Sie sind auf Seite 1von 26

1

EXECUTIVE SUMMARY
Riverview Community Hospital (RCH) is a not-for-profit hospital in an area that is being served by three other competitors. Its current financial standings and benefits of being fully accredited by the Joint Commission are not sufficient enough to overcome economic struggles. It must improve its financial stability in order to remain efficiently operational, providing a wide variety of services to the community. RCH struggles with maintaining costs, increasing patient volume, and generating high revenue. It has also recognized the dangers that threaten its existence. While RCH remains the leading provider of high quality of care, it faces fierce competition that is depleting its patient volume and overall profitability. After careful analysis of financial, operating, and patient characteristic indicators, RCH presents its findings and recommendations to the Senior Management. Through strategic implementation, cooperation, and open communication, RCH will be able to continue thriving in the metropolitan statistical area it serves.

TABLE OF CONTENTS
page

EXECUTIVE SUMMARY ................................................................................................. 1 TABLE OF CONTENTS .................................................................................................. 2 ABOUT RIVERVIEW COMMUNITY HOSPITAL ............................................................. 3 ANALYSIS OF RCH ........................................................................................................ 4 Analysis of Financial Indicators ................................................................................. 4 Analysis of Operating Indicators ............................................................................... 9 SUMMARY OF FINDINGS ............................................................................................ 10 Strengths ................................................................................................................ 10 Weaknesses ........................................................................................................... 11 RECOMMENDATIONS ................................................................................................. 12 Profitability .............................................................................................................. 13 Patient Volume ....................................................................................................... 13 Accounts Receivable .............................................................................................. 14 Other Recommendations ........................................................................................ 14 EVALUATION ............................................................................................................... 15 Financial KPIs ......................................................................................................... 15 Operating KPIs ....................................................................................................... 18 APPENDIX: TABLES AND FIGURES ........................................................................... 22

ABOUT RIVERVIEW COMMUNITY HOSPITAL


Riverview Community Hospital (RCH) is a 210 bed not-for-profit acute care hospital serving the metropolitan statistical area. It is well-known for being the leading provider of quality care and high patient satisfaction surveys. It has also received full accreditation from the Joint Commission, the highest of the accreditation categories that qualifies them for governmental reimbursement. While RCH continues to improve the health of its patients, it struggles to overcome financial pressures from the economy and competitors. RCH has recognized the importance of remaining financially stable in order to operate efficiently and provide the best quality of care to the patients. Various factors are necessary to decrease costs, increase profit, and generate revenue from multiple services provided. In order to address the dangers it is facing, an assessment and analysis of the issues and key indicators are required. RCH has identified internal and external issues that are affecting its overall success. The internal problems revolve around the annual net income. Maintaining patient volume is vital to generate enough revenue to cover all of the expenses. This includes both inpatient and outpatient visits. It is a difficult task to find the best way to reduce costs and expenses while still providing high quality care and affording full time employees. This has become increasingly challenging as there are two other non-for-profit hospitals and a large for-profit hospital in the area. Having these hospitals compete for the same patients decreases RCHs chances of remaining profitable. The external issues originate from the other competing hospitals, regulatory changes, and the declining economy. Adding to the challenge is the fact that RCH is the smallest hospital of the four. This could prevent the hospital from realizing the same level of economies of scale as the larger institutions. The for-profit hospital also seems to be the biggest threat as its reputation precedes themaggressively increasing its market share in the service areas. Unlike for-profits,

4 which can choose not to provide unprofitable services, RCH must offer a minimum package of services in order to qualify for not-for-profit status. Complicating matters is the fact that 2009 marked the introduction of several changes to the IRS 990 form, which all not-for-profits must complete to justify tax-exemptions. Lastly, the financial crisis from 2008-2009 likely affects RCHs financial stability, access to capital, and their patient populations ability to pay. Increased unemployment due to the recession might cause many of RCHs patients to lose employer-sponsored insurance. Although COBRA extends insurance for eighteen months after termination, many unemployed people forego insurance altogether because the premiums are so expensive without employer subsidies. As a result, RCH might have a higher bad debt expense for patients who cannot pay, and patients who do pay might take longer to pay off their medical bills.

