Decisive Actions to Improve Financial Performance
When a community hospital Chief Financial Officer (CFO) notices dwindling cash reserves and declining patient volume, it’s time to identify opportunities for financial improvement.
Unfortunately, in rapidly changing times like these, the financial position of many hospitals is a bit hazy. A variety of factors including COVID-19 surges, state staffing support, Federal CARES Act funding, increasing supply costs, contract labor and rising wages have created dynamics that have made it more difficult to budget and track financial performance.
Even with many challenges, community hospital closures diminished during the pandemic, due in part to support from CARES Act funds that helped keep the doors open for some smaller hospitals. Now that additional government support is depleted, hospitals that struggled pre-pandemic are again facing financial performance issues.
All of these issues make the present a particularly important time to assess and improve hospital finances.
It’s especially important in these challenging circumstances to keep a close eye on key metrics that gauge a hospital’s financial health. Although much has changed over the last two years, financial metrics are tried and true.
Hospitals may need to adjust key targets to bring them in line with what’s realistically achievable. Think wisely and as a team about how to reassess targets. The following data points should be monitored regularly.
- Days cash on hand. This is perhaps the most important piece of data to track. Taking immediate steps to increase cash reserves is one of the most important immediate actions for hospitals in financial distress.
- Business Office Metrics. Focus on daily and weekly goals for Billing, Collection, and Follow Up to ensure accounts receivable does not age beyond 60 days for Medicare and 90 days for Medicaid and Commercial payers. Monitor daily collections by payer to identify any issues timely.
- Patient revenue indicators. These include bad debt percentage and net- to- gross percentage by payer class. Are there shifts in payer mix that need to be addressed?
- Liquidity ratios. These include net days in patient accounts receivable and cash collections as a percentage of net revenue. What steps can be taken to improve cash flow?
- Aggregate volume and provider utilization trends. This data can offer a big-picture perspective to leaders and managers across departments.
- Operating ratios, including expense trends by line item. Make sure costs such as labor, supplies and purchased services remain in check.
- Labor costs relative to patient volume. Measure productivity in each department against department-specific staffing targets as well as the overall FTE per adjusted occupied bed target for the hospital as a whole.
Hospital leadership should monitor these on a daily basis when possible and, at a minimum, conduct a monthly review of these key measures. In addition, 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. Annually, take a closer look at these financial indicators as the basis of strategic planning.
As some states begin to pull back on supplemental staffing support, it’s vital to manage productivity, improve employee engagement and continue active recruitment. We don’t see salaries or contract rates declining anytime soon, so working efficiently is key. The most successful productivity efforts involve department managers who manage staffing levels at the shift level.
Supplies are another area of rising costs. Consider your current supply chain. What lessons did the pandemic teach? Many community hospitals were disappointed by their GPO’s pandemic performance and are now seeking alternatives. Supply savings make a major impact on the bottom line.
Review the patient revenue side of billing and collecting to ensure that everything is working, timely and accurately, in order to maximize cash. There are three key areas for revenue cycle improvement:
- Front-End: Opportunities to make progress here include renegotiating health plan contracts and adjusting patient registration processes.
- Mid-Cycle: In this phase, gains can be made in charge capture, pricing, medical record coding audits, coding and documentation, and chargemaster.
- Back-End: Key indicators for improvement in this phase include billing and collection metrics, such as accounts receivable, percent of collections and denial rate, with a goal of streamlining billing for faster payments and efficient use of staff time.
A Shared Responsibility
Leadership needs to ensure the hospital is operating within the correct standards and measures. Although some distress signals seem loud and clear, problems persist at many hospitals due to lack of communication. Too often, it’s left to the CFO to monitor overall financial health by measuring budgets and recent trends. However, a regular review of key metrics should be a shared responsibility for the entire healthcare leadership team.
Connect the Dots
Regular reviews of financial indicators can identify operational best practices, support strategic planning efforts, create accountability, and, if necessary, redirect financial sustainability efforts.
The most critical element of this entire process is understanding the reason for financial difficulties. Another critical element is clear communication of expectations and goals across hospital leadership in order to accomplish desired changes. The team, armed with data and clear objectives, can then address any problems head on.