Dec 27, 2016 Philip Burgess
Between federal regulations and high administrative costs, hospitals are operating on tight margins. Some even in the red.
For example, according to the Pennsylvania Health Care Cost Containment Council, the state's 171 general acute care facilities delivered $1.06 billion in uncompensated care during the 2014 fiscal year. A separate study from iVantage Health Analytics found 673 U.S. hospitals located in rural areas are at risk of shutting down.
"Industrial averages fail to inform executives of how they can improve operations."
Staying in the black involves either reducing operating costs or improving revenues. To determine where excessive expenses lie, hospitals should consider the merits of utilizing financial benchmarking and business valuation tactics, four of which are discussed below.
1. Compare the business against best-in-class competitors
Financial analysts often approach benchmarking by contrasting their companies' performance against the industry average. However, analysts should consider the merits of using top-performing competitors as a baseline for performance standards.
ASQ, a firm that provides professional certifications and training services, maintained that comparing one's operations with industrial averages fails to inform executives of how they can improve operations. In healthcare, if the average hospital is struggling, it's better to analyze what particularly healthy facilities are doing and mimic those behaviors.
2. Benchmark against similar hospitals
It doesn't make sense for a rural hospital with 100 beds to compare itself with an urban facility in charge of 450 beds. The size of one's operations isn't the only differentiator. Demographic factors dictate what sort of care certain patients receive. For example, a rural hospital in a town with a big logging and manufacturing industry may treat more patients with serious, physical injuries than a facility in a suburban area with a large white collar population.
Hospitals should consider benchmarking against businesses that share characteristics such as its patient demographics, location and number of beds. One tool, the Integra Comparative Profiler, correlates the following factors between two enterprises:
- Income in dollars
- Income in percentages
- Balance sheet in dollars
The report also comes with more than 20 comparative financial ratios so you can cover the fiduciary as well as operational similarities.
3. Use industry growth outlooks
Hospitals that compare their own financial projections with five-year industry outlooks can identify how they should allocate resources over the long term. Analysts should choose reports that provide granular data on hospital operational trends. A good report should enable them to answer specific questions, such as:
- What is the compound annual growth rate of post-acute care services over the next five years?
- Will demand for emergency room services trend upward in the next two years?
- How will wearable devices affect the cost of inpatient care over the next several years?
Be cognizant that some of the more detailed reports can be quite expensive. When budget constraints persist, opt for more affordable industry growth outlook reports that focus on general financial performance. The latter studies not only display trending growth domestic product across a certain timeframe but also inflation trends, enabling you to get an accurate interpretation of an industry's performance.