Financial Reporting vs. Your Decision Making

By Jack Ahern, MBA

Most dialysis providers are gearing up for some of the core decision making challenges related to a major change in reimbursement structure and I think this is a good time to look at how financial reports should support our management decision making process.

Information is Power

With respect to healthcare, it has often been said “No margin, no mission.” Although the mission is a statement of enduring commitment, the margin is a variable numeric reality. The profitability of dialysis facilities can increase, decrease and even become negative with fluctuations in cost and reimbursement.

The mission must be lived; however, the margin must be calculated. It is essential that management decisions with respect to capital investment, strategic positioning, and operational viability are based on accurate, real-time numerical assessments of overall profitability and those key elements which drive the financial performance.

Clearly understood, accurate and timely reporting of financial and operational performance greatly enhances the profitability, effectiveness, and ongoing improvement of any dialysis facility. In these times of change, it is more important than ever that decision makers have a complete and accurate set of financial and clinical parameters to model reimbursement and make the best decisions on items such as whether or not to opt for the three-year phase in of the new reimbursement system or to jump in with both feet and accept the new system completely. If you are wondering if your information systems and financial reports are in need of upgrading, ask yourself, what information do you need, but do not have, or do not have in a timely manner?

The following key questions should be numerically answered by financial reports.

Revenue Management

1. What percent of revenue is generated by each payer class?
2. For commercial insurance, what percent of revenue is generated by each commercial payer?
3. What is the revenue by service, by payer?
4. What percent of collectable revenue is being collected?
5. Is co-insurance being collected?
6. What is the Medicare bad debt amount?

Cost Management

1. What is the cost structure (direct, indirect, labor, supplies, capital equipment etc.) for your dialysis unit(s)?
2. Which modes of dialysis are most costly?
3. What is the cost structure for each mode of dialysis?
4. What are the costs of separately billable labs, drugs, and supplies?
5. What portion of labor cost is clinical vs. non-clinical?
6. What portion of clinical cost is RN, LPN, Technician, Social Worker etc.?

Margin Assessment

1. Is operation of the dialysis unit itself overall a source of profit or loss?
2. What is the profitability of the bundled dialysis service covered under the composite rate for each mode of dialysis?
3. What is the profitability by payer?
4. What is the profitability of separately billable dialysis related labs, drugs, and supplies?
5. With respect to related revenue streams, how much profitability is generated by services not possible without the support the dialysis units, such as physician practices, acute dialysis.
6. For hospital based units, how much profit is generated from renal related inpatient admissions and transplants?

Reader Response:  How to Choose the Best System

Having delved into financial reporting outputs, I would like to respond to several reader requests for more information regarding last month’s article on selecting billing and financial management systems. In terms of systems and vendors to consider, I cannot say any one system comes to mind—there are multiple systems on the market, each with strengths and weaknesses. However, once a system is installed, clinicians and financial staff at a facility soon become adapted to the system chosen, and over time, defects are usually compensated for.  Rarely do providers switch systems so as per my July RBT article, "Choosing the Best Financial and Clinical Management Systems for Your Facility," that the purchase decision should be made carefully. 

Short of doing a comprehensive analysis myself for a specific unit I cannot recommend any one system. However, as requested by several readers, here is some additional advice, above and beyond the suggestions in my July RBT article.

1. Be crystal clear about what features you need in your financial and clinical management system, and why.  Sharply distinguish needs from wants.
2. Look at least 5 years into the future, in terms of your financial and clinical needs.
3. Also look to the future in terms of the marketability of your facility or practice, should you decide to add facilities/clinicians or sell your facility altogether.
4. Put your requirements in writing and assign a weighted priority rating.
5. Query your present and potential future colleagues/employees, for their present and future needs.

So, enjoy the last month of summer and, as always, feel free to drop me a line at jahern@ahernconsulting.com and let me know what you think.

With offices are located in Chicago and Washington, D.C., Jack Ahern provides cutting edge financial and management consulting services to major academic medical centers, large national dialysis organizations, independently owned dialysis facilities, nephrology groups, as well as to legislators, institutional investors, pharmaceutical companies and medical device manufactures.  He and has an MBA from the University of Chicago, and undergraduate degrees in both Chemistry and Engineering from Dalhousie University.  He can be reached at (312) 997-2177, ext. 701.