Hospital Financial Stress Indicators

Unfortunately, thin margins have long been a reality for most rural hospitals, but a worsening array of issues—from decreasing reimbursements to declining populations—have forced growing numbers of them into financial distress. By monitoring indicators, creating transparency and responding swiftly to warning signals, financially stressed or distressed hospitals can get turned around before bankruptcy or closure become imminent threats. In this interview, Jim Kendrick, president and CEO of Community Hospital Corporation, discusses best practices for diagnosis and prevention of financial woes. His insights come from years of experience as a community hospital CEO in addition to his time with CHC helping community hospitals across the country bolster their financial health.
 

JK: Certain indicators are clear signs that "business as usual" isn't working and course correction may be required. Regular review of key metrics should be a shared responsibility and should not just fall to the CFO. There are several data points that are important to monitor. First, track aggregate volume and provider utilization trends. It's also important to watch operating ratios like expenses as a percentage of net operating revenue to make sure costs such as labor, supplies, and purchased services remain in check. Another ratio to monitor is labor cost relative to patient volume. Additionally, track patient revenue indicators including bad debt percentage and net to gross percentage by payer class. Finally, measure liquidity ratios, such as net days in patient accounts receivable and cash collections as a percentage of net revenue minus bad debts.
 

JK: Action goes hand in hand with awareness. Conduct monthly reviews of the key metrics, with each department responsible for producing monthly statistics and financial performance metrics. The finance department, with input from other department managers, should develop reporting procedures.
 

JK: To be clear, monitoring and adjusting financial performance indicators aren't merely reactive measures. Monthly reviews culminate in an annual deep dive into financial data, which forms the basis of strategic planning. Building on monthly reviews, planning can indeed be strategic as opposed to driven by short-term, crisis-mode thinking. Hospitals in crisis tend to focus on cutting costs, which is critical. But the fact is, distressed hospitals are lean to begin with, having made bone-deep cuts already. While growing revenue and market share may not seem pressing, these opportunities still need to be looked at as long-term strategic moves and possible means of survival.
 

JK: Regular reviews of financial indicators identify not only what's breaking down and needs improvement but also what's working. CHC owned and managed hospitals review data over time to develop operational best practices, support strategic planning efforts, create accountability, and redirect financial sustainability efforts when called for. Clear communication of expectations and goals turns all involved parties into light-bearers and active team members. Everyone participates in the most illuminating part of the review process, which is answering the question, "Why?" Only by establishing this interdepartmental culture of curiosity, and only through persistent questioning and probing, can a hospital find and address the root causes of financial problems. It's a bit like medical diagnosis when symptoms point to a simple ailment but the reality turns out to be much more complex. For example, 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, further investigation may reveal there's more to the story. What were the primary diagnoses of the admitted patients for each time period? Were there any abnormal physician trends? How do observation days this month compare? Understanding trends and their causes is the key to developing solutions that improve operating margins and reverse a distressed financial situation.
 

To learn more about Community Hospital Corporation, visit www.communityhospitalcorp.com.