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TRANSCRIPT
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EXECUTIVE SUMMARY
Riverview Community Hospital (RCH) is a not-for-profit hospital in an area that is being
served by three other competitors. Its current financial standings and benefits of being fully
accredited by the Joint Commission are not sufficient enough to overcome economic struggles.
It must improve its financial stability in order to remain efficiently operational, providing a wide
variety of services to the community. RCH struggles with maintaining costs, increasing patient
volume, and generating high revenue. It has also recognized the dangers that threaten its
existence. While RCH remains the leading provider of high quality of care, it faces fierce
competition that is depleting its patient volume and overall profitability. After careful analysis of
financial, operating, and patient characteristic indicators, RCH presents its findings and
recommendations to the Senior Management. Through strategic implementation, cooperation,
and open communication, RCH will be able to continue thriving in the metropolitan statistical
area it serves.
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TABLE OF CONTENTS
page
EXECUTIVE SUMMARY..................................................................................................2
TABLE OF CONTENTS...................................................................................................3
ABOUT RIVERVIEW COMMUNITY HOSPITAL..............................................................4
ANALYSIS OF RCH.........................................................................................................5
Analysis of Financial Indicators..................................................................................5Analysis of Operating Indicators..............................................................................10
SUMMARY OF FINDINGS.............................................................................................11
Strengths.................................................................................................................11Weaknesses............................................................................................................12
RECOMMENDATIONS..................................................................................................13
Profitability...............................................................................................................14Patient Volume........................................................................................................14Accounts Receivable...............................................................................................15Other Recommendations.........................................................................................15
EVALUATION.................................................................................................................16
Financial KPIs..........................................................................................................16Operating KPIs........................................................................................................19
APPENDIX: TABLES AND FIGURES............................................................................23
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ABOUT RIVERVIEW COMMUNITY HOSPITAL
Riverview Community Hospital (RCH) is a 210 bed not-for-profit acute care hospital
serving the metropolitan statistical area. It is well-known for being the leading provider of quality
care and high patient satisfaction surveys. It has also received full accreditation from the Joint
Commission, the highest of the accreditation categories that qualifies them for governmental
reimbursement. While RCH continues to improve the health of its patients, it struggles to
overcome financial pressures from the economy and competitors. RCH has recognized the
importance of remaining financially stable in order to operate efficiently and provide the best
quality of care to the patients. Various factors are necessary to decrease costs, increase profit,
and generate revenue from multiple services provided. In order to address the dangers it is
facing, an assessment and analysis of the issues and key indicators are required.
RCH has identified internal and external issues that are affecting its overall success. The
internal problems revolve around the annual net income. Maintaining patient volume is vital to
generate enough revenue to cover all of the expenses. This includes both inpatient and
outpatient visits. It is a difficult task to find the best way to reduce costs and expenses while still
providing high quality care and affording full time employees. This has become increasingly
challenging as there are two other non-for-profit hospitals and a large for-profit hospital in the
area. Having these hospitals compete for the same patients decreases RCH’s chances of
remaining profitable.
The external issues originate from the other competing hospitals, regulatory changes, and
the declining economy. Adding to the challenge is the fact that RCH is the smallest hospital of
the four. This could prevent the hospital from realizing the same level of economies of scale as
the larger institutions. The for-profit hospital also seems to be the biggest threat as its reputation
precedes them—aggressively increasing its market share in the service areas. Unlike for-profits,
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which can choose not to provide unprofitable services, RCH must offer a minimum package of
services in order to qualify for not-for-profit status.
Complicating matters is the fact that 2009 marked the introduction of several changes to
the IRS 990 form, which all not-for-profits must complete to justify tax-exemptions. Lastly, the
financial crisis from 2008-2009 likely affects RCH’s financial stability, access to capital, and their
patient population’s ability to pay. Increased unemployment due to the recession might cause
many of RCH’s patients to lose employer-sponsored insurance. Although COBRA extends
insurance for eighteen months after termination, many unemployed people forego insurance
altogether because the premiums are so expensive without employer subsidies. As a result,
RCH might have a higher bad debt expense for patients who cannot pay, and patients who do
pay might take longer to pay off their medical bills.
