7 Financial KPIs every hospital CFO must track
Recent changes in the healthcare industry have made CFOs and practice managers of healthcare organizations review their practice’s revenue cycle efficiency. In order to help CFOs evaluate their organization’s performance, financial KPIs are used. Key Performance Indicators or KPIs help CFOs compare their healthcare organization’s performance to other organizations like theirs. So instead of just trying to fix something internally, looking at fellow organizations can help remove major flaws (if any) in the system.
‘To effectively track healthcare revenue cycle performance, provider organizations should develop key performance indicators (KPIs)’, advises Sandra Wolfskill, Director of Healthcare Finance Policy and Revenue Cycle MAP at the Healthcare Financial Management Association (HFMA).
KPIs are usually used to measure an organization’s performance across different areas like operations, finance, etc. But financial KPIs are used to evaluate an organization’s efficiency from a financial standpoint.
1. Days Cash On Hand
Days Cash on Hand is an indication of a hospital’s liquidity.
How is it important in financial terms?
According to Richard L. Gundling, vice president of healthcare financial management practices at the Healthcare Financial Management Association, “DCOH is just one of the things lenders and others look at”.
It’s good to have cash on hand when something goes wrong, but having too much is also an indication of improper use of resources. Good DCOH makes financial analysts feel positive about an organization’s health for the time being but in order to have good DCOH in the future, it is important that we distribute our current resources to areas that can generate more revenue. Here’s how you calculate Days Cash On Hand.
(Cash and cash equivalents + Long term investments) *365 / Total expenses
2. Operating margin or operating profit margin percentage
Operating margin is one of the first key metrics an investor would look at to determine the profitability of a company. Every organization finds new ways or imitates other successful organizations to achieve a good operating profit margin.
Operating margin is the amount of revenue a company makes after paying for all of its operational and overhead costs. Operating margin excludes taxes and interest paid on debts.
Currently, healthcare CEOs are looking for new ways to generate revenue as operating margins have declined across the healthcare industry. A survey by Deloitte reveals that increased headcount costs, investments in clinical innovation and population health initiatives are three factors that are responsible for declining hospital costs, other than decreasing revenues and rising costs. Mergers, funding, acquisitions, shifting patients to outpatient services and new staffing models are seen as new ways to improve revenue streams.
(Total operating revenues – Total operating expenses) *100 / (Total operating revenues)
3. Projections
Every CFO today would like to see how his business would perform over a period of time. Projections play a crucial role in planning for both short & long term.
There are many forecasting models available in the market such as Moving Averages, exponential smoothing, trending models etc.
The best method is by tracing historical numbers and extrapolating it with projecting business days and removing anomalies.
4. Days in Accounts Receivable
Days in Accounts Receivable is the average number of days a practice takes to get paid for services provided to its customers. Faster the returns the better an organization is doing at generating revenue.
Outstanding A/R divided by Average daily net patient service charges gives Days in A/R. Days in AR can range from 30 days to 120 days or even more but having a number less than 36 is the ultimate goal for all specialties.
Days in A/R are reflective of an organization’s revenue cycle efficiency. Accounts Receivable in the healthcare industry is one of the key factors affecting an organization’s cash flow. It is not uncommon for practices to get help from third-party or offshore medical billing service providers to recover their lost revenue.
Outstanding A/R / (Average daily patient service charges)
5. Gross Collections Ratio
Whether a hospital can collect patient services cash successfully can be determined by its gross collections ratio. If you are running a hospital, you definitely want to know whether your patient services are being paid properly by payers; the gross collection ratio helps us understand a hospital’s rate of success in converting patient services into cash.
Total collected patient service cash divided by average monthly (3 or 6 months) patient service charges gives Cash Collection as a percentage of Gross Collections Ratio. The total patient service cash is the amount posted to a patient’s accounts.
Gross collections ratio = Total patient service cash collected/ Avg monthly patient service charges
6. Claims denial rate
If you are a provider treating patients in hundreds you really know how much money you could be losing by not getting reimbursed. Claim denial rate is purely meant to evaluate whether the payer you are working with makes reimbursements accurately, apart from adhering to contractual agreement.
Claim denial rate is the percentage of claims denied. Total number of claims denied divided by the aggregate number of claims remitted gives Claim Denial rate. A low denial rate means good cash flow.
This KPI is used to determine the efficiency of your RCM process. While claim denials cannot be avoided a mismanagement of denied claims could mean lost revenue.
Total number of claims denied / Total number of claims remitted
7. Bad Debts
As a healthcare organization’s CFO you would want to set a benchmark for the percentage of bad debts you want your hospital to have. An ideal practice should be seeing this at 2% or less.
Bad debt is calculated by dividing write off by total patient service charges.
Bad debts = Write off amount / Total patient service charges
No one wants multiple accounts to be placed in the ‘bad debt’ file. The ideal solution is for all accounts receivable to be paid by the patient. However, this is less of a possibility.
Note: Financial KPIs for healthcare CFOs is a series of blog posts that have been carefully researched, written and curated by our revenue cycle management experts.
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