Three things hospitals can do to improve their financial situation?

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About the Dupont Decomposition Equation [DDE]

DEM blueBy Dr. David E. Marcinko MBA CMP


According to the Dupont Decomposition Equation – which involves the conglomeration of net operating income, revenues, expenses and average operating assets – ROI and economic profit is increased in three prioritized ways:

  1. Cost and expense reductions.
  2. Revenue increases [Rev]
  3. Reduced average operating assets [AOO]

Note: ROI = NOI / Rev X Rev / AOO

Cost and expense reductions

Although many hospitals have reduced expenses, postponed projects and put clinical or information technology projects on hold because of the MU conundrum, this may be unwise and quality may suffer. And, mental health care programs are almost always the first cost center to be reduced in tough times.

Upgrades today, especially with concurrent marketing and advertising promotions, may well be considered a strategic competitive advantage, and at bargain basement prices for those with cash or credit. This cost reduction is easy because it gives the biggest buck-bang in the ROI equation, and is the first line of ROI augmentation by savvy administrators and CEOs. It is also intuitive and wholly “wrung-out” in the marketplace, to date.

Revenue increases

On the other hand, revenues can usually be only incrementally increased by improving services like emergency care, urgent care, wellness, out-patient and/or surgical departments. This is the more difficult part of the equation and yields a positive, but lesser return in the ROI equation.

Three Modern Collections Rules

The following medical practice procedures will markedly increase upfront office collections:  

  • Train staff to handle exceptions. What is your policy if the patient payment is significant? Will you allow 25% payments—one today and three over the next three months? Communicate your policy to all staff. What will you do if a patient shows up without an insurance card? There will be other exceptions. Train employees to call the appropriate practice-management contact when an exception does not fit in the categories you provide and make sure those managers are responsive.
  • Understand that not everyone will shine in collections. The value of this new front-desk function should be reflected in job descriptions and wages. Track staff performance and hold employees accountable for collection goals. The most successful practices collect in the 90% range.
  • Provide professional signage that states your basic policy. “Payments are due at time of service.” Avoid typewritten, lengthy explanations taped to walls or desks that look like clutter.

Reduced average operating assets

Finally, any delay in updating facilities – while easy and may reduce operating assets – there is little ROI advantage and profit potential. Of course, facility asset upgrades mean borrowing funds through tax-exempt bonds – the main source of debt for most hospitals – and is currently difficult or impossible in this climate. Loans from banks, private investors, angels, venture capitalists or other financial institutions are similarly difficult to obtain. Thus, this part of the equation may often be neglected; as is the case now.





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4 Responses

  1. Why days cash on hand is so important for hospitals

    Changes in payment trends brought about by the Affordable Care Act, technology expenditures related to electronic health records, and fluctuations in cash flow from higher deductibles and patient copays have all impacted the need for readily available cash.



  2. Hospitals Lost $420 million in Readmissions Penalties This Year

    Kaiser Health News recently released an analysis on The Hospital Readmissions Reduction Program penalties for its fourth year. Here are some key findings from the report:

    • Starting in October, 2,592 hospitals will receive lower payments for every Medicare patient.
    • These hospitals lost a combined $420 million due to the readmissions penalties.
    • All but 209 of the hospitals penalized in this round were also punished last year.
    • The average Medicare payment reduction is 0.61% per patient stay.
    • 38 hospitals will receive the maximum penalty of 3% per patient stay.
    • Medicare will provide financial incentives worth $1.5 billion to high-performing hospitals starting in October.

    Source: Kaiser Health News, August 3, 2015



    [Hospital dishwashing function performed by an un-insured patient]

    TAKING A CUE FROM scenes in countless movies in which a restaurant patron, unable to pay their check, ends up washing dishes in back, Controller Frank Fiscalini at Saint Emperor Norton Medical Center in San Francisco approached his CEO about putting a similar program into place.

    “We both expressed frustration at a recent news article indicating seven million people who are eligible for health insurance exchange coverage would pay less in IRS penalties than for the least expensive plan available to them, and that a sizeable number of consumers are choosing to do just that,” Fiscalini recalled when discussing his meeting with his CEO. “So we decided to move forward with our dishwashing program as an alternative method of repayment for uninsured patients who do not have adequate funds or other assets to dedicate to their hospital bill.”

    Mary Mallon, an uninsured patient participating in the program said “I don’t really mind putting in the time in the evening scrubbing pots and pans,” but expressed surprise when it was pointed out that it would take well over five thousand hours of service to retire her $80,000 hospital bill.

    “At my rate of four hour shifts, three days a week, I guess it will take eight and half years to pay that off. That’s a lot of dishes.”

    Philip K. Lamure
    [Health TurnUp]


  4. Birth Defects Account for 5.2% of Hospital Costs

    The CDC recently released an analysis of the hospitalization costs associated with birth defects. Here are some key findings from the report:

    • Structural or genetic birth defects affect 3% of live births in the U.S.
    • 20% of infant deaths in the U.S. are due to birth defects.
    • Birth defects accounted for 3% of all hospitalizations.
    • 5.2% of total hospital costs are attributable to birth defects.
    • Birth defect–associated hospitalizations cost $22.9 billion in 2013.
    • Cardiovascular defects accounted for 14% of birth defect hospitalizations.

    : Centers for Disease Control and Prevention, January 20, 2017


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