By Michael Morgan, VP Due Diligence and Strategic Analysis , Community Hospital Corporation
Thin margins have long been a reality for most rural hospitals, but a worsening array of issues—from increasing charity care and bad debt to declining reimbursements and rural populations—have forced growing numbers of them into financial distress. Despite today’s challenging operating environment, many rural hospitals across the country are using a practical approach to get turned around before bankruptcy or closure become imminent threats.
Step 1: AWARENESS
Know the signs and symptoms of declining financial health
Certain financial indicators are clear signs that “business as usual” isn’t working and course correction may be required. The problem at many hospitals is lack of communication and financial assessment across the enterprise. It’s left to the CFO to monitor overall financial health, while budgeting is usually department-specific. However, a regular review of key metrics should be a shared responsibility for the entire healthcare team. What data points should the team review?
- 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 percentage 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
This step goes hand in hand with the first step—the monthly review by hospital leadership of key measures, many of which are 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. If monthly reviews take place, planning can indeed be strategic and not driven by short-term, “crisis mode” thinking, which tends to focus on cutting costs. That’s critical, but distressed hospitals are lean to begin with, so opportunities for revenue and market share growth must also be explored.
Step 3: ANALYSIS & ACTION
Connect the dots for sustainability
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 answering, “Why?” What are the root causes of financial difficulties? Another critical element is clear communication of expectations and goals across the leadership spectrum in order to accomplish desired changes. The team, armed with data and clear objectives, can then get to the root of any problems. For instance, if inpatient admission volumes are down significantly in a current month compared to the same month in the previous year, the initial observation might be that there were fewer flu cases. However, a deeper data dive may reveal there’s more to the story. Understanding trends and their causes is the key to creating actionable solutions that improve operating margins and reverse a distressed financial situation.