Last Thursday Perficient held a webinar led by Curtis Mahanay who is a Senior Functional Consultant and accountant. The webinar was entitled, “Deeper Insight into Financials with a Driver-Based Cost & Profitability Model“. He presented on the important topic of turning data into information that capital intensive organizations, like hospitals, can use to maintain efficiency, control costs, and manage margins. You can view the slides and a replay here.
Curtis led with the following quote from James C. Robinson, PhD:
“Hospitals need revenues to finance operating expenses, to invest in new capacity, and to provide charity care for the uninsured, yet they receive payments from public insurance plans that lag behind the growth in the costs of care. Positive contribution markets on orthopedic and cardiac procedures for privately insured patients can be used to subsidize less remunerative procedures and patient groups. The average total margin for US hospitals in 2008 was 2.8%, according to American Hospital Association data, indicating the extent to which the double-digit contribution margins documented here are used to support other services. The extent to which the margins documented here are two high, too low, or just right depends on the mandates placed on hospitals by public policy, private litigation, and cultural expectations.”
In order to deal with this harsh set of circumstances, turning data into information should be a hospital’s number one financial goal. Hospitals need revenues to finance operating expenses and to invest in new capacity. In order to do so, hospitals need to be able to map their metrics by picking the top expenses that drive costs (Curtis recommends the top 3) and, instead of analyzing spreadsheets to make decision, see how a hospital’s revenues impact those specific cost drivers. This ultimately leaves us with the contribution margin approach to the income statement.
Driver-Based approach: gross revenue – expenses (key drivers) = contribution margin
Curtis went on to say that there is no business value add in simply managing allocations. If instead you analyze efficiency, price, and volume, then you can get to the bottom of these driver based expenses.
One of the most important points that Curtis made was that financial leaders at hospitals cannot just use their own judgment. By using integrated advanced analytics, financial executives can turn data into information rapidly to not only understand the important components of their current key drivers but also predict the future through modeling with pro-forma statements. You can get to this point by integrating any current data source with business intelligence tools so that you can move away from the current Excel based world (I like to call them spead-marts) and have all of your data in the same place so that you are making important financial decisions using a single version of the truth. Any industry that is capital intensive, like healthcare, needs to use predictive analytics to be truly competitive. Curtis recommends a five phase approach:
Phase 1: Application to Report/Compare Actuals
- Waterfall Reports and Heat Maps
- Monthly Summary Profitability Letters
- Customer Profitability
Phase 2: Contribution Plan/Forecast
Phase 3: ROIC Reporting and Forecasting
Phase 4: Predictive Analytics
- Predictive Analytics & Exception Reporting
- What-if Modeling & Business Optimization
Phase 5: Integrate Driver Based Forecast with Financial Plan
One of the great outcomes of this method is advanced reporting. Key reports include visualized data like heat maps and waterfall reports that can be viewed through the dashboard or by mobile methods in real time.
I was particularly fond of this slide which graphed the “return on information”. This shows how hospitals can end the reactionary cycle and get down to the all important “how”.
With the transition to the new ICD-10 code set, this is a critical data age for healthcare. It’s important to realize that if we look beyond the headaches of implementing yet another IT project, this rich financial data source can be used to improve a healthcare organization by providing important insights that lead to better decision making.
