John J. Goehle, COO of Ambulatory Healthcare Strategies in Albany and Rochester, N.Y., identifies 10 key financial metrics to measure in an ambulatory surgery center.
Revenue side
1. Number of days in accounts receivable. One mistake ASCs often make is not reviewing reports on accounts receivables on a regular basis. "This is one the most important metrics you should follow," Mr. Goehle says. "The administrator should oversee various reports from the business department monthly." The figure may creep up gradually, month by month. "If it starts climbing above 35 or 40 days, it's time to start taking action," he says. During the month, when this metric is not being measured, look at collections as an indicator of where A/R might be heading.
2. Review collections during the month. Compare payments coming in each week with the center's goal for the month. "By mid-month, you should have collected about half of your goal," Mr. Goehle says. If payments fall below that level, it may be time to check the entire collection cycle to identify where the hold-up might be.
3. Estimated net revenue for the month. When monitoring revenue, one mistake ASCs make is to survey how much they billed rather than how much they will actually be paid, based on contracts or rate schedules. "It isn't that hard to collect data on what you will actually be paid," Mr. Goehle says. Most billing systems can be set up to automatically calculate what net revenue would be, based on contract data entered into the ASC's computer system. All the major billing systems have this function, including SourceMedical, Vision and Experior.
Even though the automation is available, a lot of centers do not measure estimated net revenue, or they may do it manually, which can be very time-consuming for a high-volume facility. Mr. Goehle visited one ASC where the staff was manually calculating estimated net revenue, steps away from a computer system that could have done it for them. Small centers may not have such automation and will have to keep making manual estimates, but this may not be so challenging if the center is single-specialty with a limited number of procedures to bill for.
4. Net revenue per case. This metric might pick up a shift in case mix or a shift in volume toward lower-paying insurers, which could affect decisions on appropriate cases and staffing levels. For example, in a multispecialty ASC, the metric might reveal a rise in lower-paying GI volume or a drop in higher-paying orthopedic volume. "Compare net revenue per case with your budgeted net revenue," Mr. Goehle says. "Identify the cases that are bringing down net revenue per case and decide whether expenses for these cases can be cut back or whether they should be covered at all." This metric also affects staffing. If the ASC is doing more lower-paying, less time-consuming cases like GI, then staffing should be cut back.
Balance sheet side
5. Number of days cash on hand. The standard for ASCs is 30 days cash on hand, which means the center can go for a month without taking in any revenue. Some centers aim for 35-60 days cash on hand. To calculate this metric, take the amount of cash the center has and divide it by average daily expenses, not including depreciation or amortization. This points the focus on supplies and wages.
Why do you need to know this? "There are several scenarios when you would need to have very generous cash on hand," Mr. Goehle says. "For example, when I was working at an ASC, Medicare implemented a change in the electronic billing protocol, creating a problem with claims processing. All revenue stopped for 2-3 weeks while the Medicare intermediary worked on the problem." In a more mundane example, the billing officer goes on vacation for two weeks, with no one assigned to cover her work.
Even happy situations, like adding more physicians, can force a center to dip into its cash reserve. Adding a practice would suddenly increase volume, a cause for celebration, but it comes with a temporary downside. The added volume would substantially increase expenses before the increased revenue comes in to pay for them. "In this situation, it is going to take 30-60 days to collect revenues to cover those expenses," Mr. Goehle says. Of course, accumulating enough cash to cover 30-60 days of operation requires withholding a larger part of distributions, which physician-owners may resist. "This can be challenging because many physician-owners like to take out most of the cash in the ASC as it accumulates," he says.
6. Number of days in accounts payable. "This figure will show you how long it takes the center to pay its bills," Mr. Goehle says. Accounts payable, of course, represents the amount of money the ASC owes its vendors. To calculate days in accounts payable, take the amount in accounts payable and divide it by daily operating expenses such as supplies, but not salaries, depreciation or amortization.
This figure tends to hover somewhere below 30 days because ASCs, like other businesses, tend to wait until they get near the due date to pay a bill. Vendors typically want to be paid within 30 days, but a drug vendor, for example, might provide a discount if the bill is paid within 15 days. If the number of days in accounts payable creeps up and starts to exceed payment deadlines, angry vendors may start putting the center on credit hold, refuse to ship new supplies or require cash on delivery. That can bring an ASC to its knees.
Expense side
7. Salaries and wages divided by net revenue. This figure helps the ASC adjust staffing as revenue changes. Salaries and wages should equal 20-25 percent of net revenue. "Changes in this figure are usually an early warning indicator that staffing changes are needed," Mr. Goehle says. For example, a busy physician exits the ASC and case volume plummets. The ASC would then have to reduce staffing. On the other hand, a drop in this metric may simply mean that one or more employees are on vacation and it can be ignored. When this metric starts creeping up, some physician-owners may resist laying off employees, hoping that it is just a temporary blip, but as the realization seeps in that the change is permanent, staffing cuts will have to be implemented.
8. Total clinical hours per case. This is another way to determine whether staffing levels are correct. Determine the total paid clinical hours of the tech and nursing staff and divide it by the number of cases. To look for trends, track this metric every month or look at a three-month rolling average. Compare the figure to the center's past performance or to a national benchmark, which is available from the ASC Association. The association's figure is not yet broken out by specialty, but that is planned. "Keep in mind that total clinical hours per case will vary substantially by specialty," Mr. Goehle adds. For example, the figure would be around 5-6 hours for GI and pain and around 10-12 hours for orthopedics.
9. Supply costs per case. This figure can identify changes in supplies, such as an anesthesiologist switching to a more expensive product without telling anyone or a surgeon deciding to use a different type of implant. Because contracted prices and physician preferences vary widely, it is almost impossible to benchmark this metric using outside sources, but it can be compared to previous months within the ASC.
10. Maintenance and repair expenses. This metric can help the center decide how much money to set aside to cover routine maintenance. However, identifying a useful figure can be quite challenging. "This is a tough one," Mr. Goehle says. "Machines don't break down on schedule. They often follow Murphy's Law and break down all at once, when you have the highest caseload and the least cash in the bank." With so much variability, it takes some thought to come up with a useful number. "You could go nine months out of the year and there will be virtually no problems at all, then you'll get walloped all at once," he says.
Because of the unpredictability, Mr. Goehle recommends using rolling averages over many months. Compare maintenance and repair expenses each year or on a 12-month rolling average. A larger ASC with lots of equipment might be able to use quarterly rolling averages. "If maintenance and repair expenses are going up, you might want to ask why," Mr. Goehle adds. "If a machine is constantly being repaired, it may be time to buy a new one."
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