ANALYSIS OF RCH
Analysis of Financial Indicators* DuPont
The DuPont analysis provides a guide to understanding a hospitals return on equity (ROE). Using this analysis allowed us to better understand RCHs ROE by analyzing the superior or inferior source of the return. Calculating the ROE is essential for communicating to the board of trustees and key administrators the efficient use of capital supply. The DuPont equation decomposes ROE into three parts: 1) profitability measured by the total margin, 2) operating efficiency measured by the total asset turnover (TAT), and 3) financial leverage measured by the equity multiplier. Financial leverage in the DuPont equation refers to the use of debt to acquire additional assets. First, the profit margin is determined by the ratio of net income to total revenues. From this ratio we can better understand the percentage of total revenues, both operating and non-

Complete list of financial indicators used can be found in Appendix: Table 1.

5 operating, converted into net income. In our current fiscal year, our profit margin is 6.75 percent, which is higher than the 3 to 5 percent national average. It is important, however, for RCH to note the sharp decreasing trend that the profit margin has exhibited throughout the five-year period. Beginning in 2005, we see an 11.38 percent profit margin; however, we currently sit at a 6.75 percent profit margin. This is a 4.63 percent decrease, and we see notable decreases from 2006 to 2007 and from 2007 to 2008. From 2006 to 2007, RHC experienced a 2.53 percent decrease in profit margin (from 11.28 to 8.75 percent). It also saw a 2.27 percent reduction in the profit margin (from 8.75 to 6.48 percent). Evaluating the profitability component of the return on equity indicates that the hospital has experienced an increase in total revenue each year, with the operating revenue following the same trend. The non-operating revenue seems to fluctuate, although the non-operating budget has increased from 1.305 million to 1.834 million over the five-year period. We see, however, that the net income has decreased from 3.070 million to 2.458 million with sharper decreases from 2006 to 2007 and 2007 to 2008. This could be attributed to the increase in certain expenses in those years. From 2006 to 2007, RHC saw a rise in the salary and wage expense and depreciation. From 2007 to 2008, on the other hand, RHC saw a significant increase in fringe benefits expense and interest expense. Second, analyzing our operating efficiency allowed us to use the TAT ratio to determine how RCH uses its assets to produce revenue. The TAT, more specifically, measures the amount in revenue earned per dollar invested in total assets. The standard rate for hospitals is typically one dollar earned per one dollar invested. The hospital currently stands at earning .67 cents per one dollar invested in total assets, which is below the industry standard. The TAT ratio has fluctuated throughout the five-year period, experiencing a sharp decrease of 2.15 percent from 2005 to 2006. It continued to decrease steadily from 2006 to 2007, then again from 2007 to 2008 with a 4.43 percent decrease. Finally, RCH experienced a dramatic rise from 2008 to 2009 with a 5.87 percent increase. As mentioned earlier, our total revenues have increased as well as an increase in total assets. Further analysis, however, indicates that we must look at the rate of

6 growth for total revenues and total assets. In order to improve our TAT ratio, our total revenues must outpace our acquisition of assets. This is evident in 2009, when the rate of growth for total assets and total revenues each is approximately 2 million a year. We also saw, however, an increase of 4 million with the same trend of a 2 million increase in net assets. This increase of revenue generated a larger TAT ratio. The financial leverage or equity multiplier illustrates how much debt can be used to acquire additional assets. The ratio can be calculated by dividing one by the equity-financing ratio (net assets divided by total assets). Similar to the asset turnover ratio, there is a fluctuation in the equity multiplier as well. RCHs equity multiplier decreases from 2005 to 2007, increases from 2007 to 2008, decreases again from 2008 to 2009. The decrease is accounted for by a larger equity-financing ratio, while an increase is simply a result of a smaller-equity financing ratio. Generally, the hospital experiences an equity-financing ratio that is higher than the industry standard. It is important, nonetheless, to note that our largest equity multiplier years mirrored the years we had our lowest equity-financing ratios. Lastly, finding the product of the profit margin, the TAT, and the equity multiplier results in the ROE. Although there has been fluctuation in the asset turnover rate and the equity multiplier, RCH has seen a general decrease in all components of the ROE equation. Thus, unsurprisingly we see a decrease each year, except in 2009, in ROE. The 2009 increase is simply a result of an increase in profit margin and TAT ratio from 2008. From this analysis we can conclude that If we are to improve the financial conditions of the hospital, we must improve our profitability and operating efficiency. We must have a better dollar return in revenue per dollar invested in assets.