ANALYSIS OF RCH
Analysis of Financial Indicators*
DuPont
The DuPont analysis provides a guide to understanding a hospital’s return on equity
(ROE). Using this analysis allowed us to better understand RCH’s ROE by analyzing the
superior or inferior source of the return. Calculating the ROE is essential for communicating to
the board of trustees and key administrators the efficient use of capital supply. The DuPont
equation decomposes ROE into three parts: 1) profitability measured by the total margin, 2)
operating efficiency measured by the total asset turnover (TAT), and 3) financial leverage
measured by the equity multiplier. Financial leverage in the DuPont equation refers to the use of
debt to acquire additional assets.
First, the profit margin is determined by the ratio of net income to total revenues. From this
ratio we can better understand the percentage of total revenues, both operating and non-
operating, converted into net income. In our current fiscal year, our profit margin is 6.75 percent,
* Complete list of financial indicators used can be found in Appendix: Table 1.
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which is higher than the 3 to 5 percent national average. It is important, however, for RCH to
note the sharp decreasing trend that the profit margin has exhibited throughout the five-year
period. Beginning in 2005, we see an 11.38 percent profit margin; however, we currently sit at a
6.75 percent profit margin. This is a 4.63 percent decrease, and we see notable decreases from
2006 to 2007 and from 2007 to 2008. From 2006 to 2007, RHC experienced a 2.53 percent
decrease in profit margin (from 11.28 to 8.75 percent). It also saw a 2.27 percent reduction in
the profit margin (from 8.75 to 6.48 percent). Evaluating the profitability component of the return
on equity indicates that the hospital has experienced an increase in total revenue each year,
with the operating revenue following the same trend. The non-operating revenue seems to
fluctuate, although the non-operating budget has increased from 1.305 million to 1.834 million
over the five-year period. We see, however, that the net income has decreased from 3.070
million to 2.458 million with sharper decreases from 2006 to 2007 and 2007 to 2008. This could
be attributed to the increase in certain expenses in those years. From 2006 to 2007, RHC saw a
rise in the salary and wage expense and depreciation. From 2007 to 2008, on the other hand,
RHC saw a significant increase in fringe benefits expense and interest expense.
Second, analyzing our operating efficiency allowed us to use the TAT ratio to determine
how RCH uses its assets to produce revenue. The TAT, more specifically, measures the
amount in revenue earned per dollar invested in total assets. The standard rate for hospitals is
typically one dollar earned per one dollar invested. The hospital currently stands at earning .67
cents per one dollar invested in total assets, which is below the industry standard. The TAT ratio
has fluctuated throughout the five-year period, experiencing a sharp decrease of 2.15 percent
from 2005 to 2006. It continued to decrease steadily from 2006 to 2007, then again from 2007 to
2008 with a 4.43 percent decrease. Finally, RCH experienced a dramatic rise from 2008 to 2009
with a 5.87 percent increase. As mentioned earlier, our total revenues have increased as well as
an increase in total assets. Further analysis, however, indicates that we must look at the rate of
growth for total revenues and total assets. In order to improve our TAT ratio, our total revenues
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must outpace our acquisition of assets. This is evident in 2009, when the rate of growth for total
assets and total revenues each is approximately 2 million a year. We also saw, however, an
increase of 4 million with the same trend of a 2 million increase in net assets. This increase of
revenue generated a larger TAT ratio.
The financial leverage or equity multiplier illustrates how much debt can be used to
acquire additional assets. The ratio can be calculated by dividing one by the equity-financing
ratio (net assets divided by total assets). Similar to the asset turnover ratio, there is a fluctuation
in the equity multiplier as well. RCH’s equity multiplier decreases from 2005 to 2007, increases
from 2007 to 2008, decreases again from 2008 to 2009. The decrease is accounted for by a
larger equity-financing ratio, while an increase is simply a result of a smaller-equity financing
ratio. Generally, the hospital experiences an equity-financing ratio that is higher than the
industry standard. It is important, nonetheless, to note that our largest equity multiplier years
mirrored the years we had our lowest equity-financing ratios.
Lastly, finding the product of the profit margin, the TAT, and the equity multiplier results in
the ROE. Although there has been fluctuation in the asset turnover rate and the equity
multiplier, RCH has seen a general decrease in all components of the ROE equation. Thus,
unsurprisingly we see a decrease each year, except in 2009, in ROE. The 2009 increase is
simply a result of an increase in profit margin and TAT ratio from 2008. From this analysis we
can conclude that If we are to improve the financial conditions of the hospital, we must improve
our profitability and operating efficiency. We must have a better dollar return in revenue per
dollar invested in assets.
