting productivity goals? Look at FTE staffing per adjusted occupied bed targets.
  • Review patient revenue indicators including bad debt percentage and net to gross percentage by payor class. Are there shifts in payor mix that need to be addressed?
  • Study liquidity ratios, such as net days in patient accounts receivable and cash collections as a percentage of net revenue minus bad debts. What steps can be taken to improve cash flow?

Step 2: INFORMATION GATHERING

Identify and assess significant financial indicators

 

Operational best practices include a monthly review by hospital leadership of key measures, many of which are listed above. Procedures should be put in place by the hospital’s finance department, with input from department managers, to produce accurate monthly stats and financial performance metrics to facilitate these periodic reviews. A closer look at financial indicators also should be part of the annual review and planning process. A key to financial improvement for hospitals is clear communication of expectations and goals across the leadership spectrum in order to accomplish desired changes.  

 

Step 3: ANALYSIS & ACTION

Connect the dots for sustainability

 

Once data is available to everyone, the next step is to analyze the root cause. For instance, if inpatient admission volumes are down significantly in a current month compared to the same month in the previous year, the conclusion might be, “We think it went down because there were fewer flu cases this year compared to last year.” That may be true, but speculation can be risky. Do a deep data dive and take the guesswork out of the equation. What were the primary diagnoses of the admitted patients for each time period? Were there any abnormal physician trends? How do observation days this month compare? Understanding the trends and their causes is the key to creating actionable solutions.

 

Regular reviews of key financial indicators can identify operational best practices, support strategic planning efforts, enhance understanding and create accountability. These reviews can confirm or redirect efforts aimed at sustainability. The most critical element of the entire process is answering “why.” Only then can the team develop solutions to improve operating margins and avoid financial distress.

 

Learn more about CHC's Financial Improvement services.

Tags: Affordable Care Act, Healthcare Reform , Hospital Management, Hospital Performance Improvement, Operational Improvement, Strategic Direction

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