Profitability
Understanding the profitability of the organization allows us, as an institution, to understand the hospitals ability to generate income. In addition to the profit margin (analyzed in

Percentage changes are expressed in Table 2.

7 the DuPont analysis), it is also worthwhile to look at our return on assets (ROA). Through this indicator, we see the net income earned for each dollar invested in assets. In 2005, our return on assets of 7.75% essentially equated to $.77 in profits generated from each dollar invested in total assets. As our ROA increases, we can assume that we are productively using our assets. Unfortunately, we have seen a decrease in our ROA throughout the 5-year time period. The decrease in ROA is a result of a net income that is decreasing and total assets that are increasing. More in-depth with net income, it is important to note that the decrease stems from both the revenues and expenses increasing at an increasing rate. Revenues for RCH have increased from 5% in 2005 to 12% in 2009 while expenses have increased in a similar fashion from 5% in 2009 to 12% in 2009, as well. Looking at the percentage changes in the growth of both the revenues and expenses, RCH must at least control the rapid growth of expenses. We see some progress in mitigating expense growth from 2008 to 2009 as expense growth was controlled to 1% change in growth (from 11% in 2008 to 12% in 2009).

Liquidity
Days cash on hand represents the number of days RCH can continue paying off its financial obligations without any additional cash inflow. The average for comparable hospitals is between 30 and 45 days. RCH has exceeded the range up to the most recent year; however, as of 2009 it is at the lower end with 32 days of cash on hand. This indicates that RCH has become less liquid over time, and it has fewer resources to cover its expenses. One reason for this could be because the days in accounts receivable is alarmingly high, compared to the national average of 45 to 55 days. This means that on average, it takes them almost two months to collect receivables once services have been provided. From 2005 to 2007, there was a significant decrease that approached the national average. Over the past two years, however, it has begun to surge again. It is interesting to note the inverse relationship between days cash on hand and days in accounts receivable when the two graphs are

Liquidity graphs can be seen in Appendix: Figs. 1 and 2.

8 compared .This is could be due to the long length of time it takes to convert the receivables into cash.

Activity
The fixed asset turnover (FAT), calculated by dividing total revenue by net fixed assets, measures the hospitals efficiency in its fixed asset investments. It specifically measures how much revenue is generated by each dollar of net fixed assets. Compared to the average of 2 dollars of revenue for each dollar spent on net fixed assets, RCH is doing quite poorly since its ratio has been below 1 for the past five years. Based on the cash flow statement, RCH has purchased between $4 to $7 million worth of fixed assets every year since 2005. This helps to explain the low FAT in two ways. First, any increase to the net fixed assets will decrease the overall FAT since the denominator is also increasing. Second, depreciation is subtracted from gross fixed assets in order to obtain net fixed assets. Since recently purchased equipment has less depreciation, one would expect net fixed assets to be relatively high. Therefore, it is important to consider the average age of property, plant, and equipment to put the FAT in perspective. The average age of property, plant, and equipment is 10 years for most hospitals. In contrast, RCHs average age of property, plant, and equipment has been around 5 to 6 years for the past five years.

Capital Structure
To supplement the understanding of the capital structure, it is useful to look at the times interest earned ratio (TIE). It is the proportion of earnings available to pay each dollar of interest expense. For most hospitals, the interest expense is being met by current accounting income by a multiple of 2 to 3. 2007 was a turning point for RCH in this regard as well. Over the past two years, RCH has gone from having an above-average TIE to falling closer to the lower end of the spectrum. RCHs debt service coverage (or pre-interest cash flow divided by total debt obligations) had a similar trajectory over the past five years, going from above average to slightly above the

9 minimum standard from 2007 to 2008. This likeness is to be expected since the calculations are similar; however, the debt service coverage differs in two significant ways. First, it acknowledges that cash flow and not accounting income pays for expenses. Second, it includes both principal payments and interest expense.