Profitability†
Understanding the profitability of the organization allows us, as an institution, to
understand the hospital’s ability to generate income. In addition to the profit margin (analyzed in
the DuPont analysis), it is also worthwhile to look at our return on assets (ROA). Through this
† Percentage changes are expressed in Table 2.
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indicator, we see the net income earned for each dollar invested in assets. In 2005, our return
on assets of 7.75% essentially equated to $.77 in profits generated from each dollar invested in
total assets. As our ROA increases, we can assume that we are productively using our assets.
Unfortunately, we have seen a decrease in our ROA throughout the 5-year time period. The
decrease in ROA is a result of a net income that is decreasing and total assets that are
increasing. More in-depth with net income, it is important to note that the decrease stems from
both the revenues and expenses increasing at an increasing rate. Revenues for RCH have
increased from 5% in 2005 to 12% in 2009 while expenses have increased in a similar fashion
from 5% in 2009 to 12% in 2009, as well. Looking at the percentage changes in the growth of
both the revenues and expenses, RCH must at least control the rapid growth of expenses. We
see some progress in mitigating expense growth from 2008 to 2009 as expense growth was
controlled to 1% change in growth (from 11% in 2008 to 12% in 2009).
Liquidity‡
Days cash on hand represents the number of days RCH can continue paying off its
financial obligations without any additional cash inflow. The average for comparable hospitals is
between 30 and 45 days. RCH has exceeded the range up to the most recent year; however, as
of 2009 it is at the lower end with 32 days of cash on hand. This indicates that RCH has become
less liquid over time, and it has fewer resources to cover its expenses.
One reason for this could be because the days in accounts receivable is alarmingly high,
compared to the national average of 45 to 55 days. This means that on average, it takes them
almost two months to collect receivables once services have been provided. From 2005 to
2007, there was a significant decrease that approached the national average. Over the past two
years, however, it has begun to surge again. It is interesting to note the inverse relationship
between days cash on hand and days in accounts receivable when the two graphs are
‡ Liquidity graphs can be seen in Appendix: Figs. 1 and 2.
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compared .This is could be due to the long length of time it takes to convert the receivables into
cash.
Activity
The fixed asset turnover (FAT), calculated by dividing total revenue by net fixed assets,
measures the hospital’s efficiency in its fixed asset investments. It specifically measures how
much revenue is generated by each dollar of net fixed assets. Compared to the average of 2
dollars of revenue for each dollar spent on net fixed assets, RCH is doing quite poorly since its
ratio has been below 1 for the past five years.
Based on the cash flow statement, RCH has purchased between $4 to $7 million worth of
fixed assets every year since 2005. This helps to explain the low FAT in two ways. First, any
increase to the net fixed assets will decrease the overall FAT since the denominator is also
increasing. Second, depreciation is subtracted from gross fixed assets in order to obtain net
fixed assets. Since recently purchased equipment has less depreciation, one would expect net
fixed assets to be relatively high. Therefore, it is important to consider the average age of
property, plant, and equipment to put the FAT in perspective. The average age of property,
plant, and equipment is 10 years for most hospitals. In contrast, RCH’s average age of property,
plant, and equipment has been around 5 to 6 years for the past five years.
Capital Structure
To supplement the understanding of the capital structure, it is useful to look at the times
interest earned ratio (TIE). It is the proportion of earnings available to pay each dollar of interest
expense. For most hospitals, the interest expense is being met by current accounting income by
a multiple of 2 to 3. 2007 was a turning point for RCH in this regard as well. Over the past two
years, RCH has gone from having an above-average TIE to falling closer to the lower end of the
spectrum.
RCH’s debt service coverage (or pre-interest cash flow divided by total debt obligations)
had a similar trajectory over the past five years, going from above average to slightly above the
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minimum standard from 2007 to 2008. This likeness is to be expected since the calculations are
similar; however, the debt service coverage differs in two significant ways. First, it
acknowledges that cash flow and not accounting income pays for expenses. Second, it includes
both principal payments and interest expense.
