Early Warning Signs

Never has the phrase “time is money” been more true for hospitals than right now.

It used to be that an executive team could wait for quarterly or even annual reports to amend processes, shift budget funding, change labor allocations or make any number of changes in operations based on what those reports told them about the efficiency of their resource utilization.

No more.

These days, if a hospital’s leadership team isn’t reacting to daily or weekly reports covering everything from patient volumes to staffing to cash coming in the front door, they’re probably bleeding red on the balance sheet. Welcome to the 21st century world of hospital management, where leaders try to offset declining reimbursements, rising labor costs and razor-thin supply margins with smarter, faster, better management. That means being able to access real-time or close-to-real-time financial measurements that help hospitals react more quickly—not only to salvage their bottom line, but also to meet their mission of providing better patient care.

What metrics?

Now that the concept of scorecarding reached the majority of hospitals, selecting which metrics to regularly measure and set goals around has become the new frontier.

Vincent Pryor believes in the power of frequent measurement of key scorecard data, as well as manipulating processes to improve those metrics. As chief financial officer of a hospital where 68 percent of revenue comes from Medicare or Medicaid, Pryor says obtaining accurate measures and efficiently utilizing resources is the key to winning a life-or-death financial struggle. Ingalls Memorial Hospital in Harvey, Ill., the 425-staffed-bed hospital where Pryor has been CFO since 2002, was facing an $11 million loss from operations as recently as the 2000 fiscal year.

“Investments were keeping us in the black on net income, but we were going to consume ourselves if we didn’t show operating profit,” he says. Pryor came aboard immediately following a quick operational turnaround led by FTI Cambio Health Solutions, a Brentwood, Tenn.-based consulting firm. Those efforts included some “slash and burn” cost-cutting measures, says Pryor, leading the system to an operating profit of $8 million in 2001. But one-time savings “wouldn’t sustain the turnaround,” he says. To ensure long-term stability, Pryor started tracking key metrics daily, and the hospital implemented a software system that would transmit to managers daily and weekly drilled-down operating reports.

On a daily basis, Ingalls’ finance department monitors volume activity such as admissions, outpatient visits and emergency department visits, as well as the shift-staffing levels needed to accommodate those volumes. Further, Pryor can track relationships between those factors and revenue to see in real-time whether something looks amiss. “For example, today I noticed that given the volume, our revenue looked light,” he says. After an immediate review, Pryor’s staff found unsubmitted charges that were “sitting on someone’s desk.” In the past, such problems might have gone undetected for weeks—or even forever. “Lost charges” are an all-too-commonly accepted outcome in the hospital business, Pryor says.

“We’ve been very accepting in this industry that charges get in when charges get in,” he says. “But if you don’t track it closer than that, you see a lot of charges that are missed.” Missed charges, especially on outpatient care, Pryor says, have a significant impact on Ingalls’ bottom line. He says that with minimal effort, CFOs can implement fairly robust inpatient and outpatient revenue tracking that can be measured against volume on a daily basis in “most departments.”

His challenge is in measuring labor, another considerable cost center, more often than biweekly. “We’re creating staffing standards for each department, but they only work if the hours getting paid are current and if you can pull in the volume for that period,” he says. “The easy part is the volume, but it’s almost impossible to get people to be completely accurate, on time and attendance systems daily.”

Transparency and automation

At Saint Clare’s Health System, a four-hospital system in Denville, N.J., financial metrics have become the star of the show—or the STAR. The monthly statistical trend analysis report (STAR) is available to management to help them catch problems with billing, charge capture and other important metrics before it’s too late. Additionally, the system’s CFO and managers track and react to daily reports that measure incoming cash to date against budget, discharge-not-final-billed and other key metrics. That way, “if you have a quick spike you can take immediate action,” says Rich Temple, the system’s chief information officer, to whom the revenue cycle is no alien concept. “If it sits there for several days, you may be forfeiting money because you didn’t catch everything because you’re under the gun.”

Saint Clare’s management believes in near-full transparency when it comes to financial metrics, says Temple, a former McKesson Corp. revenue-cycle expert who contends that it’s simply too costly to have any secrecy on such metrics.