Analysis of Operating Indicators Volume


When looking at the volume operating indicators, it can be seen that over time the amount of inpatient volume, inpatient days, and average daily census has decreased since 2005. This volume change can be possibly attributed to the increase of competition within the community, as well as the increase in outpatient services as the amount of outpatient visits has increased since 2005. This reflects the boards decision in 2004 to significantly expand outpatient services to avoid losing patients to other providers, who began offering traditional inpatient procedures in an outpatient setting. Regardless of the change in inpatient volume, the occupancy rate and the average length of stay (ALOS) have remained constant with minor fluctuation over the past five years. ALOS remains under the industry average annually which can indicate excellence in utilization and clinical management as resources are being used efficiently and risk to patients is decreased with lower ALOS.

Patient Characteristics
Upon looking at RCHs patients, the case mix is approximately near the industry averages. This suggests that RCH has an average complexity of inpatient services provided. Inpatient revenue constitutes a majority of the gross patient revenue; however, the fact that there are more outpatient visits should not be overlooked. While this has decreased over the years, 73.6 percent of revenue was due to inpatient charges as of 2009. This percentage is slightly higher than the industry average of 60 percent. RCHs Medicare reimbursement rate is also lower than the average amount of Medicare payments, with about 30 percent of Medicare

Complete list of operational indicators used can be found in Appendix: Table 5.

10 patients each year compared to the average 40 to 45 percent nationally. Therefore, RCH has lower governmental reimbursements.

Price, Cost, and Profitability**


Further analysis of RCH operating indicators includes price, cost, and profitability of the hospital. With the growing costs of healthcare, it is no surprise to see that the costs per inpatient admission/discharge and per outpatient visit are all increasing. Alongside these changes are increases in the price per both outpatient visits and inpatient admission. Fortunately, RCH has been able to collect more profit due to low contractual adjustments. RCHs current contractual allowance percentage is 16.65. Despite this increase over time, RCH remains significantly lower than the industry average of about 50 percent. This signifies that RCH loses a small amount of patient revenue due to allowances and discounts. RCH is actually losing more money per outpatient visit over time, even though profitability continues to increase per inpatient discharge. The overall changes in these indicators can be attributed to a number of internal and external factors, such as decreased patient volume, increase in expenses and change in payer mix.

SUMMARY OF FINDINGS
After analyzing a number of the financial and operating indicators, RCH was able to identify its strengths and weaknesses as an organization. While it excels in a number of areas such as clinical expertise and inpatient profitability, there is room for improvement in maintaining overall financial stability.

Strengths
RCH prides itself in maintaining high patient quality of care and satisfaction levels. It provides extensive outpatient services that generate enough revenue to cover its expenses, as well as provide charity care without damaging its stability. RCHs full accreditation by the Joint Commission enables them to receive governmental reimbursement from Medicare and

**

See Appendix: Fig 3.

11 Medicaid, which constitutes a majority of its payer mix. Its short ALOS over the past five years has also been consistently below the average, which could be attributed to efficient use of resources and utilization of clinical management. A lower ALOS is beneficial to both the patient and the hospital because it is less costly and risky for them, and opens up hospital resources for other use. Overall, it gives RCH a competitive edge to accommodate higher volumes and also to improve patient satisfaction with efficient delivery of care. According to the high equity-financing ratio, RCH is in a good position to borrow money if necessary. Its overall cost of capital is 10 percent, indicating that RCH can borrow funds at a 10 percent interest rate. Having a higher equity-financing ratio also positively affects our bond rating since RCH is not highly leveraged. On the operations side, there are a number of strengths that can be identified by an analysis of the operating indicators. One of these strengths is high quality performance. As previously stated RCH has a relatively low ALOS and is consistently below the average ALOS of 5.4 days. Short ALOS is key indicator of clinical management and predictive of risk to patients. Additionally, it has been stated that RCH has received full certification from the Joint Commission and maintains high patient satisfaction scores.

Weaknesses
From analyzing the financial and operational indicators, we can also see a number of weaknesses within the organization. A major weakness for RCH is its payer mix, which heavily features government programs. Between 2007 and 2008, many of the financial indicators, such as days cash on hand, days in accounts receivable, and debt service coverage, which all went from generally favorable trends to negative trends. It could possibly be a result of the Medicare, Medicaid, & SCHIP Extension Act of 2007, there were more patients with governmentsponsored insurance. This is reflected in the stark increase in contractual allowances from $1.729 million to $5.196 million between 2007 and 2008. These represent significant revenue deductions.