Analysis of Operating Indicators§
Volume
When looking at the volume operating indicators, it can be seen that over time the amount
of inpatient volume, inpatient days, and average daily census has decreased since 2005. This
volume change can be possibly attributed to the increase of competition within the community,
as well as the increase in outpatient services as the amount of outpatient visits has increased
since 2005. This reflects the board’s decision in 2004 to significantly expand outpatient services
to avoid losing patients to other providers, who began offering traditional inpatient procedures in
an outpatient setting. Regardless of the change in inpatient volume, the occupancy rate and the
average length of stay (ALOS) have remained constant with minor fluctuation over the past five
years. ALOS remains under the industry average annually which can indicate excellence in
utilization and clinical management as resources are being used efficiently and risk to patients is
decreased with lower ALOS.
Patient Characteristics
Upon looking at RCH’s patients, the case mix is approximately near the industry
averages. This suggests that RCH has an average complexity of inpatient services provided.
Inpatient revenue constitutes a majority of the gross patient revenue; however, the fact that
there are more outpatient visits should not be overlooked. While this has decreased over the
years, 73.6 percent of revenue was due to inpatient charges as of 2009. This percentage is
slightly higher than the industry average of 60 percent. RCH’s Medicare reimbursement rate is
also lower than the average amount of Medicare payments, with about 30 percent of Medicare
§ Complete list of operational indicators used can be found in Appendix: Table 5.
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patients each year compared to the average 40 to 45 percent nationally. Therefore, RCH has
lower governmental reimbursements.
Price, Cost, and Profitability**
Further analysis of RCH operating indicators includes price, cost, and profitability of the
hospital. With the growing costs of healthcare, it is no surprise to see that the costs per inpatient
admission/discharge and per outpatient visit are all increasing. Alongside these changes are
increases in the price per both outpatient visits and inpatient admission. Fortunately, RCH has
been able to collect more profit due to low contractual adjustments. RCH’s current contractual
allowance percentage is 16.65. Despite this increase over time, RCH remains significantly lower
than the industry average of about 50 percent. This signifies that RCH loses a small amount of
patient revenue due to allowances and discounts. RCH is actually losing more money per
outpatient visit over time, even though profitability continues to increase per inpatient discharge.
The overall changes in these indicators can be attributed to a number of internal and external
factors, such as decreased patient volume, increase in expenses and change in payer mix.
SUMMARY OF FINDINGS
After analyzing a number of the financial and operating indicators, RCH was able to
identify its strengths and weaknesses as an organization. While it excels in a number of areas
such as clinical expertise and inpatient profitability, there is room for improvement in maintaining
overall financial stability.
Strengths
RCH prides itself in maintaining high patient quality of care and satisfaction levels. It
provides extensive outpatient services that generate enough revenue to cover its expenses, as
well as provide charity care without damaging its stability. RCH’s full accreditation by the Joint
Commission enables them to receive governmental reimbursement from Medicare and
Medicaid, which constitutes a majority of its payer mix. Its short ALOS over the past five years
** See Appendix: Fig 3.
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has also been consistently below the average, which could be attributed to efficient use of
resources and utilization of clinical management. A lower ALOS is beneficial to both the patient
and the hospital because it is less costly and risky for them, and opens up hospital resources for
other use. Overall, it gives RCH a competitive edge to accommodate higher volumes and also
to improve patient satisfaction with efficient delivery of care.
According to the high equity-financing ratio, RCH is in a good position to borrow money if
necessary. Its overall cost of capital is 10 percent, indicating that RCH can borrow funds at a 10
percent interest rate. Having a higher equity-financing ratio also positively affects our bond
rating since RCH is not highly leveraged.
On the operations side, there are a number of strengths that can be identified by an
analysis of the operating indicators. One of these strengths is high quality performance. As
previously stated RCH has a relatively low ALOS and is consistently below the average ALOS
of 5.4 days. Short ALOS is key indicator of clinical management and predictive of risk to
patients. Additionally, it has been stated that RCH has received full certification from the Joint
Commission and maintains high patient satisfaction scores.
Weaknesses
From analyzing the financial and operational indicators, we can also see a number of
weaknesses within the organization. A major weakness for RCH is its payer mix, which heavily
features government programs. Between 2007 and 2008, many of the financial indicators, such
as days cash on hand, days in accounts receivable, and debt service coverage, which all went
from generally favorable trends to negative trends. It could possibly be a result of the Medicare,
Medicaid, & SCHIP Extension Act of 2007, there were more patients with government-
sponsored insurance. This is reflected in the stark increase in contractual allowances from
$1.729 million to $5.196 million between 2007 and 2008. These represent significant revenue
deductions.
