Monitoring Healthcare Financial Performance: Strategies For Success

Monitoring financial performance in the healthcare industry is essential for maintaining financial viability and ensuring the delivery of quality patient care. Healthcare financial metrics provide data-driven insights that help hospital leaders and department heads make informed decisions to improve operational efficiency and patient outcomes. These metrics include revenue, operating margin, days cash on hand, gross collections ratio, and claim denial rate. They offer a quantitative assessment of financial health, enabling hospitals to identify areas for improvement, optimize resource allocation, and enhance revenue cycle management. By tracking these metrics, healthcare institutions can strive for long-term sustainability, positive financial margins, and better patient care.

Operating margin

Hospitals with higher operating margins are more likely to be larger hospitals or part of a hospital system. Not-for-profit status is associated with higher operating margins, while rural status and a larger share of Medicare patients are associated with lower operating margins.

Hospitals with higher operating margins tend to provide higher-quality patient care. This is likely due to their ability to invest in hospital infrastructure, medical equipment, and information technology, as well as hire more skilled nurses. Higher operating margins may also indicate greater efficiency, as hospitals with higher margins tend to have fewer days of patient accounts receivable.

However, it is important to note that higher operating margins do not always equate to better financial health. Hospitals with higher margins may be taking on more debt, which could lead to financial distress if not managed properly. Additionally, hospitals with higher margins may be for-profit institutions that prioritise profit over patient care.

Overall, operating margin is a critical metric for hospitals to monitor as it can provide insights into financial performance, efficiency, and quality of care.

Revenue

• Net Operating Revenue: This includes expenses as a component of net operating revenue. It is important to regularly check costs relative to patient volume and gauge productivity against staffing targets. Monitoring expenses and volume helps identify areas where costs can be optimized without sacrificing patient care.
• Bad Debt: Bad debt refers to revenue loss when patients do not pay for their care. While unemployment or other life events may be valid reasons for non-payment, tracking bad debt can help providers identify issues with billing, collection, or financial assistance processes.
• Net to Gross Percentage by Payer Class: Monitoring the net to gross percentage by payer class helps providers identify shifts in the payer mix. This information can be used to adjust pricing, contract terms, or patient volume to optimize revenue.
• Days in Patient Accounts Receivable: This metric tracks the number of days it takes to receive payment from payers, such as insurance companies or patients themselves. A high number of days indicates a potential issue with billing or collection processes, leading to cash flow problems.
• Cash Collections as a Percentage of Net Revenue: This metric helps providers understand their cash flow and make necessary improvements. It is crucial for maintaining a positive cash flow and ensuring the ability to invest in new technologies and treatments.
• Revenue Cycle Management: Effective revenue cycle management is critical for maximizing revenue. This includes optimizing billing and collection processes, minimizing claim denials, and ensuring accurate and timely reimbursement from payers.
• Payer Mix: Understanding the payer mix, including private insurance, Medicare, Medicaid, and self-pay patients, is essential for revenue management. Different payer sources have varying reimbursement rates, so providers must consider this when setting prices and managing contracts.
• Service Line Profitability: Analyzing the profitability of different service lines can help providers identify areas of strength and weakness. This information can guide strategic decisions, such as expanding profitable service lines or improving the efficiency of underperforming areas.
• Pricing Strategy: Regularly reviewing and adjusting pricing is essential for maximizing revenue. Providers should consider the cost of providing care, market rates, and the ability of patients to pay when setting or changing prices.

By closely monitoring revenue and the associated metrics, healthcare providers can make data-driven decisions to improve their financial performance. This enables them to maintain a positive cash flow, invest in new technologies, and ultimately provide better patient care.

Cost per discharge

Calculating the average cost per discharge involves dividing the total costs for a specific period by the number of patients discharged during that same period. This KPI is crucial for healthcare providers to understand the financial implications of patient care and identify areas where costs can be optimised without compromising the quality of treatment.

Tracking this metric over time enables medical practices to evaluate the effectiveness of cost-saving initiatives and pinpoint areas requiring further scrutiny or action. For instance, if expenses for a specific procedure consistently exceed expectations, healthcare providers can investigate ways to streamline the process and reduce costs.

By monitoring the average cost per discharge, healthcare organisations can also ensure they provide high-quality care in a financially sustainable manner. This KPI helps identify areas where costs can be reduced without compromising patient care, thus maintaining the clinic's financial sustainability.

When measuring the average cost per discharge, it's important to consider limitations such as variations in patient complexity, differences in treatment protocols, billing practices, and incomplete cost data, which may impact the accuracy of the KPI.

To enhance their average cost per discharge KPI, healthcare practices can implement strategies such as reducing the length of patient stays, increasing efficiency, implementing cost-reduction initiatives, improving care coordination, and focusing on preventive care.

Bad debt

To mitigate bad debt, hospitals can implement several strategies:

• Identify patients at financial risk before their procedure and create a payment plan.
• Minimise unnecessary emergency room visits by using telehealth services.
• Implement revenue cycle management software to identify and fix sources of bad debt, such as billing errors.
• Understand the true cost of delivering care to make informed financial decisions.
• Provide cost estimates to patients upfront, allowing them to make informed choices about their care.
• Collect payment upfront or allow patients to make payment plan elections.
• Verify patients' insurance coverage in real time to avoid unexpected debt.
• Automate collections to reduce debt from forgotten or missed payments.
• Train staff to discuss financial responsibility with patients before providing service, including payment methods and eligibility for Medicaid or charity care programs.
• Offer convenient payment methods to increase the likelihood of receiving payments.

By following these strategies, healthcare providers can reduce their bad debt and improve their financial performance.

Gross collections ratio

Gross collection rate (GCR) is one of the key performance indicators (KPIs) used in medical billing to gain insight into a practice's revenue cycle. It is a simple measure of a provider's profitability, referring to the gross income or gross profit margin. While gross income includes the direct cost of providing services, it does not include other costs related to selling activities, administration, taxes, and other costs related to running the overall business.

The gross collection rate is calculated using the following formula:

> Gross Collection Rate = Total Payments / Charges *100% (for a specific time period)

The gross collection rate is considered a less effective KPI than the net collection rate as it does not take into account write-offs, refunds, and contractual/non-contractual amounts. It only shows what a practice is allowed to collect, rather than the actual amount collected.

In the context of healthcare financial performance, KPIs like the gross collection rate are important for hospital finance and department leaders to effectively gauge financial and operational performance against set goals. By comparing internal data at various levels (e.g., hospital, department, physician, treatment type) with industry KPIs, leaders can identify areas driving revenue and areas offering opportunities for financial and operational improvement. This is crucial in today's rapidly evolving healthcare landscape, where having market context is critical.

Frequently asked questions