APPENDIX 28-B Comparative Analysis Using Financial Ratios and Benchmarking Helps Turn Around a Hospital in the Metropolis Health System
Sample General Hospital is another facility within the Metropolis Health System. Sample General Hospital has recently been acquired by Metropolis. It is a 100-bed hospital that has been losing money steadily over the last several years. The new chief financial officer (CFO) has decided to use benchmarking as an aid to turn around Sample’s financial situation. Benchmarking will illustrate where the hospital stands in relationship to its peer group.
The CFO orders two benchmarking reports: one for the hospitals that are 100 beds or less and one for all hospitals, no matter the size. The 100-beds-or-less report will allow direct comparability for Sample, while the all-hospital report will give a universal or overall view of Sample’s standing. Both reports appear at the end of this case study. Exhibit 28-B–1 is the benchmark data report for Sample General Hospital compared with hospitals less than 100 beds, whereas Exhibit 28-B–2 is the benchmark data report for Sample General Hospital compared with all hospitals.
When the reports arrive, the CFO writes a description of how the data are arranged so that his managers will better understand the information presented. His description includes the following points:
- The percentile rankings are intended to present the hospital’s performance ranked against all other performers in the comparison group. Whether the hospital’s actual performance is good or bad depends on the statistic being evaluated.
- The first column, labeled “Annual Average Year 1,” provides a historical trend of actual performance of the hospital in the previous year. It is provided for reference only so that the reader can see the trend over time.
- The column labeled “Q1 Year 2” represents the first quarter of the current year. These are the most recent data that this service has been provided for Sample General Hospital and are the data used in the comparison columns that follow.
- The column labeled “50th %ile” represents the 50th percentile of all of the hospitals in the comparison group that supplied data for the individual line item.
- The “Variance” column compares the data from Q1 Year 2 of Sample General Hospital with the 50th percentile information from the entire comparison group.
- The column labeled “%ile Range” indicates where Sample General Hospital’s individual score fell within a percentile range.
Exhibit 28-B–1 Hospital Statistical Data
Benchmark Data Report Sample General Hospital Compared to Hospitals of Less Than 100 Beds
Benchmark Data Report Sample General Hospital Compared to Hospitals of Less Than 100 Beds
Current Quarter Benchmark
The citation provided is a guideline. Please check each citation for accuracy before use.
Annual Average
Year Q 1 Year 250%ileVariance%ileRange
Severity/Length of Stay
Average Length of Stay 3.80 3.91 4.06 –0.15 35–40
Case Mix Index (All Patients) 1.02 1.04 1.04 0.005 50–55
Case Mix Index (Medicare) 1.24 1.26 1.19 0.07 80–85
Productivity/Labor Utilization
FTE per Adjusted Occupied Bed5.11 4.68 4.44 0.24 60–65
Paid Hours per Adjusted Patient Day 29.12 26.67 25.3 1.37 60–65
Paid Hours per Adjusted Discharge 110.53 104.19 109.5 –5.32 35–40
Salary Cost per Adjusted Discharge $2,638 $2,510 $2,510 $0 50–55
Costs & Charges
Cost per Adjusted Patient Day $1,704 $1,608 $1,448 $161 70–75
Cost per Adjusted Discharge $6,467 $6,282 $5,909 $373 55–60
Cost per CMI (All Pat.) Adj. Discharge $6,328 $6,04 $5,837 $204 50–55
