Gauging Hospital Financial Health
By Jim R. Kendrick Jr., FACHE
The COVID-19 pandemic triggered an abrupt suspension of elective surgeries in 2020, and ultimately contributed to a significant decline in patient volumes and hospital revenue. These challenging circumstances make it more important than ever for hospital and health system leaders to monitor key metrics that gauge financial health if they want to avoid financial distress, bankruptcy or even closure.
Although some financial distress signals seem loud and clear—such as declines in patient volume and revenue—problems persist at many hospitals due to a lack of communication and financial assessment. Too often, leadership teams leave it to the CFO exclusively to monitor overall financial health. However, regular reviews of key metrics should be a shared responsibility across the C-suite and leadership team.
Data Points to Track
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 as a team about how to reassess targets and monitor the following data points regularly.
- Cash flow forecasting. Create a short-term financial forecast that includes a projected income statement, balance sheet and statement of cash flows. The focus should be on the hospital’s latest actual financial trends to help leadership analyze the near-term effects of the pandemic on the hospital’s financial performance.
- Aggregate volume and provider utilization trends. This data can offer a big-picture perspective for leaders and managers across departments.
- Operating ratios, including expenses as a percentage of net operating revenue. Ensure 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. Contract nursing labor can run in excess of $100 per hour, quickly adding to overall labor costs.
- Patient revenue indicators, including the bad debt percentage and net-to-gross percentage by payer class. Are there shifts in payer mix that need to be addressed? It’s important to make sure your revenue is not being artificially inflated with stimulus funding that has not been completely vetted for the ability to keep the funds.
- 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? As previously mentioned, don’t count on stimulus funds.
Federal Funding Considerations
The COVID-19 crisis reinforced the need for financial diligence and discipline. Rural hospitals received federal funding assistance during the crisis, and this created another layer of data to monitor. Whether in the form of CARES Act Provider Relief Funding, a paycheck protection program loan or some other type of funding, the federal government requires hospitals to document the use of all funds. For example, for CARES Act Provider Relief Fund payments, hospitals must provide attestation that funds are used for COVID-related costs and COVID-related loss of revenue. The first reporting for calendar year 2020 is due Feb. 15, 2021, with final reporting and revisions due by June 30, 2021.
Many state and national hospital associations have published helpful communications about interpreting the reporting requirements. The Community Hospital Corporation even developed a COVID-19 Financial Dashboard to help hospital leaders manage cash flow associated with the pandemic, and recommends that leaders ensure supplemental funding is properly vetted and tracked.
Connecting the Dots
Hospital leadership may want to consider conducting monthly reviews of these key measures. Additionally, hospital finance departments, with input from department managers, should produce accurate monthly stats and financial performance metrics to facilitate reviews. These financial indicators are also great to review annually as a basis for strategic planning.
Regular reviews of financial indicators can help leaders 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?” 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 problem.