12 One of the weaknesses is the cash flow within the hospital, more specifically, RCH has a low days cash on hand and a high days in accounts receivable. Overall cash and investments decreased dramatically from 2008 to 2009, falling from over $5 million to just under $2.8 million, which is due to both external and internal factors. Externally, the financial crisis impacted their investments, which had a net cash outflow of $4.328 million. Internally, RCH made significant loan repayments, totaling $1.427 million. This resulted in low liquidity with fewer resources to cover its expenses. Another one of RCHs weaknesses is its decreasing inpatient volume. As previously stated, inpatient value must be retained because there are greater economies of scale and fixed costs are spread over a greater number of patients. Inpatient volume is important to profitability. While inpatient services earn over 80% of the gross patient revenue, this amount has been decreasing most likely due to the decreasing inpatient volume. This dip in average daily census and inpatient admissions can be attributed to the competition within the region, as well as the shift of certain procedures from an inpatient setting to an outpatient setting. We can identify that an additional weakness of RCH is its outpatient services. While RCH increased its outpatient services to meet demands and remain competitive, these services have not been as profitable. In fact, after looking at the operating indicators, RCH loses money per outpatient service. This loss in revenue has remained increased over the past years. In order to increase its profitability RCH must consider changing one of its weakest links: outpatient services.

RECOMMENDATIONS
RCH must capitalize on its strengths and work to alleviate its weaknesses. Outlined below are a variety of recommendations that senior management can implement in order to see organizational success on both financial and operational levels.

13

Profitability
One of the weaknesses of RCH that we have identified is the low profitability. There are a number of steps that administrators can take to help increase the patient revenue profits, especially if we focus on the outpatient services. One of the first steps to improve profitability is to decrease costs. With a decreasing volume of inpatient admissions and an increase in unprofitable outpatients visits RCH can consider attempt to increase profitability through decreasing expenses. This can be done in a number of ways including downsizing services and promoting a more efficient use of resources. Employees can use resources more efficiently, being cautious of underuse and overuse of medical supplies and equipment. Additionally utilizing process improvement methods such as Lean Six Sigma can help decrease waste and overall decrease costs. Through analyzing the services and the expenses for each, RCH may also consider downsizing some of the outpatient services that are provided to patients. Another way to increase profitability of RCH is to also increase the revenue. This may be a more arduous task for administrators because of external factors that may limit growth such as the competition between hospitals. One suggestion for increasing revenue is increasing the patient volume, especially for inpatients that have proved to be more profitable which will later be discussed. Another riskier option to increase income is to increase prices. Because of the competition within the market RCH may be a price-taker and this may not be a viable option.

Patient Volume
As previously stated, it is vital to increase patient volume in order to sufficiently fund daily operations, as patient volume greatly dictates revenues. By strategically marketing and promoting its high patient satisfaction and clinical quality, RCH can increase its inpatient volume. RCH can increase its market share in the area with a carefully devised strategic plan that will attract patients away from its competitors. Since RCH has a low ALOS compared to

14 industry standards, RCH can increase admissions. A higher occupancy rate will generate revenue from multiple services provided.

Accounts Receivable
One of the other weaknesses that we have been able to identify is the cash flow within the hospital. In order to increase its liquid assets and improve the cash flow, we can suggest restructuring RCHs billing department, especially in regards to the collection of accounts receivable. By billing patients or payers earlier and incentivizing quicker repayments, RCH can have more cash on hand and decrease its days on net accounts receivable. Additionally, RCH can attempt to attract more patients from private payers as government reimbursements are often received in a slow manner. Looking more into the revenue cycle, proper documentation can reduce the chances for errors in medical bills and diagnostic coding. These errors affect the revenue cycle, creating a snowball effect that not only affects the financial department but other patient services departments as well. For example, it will take longer than the average 30 days for Medicare to reimburse the hospital if adjustments and verifications need to be made. The average days in accounts receivable would be affected, which subsequently affects the cash reserves. A team or committee can be formed to monitor the progress and efficiency of proper documentation. This will help to ensure that current standards are maintained. These changes will allow RCH to decrease days on account and receivable and increase the amount of liquid assets. RCH can also cover all of its liabilities and expenses, and will decrease the chances that accounts receivable will be written off as bad debt. Having more cash on hand will allow RCH to repay liabilities on a sales discount that reduces the payment owed if paid in a specific time period.

