Hospital operating margins fell by 21 percent in 2019 after years of consistent decline. For cash-strapped healthcare organizations, the outlook was already bleak. Then the COVID-19 pandemic hit and made a bad situation look unimaginably worse.
At this point in the pandemic, it’s impossible to know how long things will last or to what extent they will affect the healthcare industry in coming months and years. However, we can say with unfortunate certainty that stakeholders across the industry will face deep economic turmoil for a long time to come. Some outlets are losing money as they use all their resources treating an influx of patients. Others are contending with plummeting revenues as elective procedures get canceled. In all cases, the industry as a whole needs to be monitoring finances carefully; otherwise, the numbers could grow much worse much faster than anyone thought possible.
The present moment emphasizes the importance of tracking financial metrics while also revealing one of the hardest parts: selecting what to track. In fast-moving, highly disruptive times like these, it’s tempting to focus on the metrics that are changing the fastest or getting closest to critical levels.
However, the fundamentals of finance are the same in good times and in bad, so this is no time to get distracted by unimportant metrics, no matter how extreme they seem. These are the financial KPIs healthcare leaders need to track now and later:
- Days Cash on Hand – Indicating how many days worth of operating expenses the organization has on hand, this metric speaks volumes about liquidity. In addition to revealing how long the provider can maintain the status quo, lenders will look at this metric when evaluating how well an organization pursuing financing manages its resources.
- Operating Profit Margin – With operating margins falling quickly and consistently, healthcare CFOs need to track the speed and scope of that trend moving forward. The operating profit margin metric helps encapsulate the effort to cut costs or increase revenues in other areas.
- Net Days in Accounts Receivable – Healthcare finances will always be unstable if an organization lags on accounts receivable. Tracking how long it takes to collect helps an organization understand its revenue cycle efficiency, from which they can extrapolate future revenues and make strategic decisions accordingly. Typically, organizations strive to keep this metric below 30 days.
- Cash Collection – Calculated by dividing the total collected patient service cash by the average monthly net service revenue, this metric gives healthcare outlets another look at their revenue cycle. Like all these metrics, providers need to know where this metric stands at any given time along with how quickly and extensively it’s changed over time.
- Error Claim Rate – Measuring how frequently claims end in denial or rejection because of an error during filing is the first step toward moving this metric in a positive direction. Hospitals and clinics spend a lot of resources perfecting the claims process, and each denial slashes into the balance sheet, so there’s a deep financial incentive to push the rate as low as possible.
Even more important than knowing what to track is knowing how. Many organizations need help to track metrics, including the KPIs, quickly, efficiently, or consistently enough for them to be instructive decision-making tools. That’s why so many organizations rely on insightsoftware to implement financial reporting tools that seamlessly integrate with the ERP and autonomously handle the bulk of the reporting process. Hours of time that decision-makers used to spend wrangling data can now be spent applying the insights within. Learn more about the top trends affecting the healthcare industry and how to open up opportunity and work smarter with real-time reporting solutions by downloading our whitepaper, Healthcare: 2020 Industry Outlook for F&A Professionals.