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One of the weaknesses is the cash flow within the hospital, more specifically, RCH has a
low days cash on hand and a high days in accounts receivable. Overall cash and investments
decreased dramatically from 2008 to 2009, falling from over $5 million to just under $2.8 million,
which is due to both external and internal factors. Externally, the financial crisis impacted their
investments, which had a net cash outflow of $4.328 million. Internally, RCH made significant
loan repayments, totaling $1.427 million. This resulted in low liquidity with fewer resources to
cover its expenses.
Another one of RCH’s weaknesses is its decreasing inpatient volume. As previously
stated, inpatient value must be retained because there are greater economies of scale and fixed
costs are spread over a greater number of patients. Inpatient volume is important to profitability.
While inpatient services earn over 80% of the gross patient revenue, this amount has been
decreasing most likely due to the decreasing inpatient volume. This dip in average daily census
and inpatient admissions can be attributed to the competition within the region, as well as the
shift of certain procedures from an inpatient setting to an outpatient setting.
We can identify that an additional weakness of RCH is its outpatient services. While RCH
increased its outpatient services to meet demands and remain competitive, these services have
not been as profitable. In fact, after looking at the operating indicators, RCH loses money per
outpatient service. This loss in revenue has remained increased over the past years. In order to
increase its profitability RCH must consider changing one of its weakest links: outpatient
services.
RECOMMENDATIONS
RCH must capitalize on its strengths and work to alleviate its weaknesses. Outlined below
are a variety of recommendations that senior management can implement in order to see
organizational success on both financial and operational levels.
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Profitability
One of the weaknesses of RCH that we have identified is the low profitability. There are a
number of steps that administrators can take to help increase the patient revenue profits,
especially if we focus on the outpatient services.
One of the first steps to improve profitability is to decrease costs. With a decreasing
volume of inpatient admissions and an increase in unprofitable outpatients visits RCH can
consider attempt to increase profitability through decreasing expenses. This can be done in a
number of ways including downsizing services and promoting a more efficient use of resources.
Employees can use resources more efficiently, being cautious of underuse and overuse of
medical supplies and equipment. Additionally utilizing process improvement methods such as
Lean Six Sigma can help decrease waste and overall decrease costs. Through analyzing the
services and the expenses for each, RCH may also consider downsizing some of the outpatient
services that are provided to patients.
Another way to increase profitability of RCH is to also increase the revenue. This may be
a more arduous task for administrators because of external factors that may limit growth such
as the competition between hospitals. One suggestion for increasing revenue is increasing the
patient volume, especially for inpatients that have proved to be more profitable which will later
be discussed. Another riskier option to increase income is to increase prices. Because of the
competition within the market RCH may be a price-taker and this may not be a viable option.
Patient Volume
As previously stated, it is vital to increase patient volume in order to sufficiently fund daily
operations, as patient volume greatly dictates revenues. By strategically marketing and
promoting its high patient satisfaction and clinical quality, RCH can increase its inpatient
volume. RCH can increase its market share in the area with a carefully devised strategic plan
that will attract patients away from its competitors. Since RCH has a low ALOS compared to
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industry standards, RCH can increase admissions. A higher occupancy rate will generate
revenue from multiple services provided.
Accounts Receivable
One of the other weaknesses that we have been able to identify is the cash flow within the
hospital. In order to increase its liquid assets and improve the cash flow, we can suggest
restructuring RCH’s billing department, especially in regards to the collection of accounts
receivable. By billing patients or payers earlier and incentivizing quicker repayments, RCH can
have more cash on hand and decrease its days on net accounts receivable. Additionally, RCH
can attempt to attract more patients from private payers as government reimbursements are
often received in a slow manner.
Looking more into the revenue cycle, proper documentation can reduce the chances for
errors in medical bills and diagnostic coding. These errors affect the revenue cycle, creating a
snowball effect that not only affects the financial department but other patient services
departments as well. For example, it will take longer than the average 30 days for Medicare to
reimburse the hospital if adjustments and verifications need to be made. The average days in
accounts receivable would be affected, which subsequently affects the cash reserves. A team or
committee can be formed to monitor the progress and efficiency of proper documentation. This
will help to ensure that current standards are maintained.
