March 7, 2007
The 11 financial indicators reported annually on the HFMA web site over the past several years are posted there for one reason: They are the metrics that have the most meaning to the bond rating agencies in determining the financial health of hospitals, notes an article in the fall 2006 edition of HFMA's Strategic Financial Planning newsletter.
Here's how these metrics play an important role in evaluating organizational financial health:
- Understand how these metrics are derived (that is, from where on the balance sheet the numerators and denominators are derived).
- Teach the importance of each metric to every individual receiving the information (the widest possible distribution is best).
- Set goals at the board and administrative levels for each metric.
- Report every metric on a monthly basis to the board, administration, and financial and operating managers.
- Trend the outcomes (actual and goal) so that readers get a clear picture of results.
- Assign responsibility for each metric to a specific person or group.
- Develop accountability standards and consequences for both negative and positive results.
HFMA Key Hospital Financial Statistics and Ratio Medians, December 2005
|
Measure |
S&P All Ratings 1 |
FITCH 2 |
Solucient 3 |
Data Advantage Corp. 4 |
INGENIX 5 |
Premier, Inc. 6 |
|
Sample size (n) |
560 |
220 |
832 |
4,531 |
1,907 |
380 |
|
Average length of stay (days) |
4.5 |
4.6 |
4.67 |
4.76 |
4.4 |
4.70 |
|
Maintained bed occupancy (%) |
62.0 |
N/A |
66.79 |
63.91 |
54.73 |
65.40 |
|
Operating margin (%) |
2.3 |
2.1 |
4.04 |
-1.17 |
2.0 |
3.26 |
|
Excess margin (%) |
4.1 |
3.7 |
6 |
5.65 |
N/A |
4.45 |
|
Debt services coverage (x) |
3.4 |
3.3 |
2.25 |
N/A |
3.11 |
N/A |
|
Current ratio (x) |
2.0 |
N/A |
2.23 |
1.88 |
2.04 |
2.34 |
|
Cash on hand (days) |
151.0 |
157.8 |
49.2 |
34.68 |
68.6 |
N/A |
|
Cushion ratio (x) |
11.7 |
11.4 |
N/A |
N/A |
7.68 |
N/A |
|
Accounts receivable (days) |
51.9 |
51.5 |
50.41 |
56.21 |
54.7 |
61.40 |
|
Average payment period (days) |
59.5 |
64.5 |
48.34 |
68.03 |
51.6 |
N/A |
|
Average age of plant (years) |
9.7 |
9.8 |
N/A |
13.56 |
9.77 |
N/A |
|
Debt-to-capitalization (%) |
37.6 |
42.3 |
36 |
31.44 |
27 |
32.31 |
|
Capital expense (%) |
7.3 |
N/A |
6.77 |
4.41 |
6.2 |
5.94 |
1. Standard & Poor's U.S. Not-For-Profit Healthcare 2005 Median Ratios: Improvement Continues Across the Rating Spectrum
2. FITCH Ratings, 2005 Median Ratios for Nonprofit Hospitals and Health Care Systems
3. © 2005 Solucient, LLC ACTION O-I™ Program (January – December 2004 Median Data)
4. Copyright 2005 by Data Advantage Corporation
5. © 2005, Ingenix, Inc.; Financial Analysis and Strategic Operating Indicators Services & Medicare Cost Reports
6. Premier, Inc. Operations Outlook For the Year Ending June 30, 2005
The national figures reported in the table are very high-level benchmarks; each facility's goals should be relevant to the facility's size, market, and other factors. Days cash on hand is the most important of the metrics, according to the bond rating agencies; operating margin and the three debt ratios are also high on their list. A generally underrated ratio is average age of plant, which can and should be used to determine the relative age of the building and equipment, particularly in relation to competitors. This can be very useful in determining how much cash needs to be spent in the capital budget and within the organization's long-range strategic financial plan.
SOURCE: Steven Berger, Making the Most of Key Hospital Financial Metrics, Fall 2006 Strategic Financial Planning newsletter
Note: After publication of this article, HFMA's Key Hospital Financial Metrics were updated in December 2006.
Additional Resources:
Healthcare Financial Management hfm articles (On-line access available to HFMA members only). Not a member? Join now!
Peer-to-Peer Learning:
If you have questions or comments about HFMA Wants You to Know, contact editor Maxine Harrison.
HFMA Wants You to Know ISSN: 1540-0697. Volume VI, Issue 5. Copyright 2007, Healthcare Financial Management Association. All rights reserved.