Other Recommendations
In addition to the previous suggestions, there are a number of smaller changes that we can recommend that will overall help the success of the organization. One suggestion is to

15 solicit more donations by promoting the tax advantages to donors. Increasing the amount of donations will help cover expenses and overall help increase the bottom line. As previously stated, improving the payer mix may also benefit the hospital. Not just looking at reimbursement structures and payers, RCH can also promote for a higher percentage of inpatients. If outpatient services are still leading to loss, RCH can promote the use of more inpatient services if necessary.

EVALUATION
After implementing the proposed recommendations RCH must continually work to ensure that these changes are upheld throughout the organization. Moreover, executives should evaluate the organization according to a number of key performance indicators (KPIs) to determine the effectiveness of the recommendations and ensure the intended results are seen.

Financial KPIs Days Cash on Hand

Liquidity Indicator
Current (2009) 32.72

Goal

Days Cash on Hand

Increase

Greater than 40

The days cash on hand measures the number of days the hospital could fulfill it daily cash obligations without new cash resources becoming available. This is a good key performance indicator as it illustrates the buffer in cash that can help the hospital remain liquid even in difficult economic situations. In a difficult economic climate, like we experience today, this measure is noteworthy to our board of trustees, senior leadership, and creditors. High values of

16 days cash on hand imply a higher liquidity and is viewed favorably by creditors. Thus, striving to have a high days on cash value could be essential to the hospital borrowing more, if needed, at a favorable rate during this economic period. The industry averages from about 30 to 45, but because of its value wed like to aim to increase days cash on hand to the higher portion of this range.

Days in Accounts Receivable

Liquidity Indicator
Current (2009) 78.24

Goal

Days Cash in Accouts Receivable

Decrease

Less than 55

Days in Accounts Receivable is an important indicator to monitor because it indicates how much time it takes to collect a bill. Ideally, it should be low so that RCH can use the money to pay back loans to reduce interest expense or invest it. RCH could also possibly benefit from a sales discount if they are able to pay back suppliers within a certain amount of time, so there is an opportunity cost for having their assets tied up in accounts receivable for long periods of time. We would like to see this amount meet the industry averages and decrease to between 45 to 55 days.

17

Equity Financing Ratio

Capital Indicator
Current (2009) 2.16

Goal

Debt Service Coverage

Increase

Greater than 4

The debt service ratio measures RCHs ability to repay loans. Historically, RCH has been on the upper bounds of creditworthiness, but since 2007 it has been decreasing. Although this is not cause for concern now, since RCH has a favorable equity-financing ratio, it should be monitorerd to ensure that the hospital is solvent.

Average Age of Plant

Activity Indicator
Current (2009) 0.96

Goal

Average Age of Plan

Decrease

Less than 10

An activity indicator should be included for a comprehensive dashboard. Average age of plant is the best choice since total asset turnover is accounted for in the Return on Equity, and fixed asset turnover does not give a complete picture since it depends on the size of the hospital and the average age of the plant. The average age of the plant is also a good indicator for determining when the hospital should invest in modernization and replacement, which is a characteristic of top performing hospitals.

18

Return on Equity

Profitability Indicator
Current (2009) 7.66%

Goal

Return on Equity

Increase

Greater than 8%

The return on equity (ROE) ratio allows the hospital to see the amount of net income generated in relation to the hospitals net assets. This indicator is strong because it includes a profitability indicator (total margin), a capital structure indicator (equity financing ratio), and an activity indicator (total asset turnover). Taking all of these factors into account, the ROE will allow key stakeholders to accurately determine how profitable the hospital is. Understanding the profitability through this indicator well could give the hospital a competitive advantage as ROE indicates whether the hospital is earning profits with the equity present in the hospital. We would like this value to be greater than the industry average of about 8%.

Operating KPIs Profit per Outpatient Visit

Profitability Indicator
Current (2009) ($240.60)

Goal

Profit per outpatient vist

Increase

Greater than $0

19 One of the most notable weaknesses of RCH is the lack of profitability of outpatient services. While RCH is maintaining and expanding their services to remain competitive, these outpatient services are costing the hospital millions of dollars per year. As of 2009 RCH loses a little over $200.00 per visit. One goal for RCH to maintain is to reduce this loss by increase revenue or decreasing expenses and overall aim to provide a profitable service that does not result in any losses.