Understanding the pain points of the revenue cycle process is a big advantage for him, says Temple. Ideally, even weekly and daily reporting often isn’t good enough. Saint Clare’s recent financial push has been to integrate Web-based tools that enable any senior leader or manager to log in and get a quick snapshot of the work in his or her department and determine trends and problems—often in real-time. “The key is that it allows you to take remedial action on things that before you had to wait until month-end,” Temple says.

Best-practice financial management depends less on technological whiz-bang than on senior management’s willingness to share vital financial information with those in a position to do something about it, Temple says. “There should really be no secrets in operations, and I mean that down to the floor-manager level. Anyone responsible for maintaining and developing budgets ought to be able to go in and view operational financial information that’s relevant to their world in as close to real-time as possible so that they can adjust their assumptions based on actual volumes, not projections,” Temple says. “Transparent systems allow them to create reports and more closely monitor the financial health of the organization at times other than month-end or year-end.” With the tools Temple is developing, floor-level managers, for example, can more quickly adapt to changing business realities in staffing and supplies—huge expenses on hospital budgets that often are not closely aligned with the reality on the ground.

Like starting over

Nancy Steiger knew San Mateo (Calif.) Medical Center had problems when she came aboard as CEO in March 2003, and not just because it was a county-owned safety net hospital that was losing money providing healthcare for the roughly 10,000 to 12,000 of the county’s uninsured population who sought care at her facilities. Despite that challenge, she says, many of San Mateo’s problems stemmed from the fact that strategic, actionable performance information was almost nonexistent with the exception of year-end reports—by which time it was too late to change the processes that caused the inefficiency.

Critical to any turnaround was the ability to put tools in place “so we could understand what was happening now and not wait for the end of the year,” she says. “It’s kind of hard to turn anything around when you don’t know which way the wind’s blowing,” says Steiger, whose 370-staffed-bed hospital was $9 million in the red on operations the year prior to her arrival. The hospital also owed the county about $60 million. “It’s hard to innovate when you don’t have information,” she says, referring to financial reports for which statistics had been hand-calculated. “We had lots of data, but no information.”

Steiger volunteered San Mateo as a beta site for the new Web-based decision-support software from Organizational Intelligence LLC, a Portland, Ore.-based company, in the hope that its service would put real-time statistics, revenue and expense information in managers’ hands. The waiting paid off, she says. “I thought it would take a year. It’s been two, but we’re almost there. We really had to celebrate the small steps.”

The first of those small steps was with the payroll system so managers could look at biweekly payroll reports measured against procedures and patient volume. That allowed departments to measure productivity and use of premium and outside labor. Such information helped managers make decisions about staffing—such as having too many nurses assigned to one area and too few in another—on a much more timely basis. But to Steiger, there’s still room for improvement.

“I certainly had to change my expectations. I was used to looking at staffing every two hours,” says Steiger, who worked at a high-acuity trauma center prior to coming to San Mateo. “For now, I’m happy to look at it on the pay-period level.”

The daily dashboard

Greg Mason doesn’t deal much with decision-support software like San Mateo’s. That’s because he’s usually called in after heads have rolled in the executive suite. He says in many cases, he wouldn’t be there if senior leadership had done a good job tracking and reacting to financial metrics and adjusting to unexpected swings in staffing costs, collections, or charge capture.

“In a turnaround situation, what we want to get our arms around is cash flow, so we track it at a detailed level,” says Mason, a managing director with FTI Cambio. In the past, Mason has served as an interim CFO at hospitals in need of a financial makeover. In such situations, he sets up a daily dashboard report that fits on one sheet of paper that tracks cash, which typically is “very low, usually, and in a critical state.” He and his staff track income, outlay, how much is spent on salaries, vendors and benefits. Also on the sheet might be intense tracking of accounts receivable and patient volumes versus historical activity. “We have to know how deep the hole is,” he says.

In a turnaround situation, even such rudimentary tracking of metrics might be unfamiliar to much of the staff, he says, or the facility wouldn’t be in need of a turnaround in the first place. “As you track these things on a daily basis as a CFO, you don’t have to be down in the details, but you develop a sense of what the numbers should be. A good CFO will quickly notice changes through these monitoring tools,” he says, before adding, “I’m not talking about poring over stacks of computer reports.”

