Measuring a healthcare organization’s financial situation is far more than simply subtracting expenses from income to arrive at total revenue. Rather than simple math, it’s more of a financial machine functioning on many individual cogs. Each of these individual cogs plays an essential part in supporting a healthcare organization’s financial condition.
For an organization to run smoothly, these specific healthcare financial metrics provide essential data that inform each financial decision. From the day-to-day operations of the organization to decisions made over the next 10 years. Therefore, monitoring these specific metrics is a matter of navigating the present and the future of a healthcare organization.
This blog serves as a guide for healthcare organizations to create a financial dashboard that enables them to visualize their financial position.
Key Financial Indicators that are Essential for Healthcare Organizations to Monitor
Financial metrics of an organization revolve around navigating various complexities. This can cause some metrics to overlap beyond financial measures. Analyzing these metrics should be done within the context of the organization’s overall function. Beyond financial metrics, other factors also play a role in an organization’s financial condition. Regulatory changes, administrative costs, and patient location or demographics are some to name a few. The following section is a list of financial metrics that are to be uniformly observed by every healthcare organization:
Operating Margins
Operating Margins are a key measure of an organization’s overall financial position and provide insight into the profitability of a healthcare business. They give the percentage of revenues that remain after all operating expenses have been deducted (including salaries, medical equipment and supplies, and administrative expenses).
Such margins are computed before any consideration is given to interest and tax expenses. By monitoring operating margins, organizations can assess how well they are controlling day-to-day operations relative to the revenue they generate. This provides an important link to long-term operational strategy and viability.
Net Patient Revenue (NPR)
The total expected cash flow from providing healthcare services is known as net patient revenue (NPR). This amount is determined by subtracting contractual allowances, lost revenue from charity care, and estimated uncollectible amounts (bad debt) from gross charges for healthcare services provided to patients. These subtractions reflect adjustments made to arrive at the net revenue. Thus, net patient revenue (NPR) provides a true measure of the revenue an organization will receive from patient care.
Days in Accounts Receivable
One of the most important healthcare financial metrics used by an organization to determine if they are billing and collecting correctly is its average billing cycle. The fewer days it takes to collect payment after providing a service, the more efficient the organization’s billing cycle is.
Efficiency leads to cash flow improvements and overall financial stability for the healthcare organization. Tracking this metric over time will allow organizations to identify potential delays in billing or issues with the billing process. This will help improve revenue cycle management and overall financial performance.
Days Cash on Hand
Calculating the cash reserves enables an organization to determine how many days it will be able to maintain its operations using those cash reserves. This metric is an important measure of the overall financial health of the organization over the short term. It also provides insight into how easily the organization could cope with unforeseen financial difficulties in the near future.
Denial Rate
The percentage of claims denied from the payer’s perspective is one of the benchmarks to consider when evaluating the claims processing system’s performance. A claims denial rate above 5% to 10% generally indicates that there are issues with the claims processing system.
These issues may include coding errors or inconsistencies, insurance verification problems, and deficiencies in clinical documentation. If these items can be corrected through appropriate corrective actions, it should result in a reduction in the number of claims denied and an increase in the reimbursement received. This would also lead to an improvement in overall efficiency in the revenue cycle management process.
Net Collection Rate (NCR)
The Collectible Ratio is a financial metric used by healthcare organizations. It monitors how much cash they receive from payers and patients relative to their total cash collections after any adjustments permitted by law. It is critical for organizations to monitor this ratio. A ratio below 95% may indicate issues with collecting on patients’ debts, which can impact the revenue cycle and the company’s overall financial health. Collecting and monitoring this important financial metric will help healthcare organizations identify ways to improve their revenue collection. This, in turn, will enhance cash flow management and overall financial stability.
Clean Claim Rate
The Claims clean rate is the percentage of claims submitted correctly, with no errors, rejections, or manual interventions. High goals (ideally 98% clean claims) can help to reduce administrative costs and time required to be paid.
Discharged Not Final Billed
Discharged, not final billed, is a measure of the time and dollars in claims held up following patient discharge due to incomplete coding or documentation prior to billing. It identifies capacity issues in the pre-billing process.
Labor Cost as % of total cost
Measure the percentage of total operating cost attributable to employee salaries, payroll taxes, and contract labor. Since labor often constitutes the largest portion of costs in nearly every type of healthcare organization, it is crucial to monitor and measure this ratio closely. Managing it effectively is essential to maintain viable profit margins and remain competitive.
Revenue per visit/consultation
Analyze how much money each patient is bringing to your healthcare practice. This number is extremely important in evaluating which services generate the most revenue and therefore are the highest value service. The analysis of this number also allows healthcare providers to identify those services that provide the most financial benefit to their practice.
In addition, when physicians understand the average income they earn for each patient, they can be assured that the funds received for their services from various insurance companies adequately cover the expenses involved in providing care. This understanding helps ensure that the reimbursement aligns with the costs of each case. It will help to ensure that the physician’s practice remains financially viable and has ongoing long-term success.
Payor Mix
The percentage of insurance that a healthcare facility receives from different types of insurance, including Medicare and Medicaid, as well as private payers (self-pay), contributes to the facility’s payor. Breaking this down helps clarify the sources of the facility’s reimbursement. The healthcare facility’s overall revenue may be impacted greatly as the payor mix may change over time. This is because reimbursement rates vary greatly between different types of programs, such as government-funded and private payers. Therefore, being aware of this change is critical to the facility’s financial planning process and to maintain fiscal stability in the healthcare facility’s operations.
Success rate of appeals (%)
The number of denied claims that are appealed after denial, that is, overturned and paid, demonstrates how effective a healthcare organization’s revenue recovery team is. It reflects their ability to minimize lost revenue through successful appeals.
Assessing revenue recovery and improving appeal processes enable healthcare organizations to enhance financial performance. This approach also helps increase revenue recovery. Therefore, this key performance indicator, along with all other important healthcare financial metrics, provides additional information. It helps determine how well a healthcare organization performs financially. Ultimately, this enables each healthcare organization to utilize data-informed decision-making to improve profitability and sustainability.
Conclusion
The healthcare financial metrics described above are integral to a healthcare organization’s ability to achieve its financial goals. The use of these key metrics enables organizations to assess where improvement opportunities exist and make sound, informed, data-driven decisions. Through consistent tracking of these metrics, organizations can make better use of resources and ultimately experience sustainable growth.
A robust tracking system will also be needed by healthcare organizations and measurable goals based on relevant metrics will enable organizations to remain flexible in addressing future challenges and successes. Additionally, all healthcare organizations must ensure that an environment of continuous assessment of financial performance exists within their organizations.