Average Daily Census

Volume Indicator
Current (2009) 109.76

Goal

Average Daily Census

Increase

Greater than 110

One KPI to monitor is the average daily census. As previously stated, volume of the hospital is a major concern of managers. In the recent years there has been a decrease in the annual inpatient days and therefore the average daily census. A higher volume allows providers to use assets efficiently, cover fixed costs and grow; therefore, RCH would want to increase this amount. One goal for RCH to work towards is to prevent any decrease in ADC therefore should aim for an average daily census of about 110, higher than the previous year.

20

Occupancy Rate

Volume Indicator
Current (2009) 61.69%

Goal

Occupancy Rate

Increase

Greater than 67.25%

One of the KPIs to benchmark is the occupancy rate. Like average daily census, RCH would like this value to be higher. A higher occupancy rate is better because with more inpatient patients there is a higher source of revenue. The increase from 2008 and 2009 can be attributed to the reduction in the amount of staffed beds, not an increase in volume. RCH can aim to either use their current resources more efficiently or increase the volume. Currently, RCHs occupancy rate is in the median to upper quartile of the hospitals its size, therefore a good goal for RCH is to increase the occupancy rate and move into the upper quartile.

Medicare Percentage

Patient Characteristic Indicator


Current (2009) 31.96%

Goal

Medicare Percentage

Decrease

Less than 31.25%

Patient characteristics is also important to the operations of a hospital, therefore one should be included in this new dashboard for operational indicators. From analyzing the current patient mix, it can be seen that in 2009 31.96% of patients are Medicare patients, placing RCH

21 in the median to lower quartile. Because government payers generally reimburse at later days, are less generous and provide less reimbursement than other payers, RCH should attempt to decrease this amount and decrease the Medicare payer mix by increasing the amount of private payers. RCH should move in the lower quartile (less than 31.25% Medicare patients).

Contractual Allowance Percentage

Price Indicator
Contractual allowance percentage Current (2009) 16.65%

Goal

Decrease

Less than 12.12%

Another goal for RCH to aim for is to decrease the contractual allowance percentage. This measures the amount of revenue that is lost because of allowance and discounts. In the recent years this amount has increased. To maximize revenue and profits RCH should aim to decrease their contractual allowance percentage by possibly renegotiating contracts or improving their payer mix. Currently RCHs contractual allowance percentage is 16.65%, which is the in the lower to mid-quartile. RCH can attempt to move into the lower quartile and decrease this to less than 12.12%.

22

APPENDIX: TABLES AND FIGURES


Table 1. List of relevant financial indicators.
Year DuPont Analysis Profit Margin TAT 1/EFR ROE Profitability Operating Margin Non-operating Gain Capital Structure Equity Financing Ratio Times Interest Earned Debt Service Coverage Activity Fixed Asset Turnover Average age of plant Liquidity Days cash on hand Days in a/r 2005 2006 2007 2008 2009 Industry Avg. 6.75% 67.10% 1.692 7.66% 2.94% 2.20% 59.10% 2.38 2.16 3% - 5% 1 8% 1% - 3% 5% 40% - 50% 2 to 3 2 to 4

11.38% 68.05% 1.820 14.10% 4.18% 1.78% 54.94% 3.29 4.14

11.28% 65.90% 1.732 12.88% 3.96% 1.55% 57.73% 3.46 4.07

8.75% 65.66% 1.659 9.54% 3.65% 1.72% 60.27% 3.23 4.77

6.48% 61.23% 1.787 7.09% 3.30% 2.91% 55.97% 2.32 2.16

0.92 5.17 57.79 84.13

0.89 5.10 90.82 64.76

0.84 5.03 68.08 55.25

0.79 5.39 66.87 67.73

0.86 6.12 32.72 78.24

2 10 30 - 45 45 - 55

23

Table 2. Percentage change of revenues and expenses.