He leaves such analysis for the new permanent CFO, who can decide for himself which vendor, if any, he’s most comfortable with and who can provide the level of detail, accuracy and timeliness they need with financial reporting (see “Choosing the Right Vendor” on p. 30). He says significant expense savings can often be found in staffing, where hospitals generally have the most trouble allocating resources properly, or supplies, where inventories are typically overstocked and not tracked as closely as they should be.

Staying alert

Bill Robinson, CFO of the nine-hospital Shands HealthCare headquartered in Gainesville, Fla., says he’s come into situations in his career where he wondered how the organization could have missed the early warning signs that financial crisis was in the offing.

“I wish I could tell you these are rocket science things,” he says. “But they’re not.”

Shands acquired and merged two struggling hospitals in Jacksonville in 1999 with the idea that it would keep one academic medical center in the city. When merging the two hospitals and integrating them into Shands HealthCare proved difficult for a variety of reasons—Robinson says Shands Jacksonville lost $53 million in 2000 and had a negative net worth—he turned to Mason, who worked with Robinson and was instrumental in reviving the hospital through his brand of fundamental analysis. “There are some fundamental measures that can provide an early warning,” Robinson says. He likes to keep a close handle on current ratio, a simple measure of assets divided by liabilities—and he takes it seriously when that number moves. At that point, Robinson typically starts digging to find out why.

“Never assume that it doesn’t matter. Always check at the ground, and you might find there’s some fundamental issue,” he says, adding that while most of these issues come to light in month-end reports, by then serious damage may have already been done.

Since the Shands Jacksonville turnaround, Robinson has set up financial matrices for each hospital in the system—similar in many ways, but fine-tuned somewhat to the unique operating environment of each. Reports come out at month-end for analysis, but Robinson feels some metrics, such as the percentage of accounts receivable greater than 90 days, bear closer and more frequent attention. Unit managers should look at that information daily, as well as patient volume levels, length of stay, and staffing and supply numbers, which are the most volatile, he says. “All of us want to know about an event closer to when it occurs because we have a better chance of changing what caused it,” he says. But whether they’re a home-grown Excel spreadsheet or turn-key software, any early warning systems a CFO sets up, he says, are “only as good as the information that’s feeding them.”

As CFO of a nine-hospital system, Robinson knows he can’t do it all by himself. “A number of people will identify problems for me,” he says. “In many cases I’m a reporter of events. It’s important to get that information out there so others can make good management decisions.”

Financial systems are always evolving, Robinson says. Shands implemented patient-tracking software to improve information flow between hospital departments. The system is helping reduce patient blockages in the emergency department, for example, by identifying available beds and providing administrators with information to make better nurse-staffing decisions. Shands also implemented a purchasing and inventory system designed to improve internal controls and reduce the carrying cost of expensive inventories. But despite the quality of his financial systems, Robinson says there can still be an information gap. For example, he doesn’t often know the full impact of a patient stay until a few days after discharge or the organization’s overall financial performance until after the month-end close.

Of course, what’s difficult about the hospital CFO’s role as the town crier doesn’t show up in the sophistication of the systems feeding the CFO actionable early-warning information, says Robinson.

“If this was only driven by finance, only ROI-based, only what you could get out of every service line, you’d just cut what didn’t make money,” he says. “If it was all mission, you’d make decisions based on community need with less concentration on cost or losses. The difficulty is in getting these two to work together so you have a strong, vibrant, self-sustaining organization.”

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11 Key Measures for Your Boss and Board

Former hospital chief financial officer Steven Berger, now president of Healthcare Insights, a Libertyville, Ill.-based training and software development company, sees himself as a trainer for hospital CFOs. Berger says when he started “training” six years ago, only 30 percent of hospitals used scorecards—short, number-based reports that provide a quick glance at how an organization is performing relative to budgetary targets across a variety of financial metrics. “Now 75 percent are at least doing something,” Berger says, based on his admittedly informal surveying. “But when you talk about what metrics are on the scorecards and what goals they set around those measures, that’s where things start to break apart.”