Cost per CMI (All Pat.) Adjusted Patient Day $1,667 $1,546 $1,408 $139 60–65
Supply Cost per Adjusted Discharge $1,046 $968 $867 $101 60–65
Supply Cost per CMI (All Pat.) Adj. Discharge $1,024 $931 $829 $102 60–65
Gross Charges per Adjusted Discharge$12,987 $14,155 $12,536 $1,620 60–65
Deductions Percentage 0.40% 58.46% 51.04% 7.42% 60–65
Net Charges per Adjusted Discharge $6,112 $5,880 $5,929 ($49) 45–50
Net Charges per Adjusted Patient Day $1,610$1,505$1,424 $8260–65
Utilization
Average Daily Census 43.15 46.36 37.69 8.67 65–70
Occupancy Percentage 41.09% 46.36% 57.66% –11.30% 10–15
Outpatient Charges Percentage 53.15% 54.02% 50.14% 3.88% 55–60
Beds in Use 100 100 66 34 90–95
Adjusted Occupied Beds 92.2 100.82 72.05 28.76 75–80
Total Patient Days Excluding Newborns 3,936 4,172 3,392 780 65–70
Total Discharges Excluding Newborns 1,036 1,068 751 317 80–85
Newborn Days as a % of Total Patient Days 6.95% 5.40% 4.61%0.79%60–65
Financial Performance—Profitability Ratios
Operating Margin –2.26 –3.18 1.95 –5.13 15–20
Profit Margin –2.26 –3.18 2.06 –5.24 20–25
Return on Total Assets (Annualized) (%) –2.37% –3.58% 1.22% –4.80% 20–25
Return on Equity (Annualized) (%) –6.56% –11.19% 4.61% –15.80% 15–20
Financial Performance—Liquidity Ratios
Current Ratio 1.28 1.19 1.9 –0.71 15–20
Quick Ratio 0.54 0.56 1.56 –0.99 15–20
Net Days in Patient AR (Days) 50.73 49 51.86 –2.86 40–45
Financial Performance—Leverage and Solvency Ratios
Total Asset Turnover—Annualized 1.07 1.13 0.99 0.14 65–70
Current Asset Turnover—Annualized 3.21 3.65 3.57 0.08 50–55
Equity Financing 0.38 0.32 0.47 –0.15 25–30
Long-Term Debt to Equity 0.77 0.85 0.56 0.28 70–75
For example, review the average length of stay information for hospitals less than 100 beds in Exhibit 28-B–1. For the Q1 Year 2, Sample General Hospital has a length of stay of 3.91 versus a benchmark comparison number of 4.06, a favorable performance against the 50th percentile by 0.15 (the –0.15 indicates an amount under the 50th percentile that, in the case of average length of stay, would be favorable). This performance places the hospital’s score in the 35th to 40th percentile of all respondents.
As the CFO already knows, Sample General Hospital is in trouble. In most cases, the facility is either at or below (worse than) the 50th percentile information. Most of the labor productivity measures are in the 60th to 65th percentile range, with the cost information in the same relative range. This indicates that Sample is spending more than the peer group for labor and supplies. The utilization statistics also present a dismal picture.
Each statistic has to be evaluated against what it means to the institution before a conclusion can be drawn. For example, the occupancy percentage for Sample is 46.36% versus the 50th percentile of 57.66%. This places Sample in the 10th to 15th percentile range for the comparison group of hospitals less than 100 beds. In terms of utilization, the CFO knows that a facility should be in the 80th to 85th percentile range to use all of its assets effectively.
What other statistics should the CFO review to assure that a higher occupancy percentage is beneficial to the hospital? The answer is average length of stay. Sample General Hospital has a length of stay of 3.91 (as discussed earlier), which is favorable compared with the peer group, but an occupancy rate that is 11.30% below the 50th percentile for the peer group of hospitals less than 100 beds. If these two statistics are observed in combination, one could say that Sample efficiently manages its patients, but just does not have enough of them.