Revenue Percent Change 2005 26.966 2006 28.497 6% 2007 30.033 5% 2008 32.429 8% 2009 36.416 12%

Expenses Percent Change

2005 23.898

2006 25.283 6%

2007 27.404 8%

2008 30.327 11%

2009 33.958 12%

Table 3. Common Size Net Patient Revenue


2005 GPR Inpatient Outpatient Gross Patient Revenue Revenue Deductions Contractual Allowances Charity Care Total Deductions Net Patient Service Rev. 0.84 0.16 2006 0.81 0.19 2007 0.80 0.20 2008 0.76 0.24 2009 0.74 0.26

0.08 0.06 0.14 0.86

0.07 0.06 0.13 0.87

0.05 0.07 0.12 0.88

0.14 0.07 0.20 0.80

0.17 0.07 0.23 0.77

Table 4. Common Size Statement of Operations


2005 REVENUES Net patient service revenue Other revenue Total revenues EXPENSES Salaries and wages Fringe benefits Interest expense Depreciation Provision for bad debts Professional liability Other Total expenses Excess of revenues over expenses 2006 2007 2008 2009

95.2% 4.8% 100.0%

95.6% 4.4% 100.0%

95.9% 4.1% 100.0%

94.3% 5.7% 100.0%

95.0% 5.0% 100.0%

40.2% 5.5% 5.0% 6.3% 2.0% 0.4% 29.2% 88.6%

39.1% 6.1% 4.6% 6.9% 2.1% 0.6% 29.4% 88.7%

40.8% 6.1% 3.9% 7.8% 2.1% 0.5% 30.1% 91.2%

38.4% 7.4% 4.9% 8.2% 2.0% 0.6% 31.9% 93.5%

38.4% 7.1% 4.9% 7.6% 2.1% 0.6% 32.5% 93.3%

11.4%

11.3%

8.8%

6.5%

6.7%

24

Days Cash on Hand


100 90 80 70 60 Days 50 40 30 20 10 0 2005 2006 2007 Year 2008 2009

Figure 1. Days Cash on Hand over time. Industry average of this indicator has been shaded in grey.

Days in Net Accounts Receivable


90 80 70 60 Days 50 40 30 20 10 0 2005 2006 2007 Year 2008 2009

Figure 2. Days in Net Accounts Receivable over time. Industry average of this indicator has been shaded in grey.

25

Table 5. List of relevant operational indicators.


2005 Volume Inpatient Admissions Inpatient Days Average Daily Census Beds Occupancy Rate Outpatient Visits Case Mix Inpt Revenue % Outpt Revenue % ALOS Bad Debt/Charity Percentage Medicare Payment Percentage Price Gross price per Inpt Net price per Inpt Contractual allowance % Gross price per Outpt Net price per Outpt Cost Cost per Inpt Dc Cost per Outpt visits Profitability Profit per Inpt Dc Profit per Outpt Vist 9680 45296 124.099 192 64.63% 30754 1.2531 84.13% 15.87% 4.679 7.71% 31.07% 2006 9311 45983 125.981 196 64.28% 31960 1.2674 80.90% 19.10% 4.939 8.14% 31.79% 2007 8784 44085 120.781 193 62.58% 32285 1.2869 79.99% 20.01% 5.019 8.42% 30.98% 2008 8318 42434 116.258 197 59.01% 32878 1.2993 76.15% 23.85% 5.101 8.26% 34.38% 2009 8576 40062 109.759 178 61.66% 36796 1.3161 73.60% 26.40% 4.671 8.43% 31.96%

$ 2,599.28 $ 2,650.93 8.32% $ 154.39 $ 8.34 $ 1,925.10 $ 171.07 $ $ 725.93 (162.66)

$ 2,714.53 $ 2,925.14 6.57% $ 186.76 $ 8.52 $ 2,064.33 $ 189.67 $ $ 861.14 (181.48)

$ 2,973.25 $ 3,278.23 5.30% $ 202.42 $ 8.92 $ 2,342.10 $ 211.58 $ $ 936.23 (203.08)

$ 3,504.21 $ 3,675.88 13.57% $ 277.69 $ 9.30 $ 2,672.40 $ 246.30 $ 1,003.88 $ (236.70)

$ 3,873.13 $ 4,032.42 16.65% $ 323.73 $ 9.40 $ 2,888.41 $ 249.67 $ 1,144.42 $ (240.60)

26

RCH Profitability
$40.00 $35.00 Amount (in millions) $30.00 $25.00 $20.00 $15.00 $10.00 $5.00 $2005 2006 2007 Year 2008 2009

Figure 3. RCH Profitability over time.