These changes will allow RCH to decrease days on account and receivable and increase
the amount of liquid assets. RCH can also cover all of its liabilities and expenses, and will
decrease the chances that accounts receivable will be written off as bad debt. Having more
cash on hand will allow RCH to repay liabilities on a sales discount that reduces the payment
owed if paid in a specific time period.
Other Recommendations
In addition to the previous suggestions, there are a number of smaller changes that we
can recommend that will overall help the success of the organization. One suggestion is to
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solicit more donations by promoting the tax advantages to donors. Increasing the amount of
donations will help cover expenses and overall help increase the bottom line. As previously
stated, improving the payer mix may also benefit the hospital. Not just looking at reimbursement
structures and payers, RCH can also promote for a higher percentage of inpatients. If outpatient
services are still leading to loss, RCH can promote the use of more inpatient services if
necessary.
EVALUATION
After implementing the proposed recommendations RCH must continually work to ensure
that these changes are upheld throughout the organization. Moreover, executives should
evaluate the organization according to a number of key performance indicators (KPIs) to
determine the effectiveness of the recommendations and ensure the intended results are seen.
Financial KPIs
Days Cash on Hand
The days cash on hand measures the number of days the hospital could fulfill it daily cash
obligations without new cash resources becoming available. This is a good key performance
indicator as it illustrates the buffer in cash that can help the hospital remain liquid even in
difficult economic situations. In a difficult economic climate, like we experience today, this
measure is noteworthy to our board of trustees, senior leadership, and creditors. High values of
Liquidity Indicator
Days Cash on HandCurrent (2009)
32.72
Goal
Increase Greater than 40
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days cash on hand imply a higher liquidity and is viewed favorably by creditors. Thus, striving to
have a high days on cash value could be essential to the hospital borrowing more, if needed, at
a favorable rate during this economic period. The industry averages from about 30 to 45, but
because of its value we’d like to aim to increase days cash on hand to the higher portion of this
range.
Days in Accounts Receivable
Days in Accounts Receivable is an important indicator to monitor because it indicates
how much time it takes to collect a bill. Ideally, it should be low so that RCH can use the money
to pay back loans to reduce interest expense or invest it. RCH could also possibly benefit from a
sales discount if they are able to pay back suppliers within a certain amount of time, so there is
an opportunity cost for having their assets tied up in accounts receivable for long periods of
time. We would like to see this amount meet the industry averages and decrease to between 45
to 55 days.
Liquidity Indicator
Days Cash in Accouts Receivable
Current (2009)78.24
Goal
Decrease Less than 55
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Equity Financing Ratio
The debt service ratio measures RCH’s ability to repay loans. Historically, RCH has been
on the upper bounds of creditworthiness, but since 2007 it has been decreasing. Although this is
not cause for concern now, since RCH has a favorable equity-financing ratio, it should be
monitorerd to ensure that the hospital is solvent.
Average Age of Plant
An activity indicator should be included for a comprehensive dashboard. Average age of
plant is the best choice since total asset turnover is accounted for in the Return on Equity, and
fixed asset turnover does not give a complete picture since it depends on the size of the hospital
and the average age of the plant. The average age of the plant is also a good indicator for
determining when the hospital should invest in modernization and replacement, which is a
characteristic of top performing hospitals.
Capital Indicator
Debt Service Coverage
Current (2009)2.16
Goal
Increase Greater than 4
Activity Indicator
Average Age of Plan
Current (2009)0.96
Goal
Decrease Less than 10
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Return on Equity
The return on equity (ROE) ratio allows the hospital to see the amount of net income
generated in relation to the hospital’s net assets. This indicator is strong because it includes a
profitability indicator (total margin), a capital structure indicator (equity financing ratio), and an
activity indicator (total asset turnover). Taking all of these factors into account, the ROE will
allow key stakeholders to accurately determine how profitable the hospital is. Understanding the
profitability through this indicator well could give the hospital a competitive advantage as ROE
indicates whether the hospital is earning profits with the equity present in the hospital. We would
like this value to be greater than the industry average of about 8%.
