How to Gauge Your Hospital’s Financial Health
Some rural hospitals that were already struggling are now in serious financial trouble due to the coronavirus. The suspension of elective surgery and non urgent care in most states led to an abrupt drop in patient volumes and hospital revenue. That loss, combined with the cost of preparing for COVID-19 protections for patients and employees, has forced rural hospitals into deeper distress. It’s especially important in these challenging circumstances to keep a close eye on key metrics that gauge a hospital’s financial health. By monitoring indicators, creating transparency and responding swiftly to warning signals of financial distress, hospitals can stave off bankruptcy or closure while states loosen restrictions on elective and non urgent procedures.
A Shared Responsibility
Signs that a hospital is headed for, or already in, financial distress include obvious indicators such as declining revenues or a dip in patient volume. Although some distress signals seem loud and clear, problems persist at many hospitals due to lack of communication and financial assessment across the enterprise. Too often, it’s left to the CFO to monitor overall financial health by measuring against budgets and recent trends. However, a regular review of key metrics should be a shared responsibility for the entire healthcare leadership team.
Data Points to Review
Hospitals may need to adjust key targets to bring them in line with what’s realistically achievable while the pandemic persists, particularly when it comes to productivity and net revenue metrics. Think wisely and as a team about how to reassess targets. The following data points should be monitored regularly.
- Aggregate volume and provider utilization trends. This data can offer a big-picture perspective to leaders and managers across departments.
- Operating ratios, including expenses as a percentage of net operating revenue. 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.
- 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?
Hospital leadership should conduct a monthly review of the key measures listed above. 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 these will form the basis of strategic planning.
The COVID-19 crisis reinforces the need for financial diligence and discipline. Rural hospitals received federal funding to help them during the crisis, and this created another layer of data to monitor. Whether in the form of a CARES Act grant, a PPP loan or some other type of funding, these outlays must be closely controlled, properly managed and restricted in use so the hospital does not run out of cash. In certain cases, the federal government will require hospitals to document the use of funds. For example, for CARES Act stimulus payments, hospitals must provide attestation (quarterly beginning in July) that funds are used for COVID-related costs and COVID-related loss of revenue. In any case, CHC recommends that hospitals set up a tracking system to account for these funds.
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 COVID-19 crisis accelerates the timeline during which financial improvements must be made.
The most critical element of this entire process is answering, “Why?” This means finding the root causes 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 get to the root of any problems.