Exhibit 28-B–2 Hospital Statistical Data
Benchmark Data Report
Sample General Hospital
Compared to All Hospitals
Current Quarter Benchmark
Annual Average Year 1Q 1 Year 250%ileVariance%ile Range
Severity/Length of Stay
Average Length of Stay 3.80 3.91 4.81 –0.91 10–15
Case Mix Index (All Patients) 1.02 1.04 1.14 –0.103 25–30
Case Mix Index (Medicare) 1.24 1.26 1.38 –0.118 30–35
Productivity/Labor Utilization
FTE per Adjusted Occupied Bed 5.11 4.68 4.87 –0.19 40–45
Paid Hours per Adjusted Patient Day 29.12 26.67 27.77–1.1 40–45
Paid Hours per Adjusted Discharge 110.53104.19 134.6–30.4110–15
Salary Cost per Adjusted Discharge $2,638 $2,510 $2,927 ($417) 25–30
Costs & Charges
Cost per Adjusted Patient Day $1,704 $1,608 $1,530 $78 60–65
Cost per Adjusted Discharge $6,467 $6,282 $7,284 ($1,001) 30–35
Cost per CMI (All Pat.) Adj. Discharge$6,328$6,041 $6,115($74) 45–50
Cost per CMI (All Pat.) Adjusted Patient Day $1,667$1,546$1,268$27880–85
Supply Cost per Adjusted Discharge $1,046$968$1,250($282)25–30
Supply Cost per CMI (All Pat.) Adj. Discharge $1,024$931$1,069($138)30–35
Gross Charges per Adjusted Discharge $12,987$14,155$17,196($3,041)35–40
Deductions Percentage 0.40% 58.46% 56.31% 2.15% 55–60
Net Charges per Adjusted Discharge $6,112$5,880$7,419($1,539)20–25
Net Charges per Adjusted Patient Day $1,610$1,505$1,529($24)45–50
Utilization
Average Daily Census 43.15 46.36 142.98 –96.62 15–20
Occupancy Percentage 41.09% 46.36% 69.38% –23.02% < 5
Outpatient Charges Percentage 53.15% 54.02% 39.64% 14.38% 85–90
Beds in Use 100 100 206 –106 20–25
Adjusted Occupied Beds 92.2 100.82 225.9 –125.09 15–20
Total Patient Days Excluding Newborns3,936 4,172 12,868 –8,696 15–20
Total Discharges Excluding Newborns 1,036 1,068 2,506 –1,438 20–25
Newborn Days as a % of Total Patient Days 6.95%5.40% 4.52% 0.87% 60–65
Financial Performance—Profitability Ratios
Operating Margin –2.26 –3.18 4.45 –7.63 10–15
Profit Margin –2.26 –3.18 4.66 –7.84 10–15
Return on Total Assets (Annualized) (%)–2.37% –3.58% 4.04% –7.62% 10–15
Return on Equity (Annualized) (% ) –6.56% –11.19% 8.46% –19.65% 5–10
Financial Performance—Liquidity Ratios
Current Ratio 1.28 1.19 2.2 –1 10–15
Quick Ratio 0.54 0.56 1.74 –1.18 5–10
Net Days in Patient AR (Days) 50.73 49 55.76 –6.77 25–30
Financial Performance—Leverage and Solvency Ratios
Total Asset Turnover—Annualized 1.07 1.13 0.93 0.2 70–75
Current Asset Turnover—Annualized
3.21 3.65 3.48 0.18 50–55
Equity Financing 0.38 0.32 0.5 –0.18 20–25
Long-Term Debt to Equity 0.77 0.85 0.59 0.26 65–70
Other statistics bear the same message. The hospital is not profitable, and much of the problem is because the cost of running the institution exceeds the availability of patients to pay the bills. In other words, all institutions have core staffing requirements, and within a certain range of volume, most costs are fixed. Sample has 100 beds in use while the 50th percentile for its peer group shows 66 beds in use. Sample’s plant is too big for its patient volume. These circumstances can mean the hospital is heading for disaster.
So what happened to Sample General Hospital? As you can surmise from the data, the previous year (labeled “Year 1” on Exhibits 28-B–1 and 28-B–2) was not favorable. Three years previous, the institution was losing money at a rate of over $1 million per month. The next two years showed improvement (even though the data still show concern), and the improvement trend continued through the year labeled “Year 2” on Exhibits 28-B–1 and 28-B–2. By using benchmarking data (and a lot of other analysis), management was able to determine and address many issues that forced this facility to perform below market averages. By improving quality, managing costs, and controlling productivity, the hospital was able to stabilize its financial position. In addition, with creative management and attention to both clinical quality and customer service, the occupancy percentage rose to above the 50th percentile. Finally, the operating margin improved dramatically. In the first quarter of year 2, the margin was minus 3.18. By the end of year 3, results showed a positive margin of greater than 2.5%, a dramatic turnaround. Benchmarking assisted in this turnaround by showing management where the need for improvement was greatest.
(Baker 417)
Baker, Judith J. Health Care Finance, 4th Edition. Jones & Bartlett Learning, 08/2013. VitalBook file.
The citation provided is a guideline. Please check each citation for accuracy before use.
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