7 Ways Hospitals Can Create More Accurate, More Useful Finance Benchmarks

Hospital Finance Benchmarks

Benchmarking is critical to accurate reporting, yet many hospital finance directors fail to track the right metrics or properly use the measurements they do collect.

Too often, they fixate on broad scale comparisons to industry averages, instead of looking directly at the top performers. They also fail to look outside the healthcare industry for role models. Why is that? The US healthcare industry has its share of problems, but we are, in general, trending toward innovation an evolution. Why does it seem like the industry’s finance directors, who are typically savvy people, are failing to see the correlations between the healthcare industry and the service sector as a whole?

Broad benchmarks can mask average or poor performance.

Benchmarking can be a powerful tool, or it can be a constraint. If hospitals focus too narrowly on how they compare — and not on what they are doing to change outcomes — they run the risk of becoming mired in the middle of the performance pack.

Consider a hospital that tracks its profit margin relative to peer organizations within its credit rating group. Let's say that, for hospitals within that credit rating cohort, the national average for adjusted monthly profit margin was 2.9%, and the hospital in question had realized 3.7%, 3.1% and 3.3% margins, respectively, over the preceding three months.

That hospital's finance director is probably pretty happy. But should she be? What if she learned that, for the top quartile of her organization's peers, the average adjusted monthly profit margin was 5.5%, with a standard deviation of 0.8%? Is her organization really performing well?

Not really. In this case, her organization is performing no more than 1 standard deviation above the national average and over 2 standard deviations below the average for the top quartile. In fact, the entire distribution curve is likely skewed left, and this finance director is on the wrong side of the median. There may be significant room for improvement in revenue cycle, operations, marketing and more.

Because she is not tracking her hospital's performance relative to industry leaders or relative to the standard deviation, she continually paints a rosy picture for the board and for stakeholders, but fails to realize — until it's too late — that her hospital is underperforming, non-competitive and vulnerable to a disruption in the market.

So, how can hospitals and other healthcare organizations develop more useful benchmarks? Here are 7 benchmarking best practices you should keep in mind when developing your reports.

1. If you focus on how you relate to the average, "above average" will be your only goal. Aim higher.

Monthly and quarterly financials are the proverbial canaries in the coal mine when it comes to predicting a hospital's viability. So why are you only measuring performance against the middle of the pack? Your hospital needs to be stronger than the strongest competition in a cutthroat, results-based market, right? Contrast your organization's numbers against the top performers' numbers — not against the industry average.

2. Means are only valuable measuring sticks if you also know the standard deviation.

If you track one, track the other — without fail. Moreover, know how many standard deviations your result is above or below that of your strongest competitor.

3. Benchmarks should be video clips, not snapshots.

If you take nothing else away from this discussion, take the following:

Derivatives are often more valuable for capturing performance than nominal values are. Measure and compare the rate of change (relative to your competition's rate of change), and you'll have a better picture of how your healthcare organization stacks up in the market.

As Charles C. Y. Wang, an assistant professor of business administration at the Harvard Business School, cautioned, "Traditional industry classifications are unlikely to capture nuanced or changing economics in firms in an increasingly service- and knowledge-based economy."

Measuring rates of change and noting standard deviations will help you to capture nuances and changes in market conditions as they develop, giving you more time to push your hospital to adjust. In effect, they make your organization more nimble and better able to survive both competition and market shocks.

4. Don't select too narrow a peer group.

For most healthcare organizations, benchmarking typically begins with a search for a select group of comparable hospitals. Unfortunately for most organization, trying to narrow down a peer group quickly becomes an endless task that spirals down into a never ending cycle of sorting and resorting data.

The problem with focusing on a narrow peer group is that you aren't just in competition with peer organizations. You're in competition with the market as a whole.

It's fine to be able to report to your board that your hospital is doing more with the same amount of resources compared to other organizations its size. But market share isn't determined by efficiency of resource management — it's determined by consumer perceptions and consumer experiences.

Let's say, for example, that your facility is a small community hospital in a mid-sized city. Your only local competitors are one other, similarly-sized, community hospital and a big, university-based academic medical center.

If your benchmarks compare your organization's performance relative to the standard performances of that one other community hospital, plus 15 other peer community hospitals throughout the United States, they say nothing about your organization's ability to compete with the local academic medical center's deep, state- and university-subsidized pockets and its esteemed reputation among patients in your consumer base.

You need to use your benchmarking to identify relative weaknesses and relative strengths of your hospital relative to its most immediate competition first. Then you can worry about comparisons to nationwide peers. Your goal here is to bring patients in the door and keep them coming in the door, or otherwise to find out why they aren't coming in your door and opting instead for your competitors.

5. Always bear in mind that, to be effective, benchmarking must be paired with ongoing performance improvement efforts.

It's not useful to collect data if it is not applied. If you are tasked with reporting the financials, you are also tasked — implicitly — with finding collaborative ways of using financials to improve outcomes, and using improved outcomes to, in turn, improve market performance.

Too often, hospital finance directors silo themselves away from the clinical environment and the customer service line. Regardless of how good the numbers look relative to your benchmarks, there will always be room for improvement.

Could tweaks to revenue cycle policies improve accounts payable and accounts receivable? Could more proactive claims scrubbing and utilization review prevent denials and shorten your bill-to-reimbursement times? Could adjustments to protocols on the floor lower your facility's hospital-acquired infection rate, reduce preventable readmissions and, ultimately, increase reimbursement rates?

A finance director who is actively tracking, analyzing and employing benchmark data should be found out in the organization just as frequently as sitting in his or her office. Get out of the C-suite and out on the wards. Find the managers, providers and advocates who can help you plan and instigate positive changes.

6. If the numbers don't tell the tale you had hoped, don't hide them. Publicize them and use them to spur change.

Transparency can be a key motivator — for providers and stakeholders alike. Consider the case of Cincinnati Children's Hospital Medical Center (CCHMC).

According to the Harvard Business Review, a performance improvement initiative in the late 1990s and early 2000s revealed that CCHMC was not the industry leader it thought it was in several key areas. Although the medical center had assumed it was among best-in-class for acute and ongoing pediatric care, several of its clinical areas' outcomes were well below average.

For example, CCHMC discovered that outcomes in its Cystic Fibrosis (CF) clinic were only the 20th percentile, relative to national benchmarks. Instead of hiding this information from providers and from patients' families, the institution communicated its known shortcomings and enlisted patients and their parents in its clinical improvement efforts.

Using feedback from patients, families and providers, the hospital changed many of its CF clinic procedures and instituted new communication and follow-up care strategies. As a result, 6 short years later, its CF clinic outcomes had improved to rank in the 90th national percentile.

If your hospital's financial benchmark measurements show room for improvement, don't gloss over the numbers. Share them outside the C-suite. Enlist your providers, your support personnel and even your patients in improving. Gather as much feedback as you can.

7. Look for role models outside healthcare.

Healthcare is a service industry. Granted, it's a service industry based on complex systems management and application of the scientific method, but in the end, success is still based primarily on consumer satisfaction.

So why aren't you benchmarking relative to other industries?

There are certainly analogues. The air transportation industry requires complex systems management while lives hang in the balance. The food manufacturing industry requires implementation and tracking of rigorous safety procedures. The retail industry is dependent upon providing excellent customer service and support.

Broaden your scope. Look to areas of the economy other than healthcare to see how you stack up from your target consumer's point of view or relative to other industries from the standpoint of operational safety and improvement.

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