Although there’s no cookie-cutter set of measures that will help improve hospital performance, 11 are generally accepted by experts and the Healthcare Financial Management Association, and Berger estimates only 20 percent of hospitals regularly report all 11 to the board and down the management food chain.

The 11 measures are:

• Operating margin
  
• Excess margin
  
• Debt service coverage
  
• Current ratio
  
• Days cash on hand
  
• Cushion ratio
  
• Days accounts receivable
  
• Average payment period days
  
• Average age of plant
  
• Debt to capitalization
  
• Capital expense

“Why are those 11 so important? Not because I say so,” says Berger. “That’s what the bond-rating agencies say are important.”

If your hospital doesn’t have a bond rating, Berger says, you don’t have to report the three debt ratios. But reporting the rest on at least a monthly basis is good practice in fiscal discipline, and “one day you may want a bond rating.” Also, by providing a snapshot of how a hospital’s various departments contribute toward the common goal of generating the margin necessary for technology, staffing and patient-care improvements, leaders can help managers form a clear vision of how their actions aid or hinder the organization’s goals.

Berger says because hospital payor mixes, patient populations and labor issues, just to name a few, are all different, those 11 are “only the starter set.” A 12th measure that Berger feels is the most important, for example, is called the compensation ratio, which measures total salaries, benefits and contract labor as a percentage of total revenue. The lower the number, the better, he says, adding that the median compensation ratio is 51.6 percent, according to Fitch Ratings, but that top performers have a goal of near 40 percent. Nashville, Tenn.-based HCA, Inc., for example, routinely hits that number. “You don’t only want to report; you want to set goals around them and report on whether you met the goals,” he says. “This is critical to the administration and supercritical to the board.”

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Choosing the Right Vendor

You don’t know programming. Programming doesn’t know you. But you know a programmer. Use him.

When you’re trying to keep track of all the variables that can make or break your finances, it helps to have a right-hand man or woman you can count on. Numbers can tell a lot of stories, but in their raw form they’re not much help. Your chief information officer should be your key consultant in helping you find the right vendor to coordinate your financial information. He can help translate your needs into English.

There’s room for software vendors in the mix, but heed these words of advice from those who have already fought those battles:

• Get software that’s easy to use for someone who doesn’t have an advanced degree in programming.—Richard Temple
  
• It doesn’t have to look very sexy, but it’s got to be something your managers are going to use.—Nancy Steiger
  
• You need something with point-and-click functionality, so people can pull data and information without having to write if-then statements.—Vincent Pryor
  
• Whatever system you use should take advantage of Web technology whenever possible. Ideally, the system should be open-source and should allow for easy display of information.—Richard Temple
  
• I’ve bought a lot of systems. I would fall in love with some of them because of the bells and whistles. That’s fine if I do everything myself. But financial systems are not as effective if only two or three people in the organization can work with it. A lot of the managers we work with weren’t trained in business whatsoever. They were trained to take care of the patients.—Vincent Pryor
  
• Where I run into problems is keeping these products maintained. We spend a lot of money just with the interface and upgrading of these products annually.—Bill Robinson
  
• You should be able to drag and drop fields on grids that will allow you to see data over time, in a graph or in a table.—Richard Temple
  
• Doing what you did yesterday won’t solve tomorrow’s problem, and you need new tools to get you where you want to go.—Nancy Steiger
  
• You go with these systems that look nice and then you install, and often you customize so much that it doesn’t look like the original product. This can add a degree of complexity when you upgrade.—Bill Robinson
  
• Ask yourself, would you and could you use it? Mid-month I’m taking a sneak peek at how the month is going to be. Is that what a CEO should be doing? Not necessarily, but it’s important that I can.—Nancy Steiger
  
• Know that any system will be interfacing with other legacy systems. You should know exactly how your vendor is going to reconcile your final system and the legacy systems feeding into it.—Richard Temple

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Philip Betbeze is finance editor with HealthLeaders. He can be reached at pbetbeze@healthleadersmedia.com.