1. Part V: Plan, Monitor and Control Financial Operations CHAPTER 12: COMPARATIVE DATA, FORECASTS, & BENCHMARKING

2. Using Comparative Data Managers use comparative data to set common ground for planning, control and decision-making purposes.

3. Common Sizing Common sizing puts data on the same relative basis.

4. Common Sizing: Example Common sizing converts numbers to percentages so that comparative analysis can be preformed. The worksheet below shows the assets of two hospitals. Same Year for All Three Hospitals Hospital 1Hospital 2Hospital 3 Current Liabilities Long-term debt Total liabilities $100,000 400,000 $500,000 20% 80% 100% $500,000 1,500,000 $2,000,000 25% 75% 100% $400,000 100,000 $500,000 80% 20% 100%

5. Common Sizing: Practice Same Year for both Hospitals Hospital AHospital B Current Assets Property, Plant & Equipment Other Assets Total Assets $ 2,000,000 7,500,000 500,000 $10,000,000 $ 8,000,000 30,000,000 2,000,000 $40,000,000 20% 75% 5% 100% 20% 75% 5% 100%

6. Common Sizing: Assignment Metropolis Health System Statement of Revenue and Expenses for the years ended March 31, 2000 and 1999 Year 2Year 1 Revenue Net patient service revenue Other revenue Total Operating Revenue Expenses Nursing services Other professional services General services Support services Depreciation Amortization Interest Provision for doubtful accounts Total Expenses Income from Operations Nonoperating Unrestricted gifts and memorials Interest income Nonoperating Gains Net Revenue and Gains in Excess of Expenses and Losses $34,000,000 1,100,000 35,100,000 5,025,000 13,100,000 3,200,000 8,300,000 1,900,000 50,000 325,000 1,500,000 33,400,000 1,700,000 20,000 80,000 100,000 1,800,000 $33,600,000 1,000,000 34,600,000 5,450,000 12,950,000 3,220,000 8,340,000 1,800,000 50,000 350,000 1,600,000 33,760,000 840,000 70,000 40,000 110,000 950,000 Metropolis Health System Statement of Revenue and Expenses for the years ended March 31, 200_ and 200_ Year 2PercentYear 1Percent Revenue Net patient service revenue Other revenue Total Operating Revenue Expenses Nursing services Other professional services General services Support services Depreciation Amortization Interest Provision for doubtful accounts Total Expenses Income from Operations Nonoperating Unrestricted gifts and memorials Interest income Nonoperating Gains Net Revenue and Gains in Excess of Expenses and Losses $34,000,000 1,100,000 35,100,000 5,025,000 13,100,000 3,200,000 8,300,000 1,900,000 50,000 325,000 1,500,000 33,400,000 1,700,000 20,000 80,000 100,000 1,800,000 96.87% 3.13% 100.00% 14.32% 37.32% 9.12% 23.65% 5.41% 0.14% 0.93% 4.27% 95.16% 4.84% 0.06% 0.23% 0.28% 5.13% $33,600,000 1,000,000 34,600,000 5,450,000 12,950,000 3,220,000 8,340,000 1,800,000 50,000 350,000 1,600,000 33,760,000 840,000 70,000 40,000 110,000 950,000 97.11% 2.89% 100.00% 15.75% 37.43% 9.31% 24.10% 5.20% 0.14% 1.01% 4.62% 97.57% 2.43% 0.20% 0.12% 0.32% 2.75%

7. Trend Analysis Trend analysis compares figures over several time periods.

8. Trend Analysis: Example Trend Analysis for Liabilities Hospital 1 Year1Year 2Difference Current Liabilities Long-term debt Total liabilities $100,000 400,000 $500,000 20% 80% 100% $500,000 1,500,000 $2,000,000 25% 75% 100% $50,000 50,000 $100,000 50.0% 12.5% Trend analysis allows comparison of figures over time.

9. Trend Analysis: Practice Hospital A Year 2 $ 2,000,000 7,500,000 500,000 $10,000,000 $1,600,000 6,000,000 400,000 $8,000,000 Current Assets Property, Plant & Equipment Other Assets Total Assets Year 1Year 2 25% $ 400,000 1,500,000 100,000 $2,000,000 7,500,000 500,000 $10,000,000 $1,600,000 6,000,000 400,000 $8,000,000 Current Assets Property, Plant & Equipment Other Assets Total Assets DifferenceYear 1 Hospital A

10. Trend Analysis: Assignment Metropolis Health System Statement of Revenue and Expenses for the years ended March 31, 2000 and 1999 Year 2Year 1 Revenue Net patient service revenue Other revenue Total Operating Revenue Expenses Nursing services Other professional services General services Support services Depreciation Amortization Interest Provision for doubtful accounts Total Expenses Income from Operations Nonoperating Unrestricted gifts and memorials Interest income Nonoperating Gains Net Revenue and Gains in Excess of Expenses and Losses $34,000,000 1,100,000 35,100,000 5,025,000 13,100,000 3,200,000 8,300,000 1,900,000 50,000 325,000 1,500,000 33,400,000 1,700,000 20,000 80,000 100,000 1,800,000 $33,600,000 1,000,000 34,600,000 5,450,000 12,950,000 3,220,000 8,340,000 1,800,000 50,000 350,000 1,600,000 33,760,000 840,000 70,000 40,000 110,000 950,000 Metropolis Health System Statement of Revenue and Expenses for the years ended March 31, 200_ and 200_ Year 2Year 1DifferencePercent Revenue Net patient service revenue Other revenue Total Operating Revenue Expenses Nursing services Other professional services General services Support services Depreciation Amortization Interest Provision for doubtful accounts Total Expenses Income from Operations Nonoperating Unrestricted gifts and memorials Interest income Nonoperating Gains Net Revenue and Gains in Excess of Expenses and Losses $34,000,000 1,100,000 35,100,000 5,025,000 13,100,000 3,200,000 8,300,000 1,900,000 50,000 325,000 1,500,000 33,400,000 1,700,000 20,000 80,000 100,000 1,800,000 $33,600,000 1,000,000 34,600,000 5,450,000 12,950,000 3,220,000 8,340,000 1,800,000 50,000 350,000 1,600,000 33,760,000 840,000 70,000 40,000 110,000 950,000 $400,000 100,000 500,000 ($425,000) 150,000 (20,000) (40,000) 100,000 0 (25,000) (100,000) (360,000) $860,000 ($50,000) 40,000 (10,000) $850,000 1.19% 10.00% 1.45% -7.80% 1.16% -0.62% -0.48% 5.56% 0.00% -7.14% 102.38% -1.07% 102.38% -71.43% 100.00% -9.09% 89.47%