Operating KPIs
Profit per Outpatient Visit
Profitability Indicator
Return on EquityCurrent (2009)
7.66%
Goal
Increase Greater than 8%
Profitability Indicator
Profit per outpatient vist
Current (2009) ($240.60)
Goal
Increase Greater than $0
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One of the most notable weaknesses of RCH is the lack of profitability of outpatient
services. While RCH is maintaining and expanding their services to remain competitive, these
outpatient services are costing the hospital millions of dollars per year. As of 2009 RCH loses a
little over $200.00 per visit. One goal for RCH to maintain is to reduce this loss by increase
revenue or decreasing expenses and overall aim to provide a profitable service that does not
result in any losses.
Average Daily Census
One KPI to monitor is the average daily census. As previously stated, volume of the
hospital is a major concern of managers. In the recent years there has been a decrease in the
annual inpatient days and therefore the average daily census. A higher volume allows providers
to use assets efficiently, cover fixed costs and grow; therefore, RCH would want to increase this
amount. One goal for RCH to work towards is to prevent any decrease in ADC therefore should
aim for an average daily census of about 110, higher than the previous year.
Volume Indicator
Average Daily Census
Current (2009) 109.76
Goal
Increase Greater than 110
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Occupancy Rate
One of the KPIs to benchmark is the occupancy rate. Like average daily census, RCH
would like this value to be higher. A higher occupancy rate is better because with more inpatient
patients there is a higher source of revenue. The increase from 2008 and 2009 can be attributed
to the reduction in the amount of staffed beds, not an increase in volume. RCH can aim to either
use their current resources more efficiently or increase the volume. Currently, RCH’s occupancy
rate is in the median to upper quartile of the hospitals its size, therefore a good goal for RCH is
to increase the occupancy rate and move into the upper quartile.
Medicare Percentage
Patient characteristics is also important to the operations of a hospital, therefore one
should be included in this new dashboard for operational indicators. From analyzing the current
patient mix, it can be seen that in 2009 31.96% of patients are Medicare patients, placing RCH
Volume Indicator
Occupancy RateCurrent (2009)
61.69%
Goal
Increase Greater than 67.25%
Patient Characteristic Indicator
Medicare Percentage
Current (2009) 31.96%
Goal
Decrease Less than 31.25%
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in the median to lower quartile. Because government payers generally reimburse at later days,
are less generous and provide less reimbursement than other payers, RCH should attempt to
decrease this amount and decrease the Medicare payer mix by increasing the amount of private
payers. RCH should move in the lower quartile (less than 31.25% Medicare patients).
Contractual Allowance Percentage
Another goal for RCH to aim for is to decrease the contractual allowance percentage. This
measures the amount of revenue that is lost because of allowance and discounts. In the recent
years this amount has increased. To maximize revenue and profits RCH should aim to decrease
their contractual allowance percentage by possibly renegotiating contracts or improving their
payer mix. Currently RCH’s contractual allowance percentage is 16.65%, which is the in the
lower to mid-quartile. RCH can attempt to move into the lower quartile and decrease this to less
than 12.12%.
Price Indicator
Contractual allowance percentage
Current (2009) 16.65%
Goal
Decrease Less than 12.12%
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APPENDIX: TABLES AND FIGURES
Table 1. List of relevant financial indicators.Year 2005 2006 2007 2008 2009 Industry
Avg.DuPont Analysis
