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Benchmarking: How to Start Simply and Build on Your Success
Hospitals today are tracking more data than ever before. For finance leaders, the challenge is deciding how to prioritize what gets tracked. In other words, what are the key performance indicators for the organization?
Failing to prioritize is where many CFOs fall short.
“Many organizations over-complicate their benchmarking efforts,” says Brian Robertson, chief operating officer at MedeFinance, Emeryville, CA. “They get caught up in design and IT issues, perhaps spending three to four years trying to design pretty-looking hospital performance scorecards.”
Some experts like Robertson believe that creating scorecards—one of the key tools of benchmarking and data sharing—doesn’t need to take years. In fact, he believes that a hospital can create a simple scorecard in just three months. More importantly, this means CFOs can get early feedback on where their strengths and weaknesses lie—and make quicker adjustments to their strategy.
From Ask the Experts...
Question: Do you have any benchmarks for inventory days or turns by department?
Where to Start
If benchmarking seems overwhelming, the finance team can begin simply by bringing stakeholders together to talk. Have monthly meetings centered on metrics, Robertson suggests. “This helps bring metrics into the culture and your day-to-day thinking.”
Some of the questions to address in metrics meetings:
- What are the organization’s top goals? (For example, improving the revenue cycle)
- What are the national standards related to those goals?
- How can we integrate these measures into our daily processes in the organization?
- Are the right parties involved: medical records, registration, utilization management, and the business office?
- How often do we report data, and to whom? (management, the board, and the revenue cycle team?)
- How does the organization share performance data? What kind of reports are needed?
Selecting What to Measure
To break into benchmarking management, hospitals can start with just three to five solid metrics, Robertson says (see Figure 1 from Mede). Data should be reported at least monthly, with performance for that month compared to budget, and year-to-date compared to both budget and the prior year. Some systems use daily electronic reporting to share key financial data, such as inpatient and outpatient revenue, and cash collection.
Finance leaders also should compare their financial data to external benchmarks, such as those derived from Medicare cost reports. Firms such as Moody’s, Standard & Poors, and Goldman Sachs also provide valuable comparative data for hospitals looking to benchmark their performance against their peers. For individual service lines, specialty organizations like the American Heart Association and the American College of Surgeons Commission on Cancer can provide useful quality indicators.
Some Key Performance Measures
When tracking financial performance, many organizations focus on some or all of the following indicators:
- Days cash on hand
- Days in accounts receivable, which can reveal revenue cycle issues
- Debt service coverage ratio, which tracks cash available to make debt payments
- Adjusted patient days and length of stay, which measure volume
- Revenue per adjusted patient day, which can reveal issues related to payer mix, services, or Medicare ratings
- Expense per adjusted patient day, which can be broken down further by salaries, supplies, etc.
- Paid FTEs per adjusted occupied bed, which tracks labor
- Earnings before interest depreciation and amortization (EBIDA), which helps measure cash generation
HFMA publishes national values each year for 14 indicators, which also can assist finance leaders in their benchmarking efforts.
Of course, hospitals aren’t the only ones monitoring their performance. Industry analysts and lending institutions also keep an eye on metrics that paint a picture of an organization’s financial health. Some of the indicators that analysts watch include gross revenue percentages, average length of stay, and maintained bed occupancy percentages.
What Matters Most
There is a range of operational, clinical, and financial measures that can help finance leaders track the performance of their organization (see Figure 2). By monitoring even a few select metrics, the finance team can reveal areas for improvement and help the organization evolve to meet current and future needs.
When prioritizing, a CFO may choose to focus on metrics like days cash on hand, days in accounts receivable, operating margin, adjusted cost purchase of discharge, and net revenue per adjusted discharge.
If an organization is blessed with having a rich financial data system, finance leaders can take cues from their patient accounting data. For example, total open accounts can hint at liquidity issues, while closed accounts can suggest trends in net revenue (such as, how much did Blue Cross pay for a particular DRG over the last six months)? Drilling down from the general financial statement also can reveal opportunities for improvement, such as lower than expected payments, improper coding issues, and atypical losses by payer for a particular service. Generally, total open accounts should be reviewed in tandem with the number of new accounts each month.
With so much data to crunch, it can be easy for hospital leaders to think they need to benchmark everything. But in reality, most organizations should limit the number of metrics to no more than 20, Robertson says.
Blip or Trend?
When benchmarking internally against budget, the finance team will find variances. These variances simply may be monthly “blips” or they can signal a trend that demands more scrutiny from finance leaders. When sharing data reports, many organizations use graphs and color-coding to “rate” indicators using the traffic light system: red and yellow signal variance and require attention, while green indicates that the metric is at budget or better. This makes it easier for stakeholders to identify trouble areas.
Ideally, information should lead to action. For example, benchmarking may reveal certain procedures for which reimbursement rates are too low compared to cost. Armed with this data, an organization may have more leverage when negotiating with managed care payers.
While the finance team may be responsible for triggering an inquiry about variances, it’s the managers’ responsibility to respond to variances and develop action plans, when needed. Keeping action plans realistic for the organization is important, experts say. For example, a hospital with 100-plus days in accounts receivable may not be able to meet the industry target of 60 days. Instead, a more modest goal might be somewhere in between.
Today’s “Hot” Indicators
A scorecard should be constantly evolving. Metrics will, and should, change based on strategic goals, leadership changes, and the external environment. Depending on what’s occurring in the health care environment, new indicators may arise. Take, for example, the recent present on admission (POA) indicators from the Centers for Medicare and Medicaid Services, http://www.cms.hhs.gov/HospitalAcqCond/05_Coding.asp. Required for all inpatient claims at general acute care hospitals, these codes clarify if a diagnosis was present at the time of admission. Without proper POA documentation, a hospital stands to lose the reimbursement it’s due.
Other measures that are particularly timely are the new severity-adjusted diagnosis related groups (DRGs). The rules will require hospitals to be even more focused on quality measures.
With increased interest in pay-for-performance initiatives, getting the organization behind CMS’s core measures should be among an organization’s top benchmarking goals. “More organizations are moving from measuring financial and clinical and quality data separately to trying to marry them together,” Robertson says. “The end game for hospitals will be to determine if they can deliver the highest quality at the most efficient cost per unit. That’s where hospitals need to be headed as the trends of consumerism and transparency gain momentum. Payers want to see it. Patients want to see it. And employers want to see it.”
A Scorecard Is Just a First Step
Benchmarking, while critical to a hospital’s success, is only part of the strategy, Robertson says. It’s the stuff that comes after that’s really tough—determining how to change processes and behaviors that negatively affect margins and other outcomes.
“A scorecard is not a silver bullet,” Robertson says. “Once you have developed it, you then have the very hard work of developing a data-driven culture to get things done.”
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