11. Horizontal Analysis Comparative Analysis of Operating Data Refer to examples in this chapter. Usually involves converted $ to %. Called “horizontal analysis” because computation of the % is across, or horizontal.

12. Comparative Analysis of Operating Data Vertical Analysis Refer to examples in the chapter. Usually involves converted $ to %. Called “vertical analysis” because computation of the % is up and down, or vertical.

13. Forecasting Results Short Range — Next year Intermediate Range — 5 years from today Long Range — The next decade and beyond Managers can use three levels of forecasts:

14. Forecasting Results Assumptions are the basis of the numbers in your forecast. Example: Computing a staff requirement of 3 lab technicians requires an assumption. Computing the salary and fringe benefits for each of the technicians requires another assumption. When the salary and fringe benefit dollars are computed for the 3 lab technicians, the resulting figure becomes part of your forecast. Assumptions affect forecasted results.

15. Forecasting Results Assumptions can be determined by Trend Analysis Payer Changes Utilization Changes

16. Forecasting Results Managers often have to prepare staffing forecasts Watch for Non-Controllable Expense Problems Capacity Problems Labor Market Problems More details are in the chapter.

17. Forecasting Results And always remember: Forecasting is an important part of the budget process.

18. Other Performance Measures A variety of performance measures must be in place for the organization. Many types of such measures are available. Generally different organizations lean toward using one type over another.

19. Other Performance Measures Adjusted performance measures over time. We have previously discussed the advantages of comparative analysis — the comparison of various time periods, one to another. Measures that compare performance over various time periods are especially effective. Figure 12-2 illustrates measures over time combined with a 2-part case mix adjustment.

20. Other Performance Measures Financial Benchmarking Benchmarking is the continuous process of measuring products, services, and activities against the best levels of performance. The best levels may be found inside the organization or outside it.

21. Benchmarking A financial variable reported in an accounting system. A financial variable not reported in an accounting system. A nonfinancial variable. There are 3 types of benchmarks Benchmarks are used to measure performance gaps.

22. Benchmarking Studying the methods and results of your prime competitors; Examining the process of noncompetitors with a world-class reputation; or Analyzing processes within your own organization that are worthwhile to replicate. How do you benchmark? Three possible methods include:

23. Financial benchmarking compares financial measure among benchmarking groups. It is the most common type of peer group method used in health care. Benchmarking (Statistical benchmarking is another related method.) See Table 12-6 for an example of financial benchmarking.

24. Measurement Tools Pareto analysis is a measurement tool based on the Pareto Principle. The Pareto Principle is often called the “80/20 Rule.” For example, “80% of an organization’s problems are caused by 20% of the possible causes.”

25. Measurement Tools The analysis quantifies these steps through construction of a Pareto diagram. Pareto Analysis is an analytical tool that aids managers to improve some steps in a process. Figure 12-3 and accompanying text explain how to construct and interpret a Pareto diagram.

26. Pareto Rule: Solution Number 0 10 20 30 40100% 36.37 PDBRWSLDCD ActivityNumber % PDB 1236.37 RWS 1030.30 LD 618.18 CD 515.15 33100%

27. Measurement Tools Reporting by quartiles is an effective way to show ranges of either financial or statistical results. Quartiles are based on a quantitative method of computation and can effectively illustrate a variety of performance measures. Chapter text plus Table 12-6 illustrate how to compute and construct a report using quartiles.

28. Quartiles: Solution Total Patient Days 1 Sarasota Memorial110,033110,033 High/Maximum 2 Naples Community Hospital 80519 3Southwest Florida Reg. Medical Ctr. 57,984 4Lee Memorial Hosp-Cleveland 55,305 5Lee Memorial Hosp-Healthpark 45,510 56,645 Third Quartile 6Bon Secours-Venice Hospital 43,608 7Cape Coral Hospital 41,630 8Columbia Doctors Hosp of Sarasota 38,320 9Fawcett Memorial Hospital 35,998 35,998 Median 10St. Joseph Hosp of Port Charlotte 34,697 11Charlotte Regional Medical Center 25,985 12Englewood Community Hospital 19,763 13North Collier Hospital 17,12117,121 First Quartile 14Gulf Coast Hospital 14,759 15Desoto Memorial Hospital 9,313 16East Pointe Hospital 9,026 17Hendry Regional Medical Center 4,3804,380 Low/Minimum Total643,951

29. Performance Measures Remember, several types of performance measures will be in use in the organization. Familiarity with the use of such measures lets the manager do a better job analyzing performance.