Best Metrics: Healthcare Industry

The following post is a summarization of insights based on conversations from the Best Metrics Podcast featuring industry leader Michael DeLuca, of HBK. Listen here to the full episode. 

Being a financial advisor for businesses in the healthcare industry presents unique challenges and responsibilities. These businesses hold a special position within their communities, providing essential care with a humanitarian touch. However, the financial landscape can be as varied as the services they offer. The saying, “once you’ve seen one practice, you’ve seen one practice,” aptly reflects the diversity in how these practices generate revenue and manage their finances. Each practice's financial health must be evaluated on its unique terms.

Understanding Net Profitability

Let’s talk profitability. For a thriving healthcare practice, you’re aiming for a net profitability of 30%-40%, depending on the type of practice. Profit margins dipping into the high 20% range signal a potential danger zone. Beyond top-line revenue, advisors need to scrutinize the quality of processes and operations behind revenue collection to ensure long-term financial stability.

Over Leveraged?

First up on our checklist: is the practice over-leveraged? Excessive debt can strain the practice's cash flow, limiting its ability to invest in new technology, hire essential staff, or expand services. However, not all debt is detrimental. Healthy debt, often reflected in a balanced Debt-To-Equity ratio, can support growth and operational efficiency.

Debt-To-Equity and Capital Expenditures

In healthcare, an optimal Debt-To-Equity ratio is a moving target but crucial, and should be carefully monitored. Practices should monitor an aging asset schedule for capital expenditures to manage their investments wisely. This schedule helps in planning for equipment upgrades and replacements, helping to avoid the all-too-common trap of piling on debt without clear ROI. 

When advising on debt-financed capital expenditures, it’s crucial to analyze the return on investment (ROI) for specific equipment. This means looking beyond net cash flow to assess the anticipated ROI of ancillary services added to the practice. If debt levels are too high, especially in established practices, cash flow management becomes a priority, guiding advisors on which metrics to focus on to restore financial health.

Optimizing Accounts Receivable

Let’s not forget Accounts Receivable (A/R), the lifeblood of healthcare finance. An A/R Aging Schedule from practice management software provides insights into how efficiently claims are processed and collected. A clean claim should achieve a collection rate of over 95%, with less than 5% of bad debt. The ideal collection timeframe is within 90 days, and even shorter for Medicare claims.

Regularly reviewing and renegotiating contracts with commercial payers can improve collection rates. Additionally, coding and billing within 3-5 days post-service, and ensuring claims are clean the first time, are essential strategies. Clean claims should exceed a 95% success rate initially, and denied claims should be addressed within 3-5 days to maintain cash flow.

Operational Metrics and Non-Financial Indicators

Beyond financial metrics, operational performance indicators are equally important.

• Patient satisfaction scores
• Wait times
• No-show rates
• Provider-to-staff ratios
• Provider-to-patient ratios
• Revenue mix metrics

All of these offer a comprehensive view of a practice's health. Regional demographics, like Florida’s high Medicare rate, should be considered when evaluating these metrics to ensure context-appropriate assessments.

Strategies for Growth

Growth strategies for healthcare practices vary depending on the type of practice but often include

• Adding physicians
• Bolstering support staff
• Introducing ancillary services
• And leveraging nurse practitioners for less critical tasks are all smart moves.

These strategies for growth involve working smarter not harder. 

Financial advisors in the healthcare industry play a crucial role in navigating the complexities of practice management. By focusing on both financial health and operational efficiency, advisors help practices achieve sustainability and growth. The advisory role extends beyond numbers, supporting practices in delivering high-quality care to their communities.

About Peerview Data

Peerview Data offers advanced data analytics and benchmarking tools that empower healthcare practices to gain actionable insights into their financial and operational performance. Our platform provides comprehensive reports, helping practices make informed decisions and stay ahead of the curve in an ever-evolving industry. With Peerview Data, you can ensure your practice is not only financially sound but also primed for growth and excellence in patient care.