Profit Margin 11.38% 11.28% 8.75% 6.48% 6.75% 3% - 5%TAT 68.05% 65.90% 65.66% 61.23% 67.10% 11/EFR 1.820 1.732 1.659 1.787 1.692ROE 14.10% 12.88% 9.54% 7.09% 7.66% 8%
ProfitabilityOperating Margin 4.18% 3.96% 3.65% 3.30% 2.94% 1% - 3%Non-operating Gain 1.78% 1.55% 1.72% 2.91% 2.20% 5%
Capital StructureEquity Financing Ratio 54.94% 57.73% 60.27% 55.97% 59.10% 40% - 50%Times Interest Earned 3.29 3.46 3.23 2.32 2.38 2 to 3Debt Service Coverage
4.14 4.07 4.77 2.16 2.16 2 to 4
ActivityFixed Asset Turnover 0.92 0.89 0.84 0.79 0.86 2Average age of plant 5.17 5.10 5.03 5.39 6.12 10
LiquidityDays cash on hand 57.79 90.82 68.08 66.87 32.72 30 - 45Days in a/r 84.13 64.76 55.25 67.73 78.24 45 - 55
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Table 2. Percentage change of revenues and expenses.2005 2006 2007 2008 2009
Revenue 26.966 28.497 30.033 32.429 36.416Percent Change
6% 5% 8% 12%
2005 2006 2007 2008 2009Expenses 23.898 25.283 27.404 30.327 33.958Percent Change
6% 8% 11% 12%
Table 3. Common Size Net Patient Revenue 2005 2006 2007 2008 2009
GPR Inpatient 0.84 0.81 0.80 0.76 0.74 Outpatient 0.16 0.19 0.20 0.24 0.26 Gross Patient RevenueRevenue Deductions Contractual Allowances 0.08 0.07 0.05 0.14 0.17 Charity Care 0.06 0.06 0.07 0.07 0.07Total Deductions 0.14 0.13 0.12 0.20 0.23
Net Patient Service Rev. 0.86 0.87 0.88 0.80 0.77
Table 4. Common Size Statement of Operations2005 2006 2007 2008 2009
REVENUESNet patient service revenue 95.2% 95.6% 95.9% 94.3% 95.0%Other revenue 4.8% 4.4% 4.1% 5.7% 5.0% Total revenues 100.0% 100.0% 100.0% 100.0% 100.0%
EXPENSESSalaries and wages 40.2% 39.1% 40.8% 38.4% 38.4%Fringe benefits 5.5% 6.1% 6.1% 7.4% 7.1%Interest expense 5.0% 4.6% 3.9% 4.9% 4.9%Depreciation 6.3% 6.9% 7.8% 8.2% 7.6%Provision for bad debts 2.0% 2.1% 2.1% 2.0% 2.1%Professional liability 0.4% 0.6% 0.5% 0.6% 0.6%Other 29.2% 29.4% 30.1% 31.9% 32.5% Total expenses 88.6% 88.7% 91.2% 93.5% 93.3%
Excess of revenues over expenses 11.4% 11.3% 8.8% 6.5% 6.7%
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2005 2006 2007 2008 20090
102030405060708090
100
Days Cash on Hand
Year
Days
Figure 1. Days Cash on Hand over time. Industry average of this indicator has been shaded in grey.
2005 2006 2007 2008 20090
10
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Days in Net Accounts Receivable
Year
Days
Figure 2. Days in Net Accounts Receivable over time. Industry average of this indicator has been shaded in grey.
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Table 5. List of relevant operational indicators.2005 2006 2007 2008 2009
VolumeInpatient Admissions 9680 9311 8784 8318 8576Inpatient Days 45296 45983 44085 42434 40062Average Daily Census 124.099 125.981 120.781 116.258 109.759Beds 192 196 193 197 178Occupancy Rate 64.63% 64.28% 62.58% 59.01% 61.66%Outpatient Visits 30754 31960 32285 32878 36796Case Mix 1.2531 1.2674 1.2869 1.2993 1.3161Inpt Revenue % 84.13% 80.90% 79.99% 76.15% 73.60%Outpt Revenue % 15.87% 19.10% 20.01% 23.85% 26.40%ALOS 4.679 4.939 5.019 5.101 4.671Bad Debt/Charity Percentage 7.71% 8.14% 8.42% 8.26% 8.43%Medicare Payment Percentage
31.07% 31.79% 30.98% 34.38% 31.96%
PriceGross price per Inpt $ 2,599.28 $ 2,714.53 $ 2,973.25 $ 3,504.21 $ 3,873.13Net price per Inpt $ 2,650.93 $ 2,925.14 $ 3,278.23 $ 3,675.88 $ 4,032.42Contractual allowance % 8.32% 6.57% 5.30% 13.57% 16.65%Gross price per Outpt $ 154.39 $ 186.76 $ 202.42 $ 277.69 $ 323.73Net price per Outpt $ 8.34 $ 8.52 $ 8.92 $ 9.30 $ 9.40
CostCost per Inpt Dc $ 1,925.10 $ 2,064.33 $ 2,342.10 $ 2,672.40 $ 2,888.41Cost per Outpt visits $ 171.07 $ 189.67 $ 211.58 $ 246.30 $ 249.67
ProfitabilityProfit per Inpt Dc $ 725.93 $ 861.14 $ 936.23 $ 1,003.88 $ 1,144.42Profit per Outpt Vist $ (162.66) $ (181.48) $ (203.08) $ (236.70) $ (240.60)
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2005 2006 2007 2008 2009 $-
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RCH Profitability
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Figure 3. RCH Profitability over time.