Design a presentation in PowerPoint for the Marion Community Hospital Board of Directors. The purpose of the presentation is to share dashboards made up of key performance indicators (KPIs). These dashboards should provide a more easily understood picture of the financial and operational health of the organization. You will create two separate dashboards - one for the financial performance and one for the operating indicators. Each dashboard will be made up of 5 key performance indicators (KPIs). The presentation will include your dashboards along with your rationale for choosing the ratios.
Case Study:
Marion Community Hospital Assessing Hospital Performance Case Study Marion Community Hospital is a 210-bed, not-for-profit, acute care hospital with a long-standing reputation for quality service to a growing service area. Marion competes with three other hospitals in its metropolitan statistical area-two not-for-profits and one for-profit. It is the smallest of the four but has traditionally been ranked highest in-patient satisfaction polls. Hospitals are accredited by The Joint Commission, an independent, not-for-profit organization whose mission is to improve the safety and quality of healthcare provided to the public through accreditation and related services. (For more information on The Joint Commission, visit its website at www.jointcommission.org), Although accreditation is optional for hospitals, it is generally required to qualify for governmental (Medicare and Medicaid) reimbursement, and hence most hospitals apply for accreditation. Marion passed its latest Joint Commission survey, receiving its Gold Seal of Approval. In recent years, competition among the four hospitals in Marions service area has been keen but friendly. However, a large for-profit chain recently purchased the for-profit hospital, resulting in some anxiety among the managers of the other three hospitals because of the chains reputation for aggressively increasing market share in the markets they serve. Relevant financial and operating data for Marion are contained in exhibits 24.1 through 24.5, and selected industry data are contained in exhibits 24.6 and 24.7. (Note that the industry data given in the case are for illustrative purposes only and do not represent actual data for the years specified. For a better idea of the type of comparative data available for hospitals, see the Optum website at www.hospitalbenchmarks.com/index.aspx). In addition to the data in the exhibits, the following information was extracted from the notes section of Marions 2017 Annual Report. 1. A significant portion of Marions net patient service revenue was generated by patients who are covered by either Medicare or Medicaid, or other government programs or by various private plans, including managed care plans, that have contracts with Marion and specify discounts from charges. In general, the proportional amount of deductions is similar between inpatients and outpatients. A breakdown of the gross and net patient service revenues and operating expenses for both inpatient and outpatient services is given in exhibit 24.4. 2. Marion has a contributory money accumulation (defined contribution) pension plan that covers substantially all of its employees. Participants can contribute up to 20 percent of earning to the pension plan. Marion matches, on a dollar-for-dollar basis, employee contributions of up to 2 percent of wages and pays 50 cents on the dollar for contributions of more than 2 percent and up to 4 percent. Because the plan is a defined contribution plan (as opposed to a defined benefit plan), Marion has no unfunded pension liabilities. Pension expense was approximately $0.543 million in 2016 and $0.588 million in 2017. 3. Marion is a member of the State Hospital Trust Fund, under which it purchases professional liability insurance coverage for individual claims up to $1 million (subject to a deductible of $100,000 per claim). Marion is self-insured for amount of more than $1 million but less than $5 million. Any liability award in excess of $5 million is covered by a commercial liability policy. For example, the policy pays $2 million on a $7 million award. Marion is currently involved in eight suits involving claims of various amounts that could ultimately be tried before a jury. Determining the exact potential liability in these claims is impossible, but management does not believe that the settlement of these cases would have a material effect on Marions financial position. You have just joined the Marion staff as a special assistant to the CEO. On your first day on the job, the CEO stated that the best way to get to know the financial and operating conditions of the hospital is to conduct thorough financial statement and operating indicator analyses; thus, she assigned you the task. Although you agree that such analyses are a good way to get started, you wonder whether the CEO has any ulterior motives. Perhaps the hospital is having problems and she thinks that you can spot them, or perhaps she wants to test your analytical skills. The CEO is from the old school of hospital management and has been looking for someone to bring modern management methods to the hospital. As you prepare for the analyses several relevant factors come to light. First, in reviewing the policy decisions made by Marions board of trustees over the past decade, you note that in 2012 the board made the decision to significantly expand Marions outpatient services. The rationale was that many procedures historically done on an inpatient basis were now being done in an outpatient setting, and if Marion did not offer such service it would lose the patients to other providers. Second, the board chair has great concerns about the decline in profitability between 2015 and 2016 and has not been assuaged by the recent modest upturn. Perhaps because she is CEO of a local company, the chair focuses on return on equity (ROE) as the key measure of profitability. She has requested management to develop some strategies to improve profitability and estimate the impact of strategies on Marions ROE. Third, board members were complaining that too much time is being spent at quarterly board meetings to discuss Marions financial condition. There is so much to accomplish that we just dont have the time to consider a large number of ratios at each meeting, said one member. You know that many healthcare providers are now using dashboards to focus on key performance indicators (KPIs). A dashboard is nothing more than a way to summarize an organizations financial and operating performance. Of course, the name stems from an automobiles dashboard, which contains gauges that give drivers essential information abut the cars performance and operating condition. Thus, you plan to develop two dashboards each containing no more than 5 KPIs. One dashboard will use financial ratios to focus on the financial performance while the other will use operating indicator ratios to focus on operating performance. At the next board meeting you plan to present your recommendations for the content of these dashboard along with the rational for the ratios chosen. Your goal is to replace the full financial and operating performance discussion at the future board meetings with limited discussion of the KPIs.
Exhibit 24.1 Marion Community Hospital Statement of Operations (in Millions of Dollars) 2015 2016 2017 $ 28.796 $ 30.576 $ 34.582 1.237 1.853 1.834 $ 30.033 $ 32.429 $ 36.416 REVENUES Net patient service revenue Other revenue Total revenues EXPENSES Salaries and wages Fringe benefits Interest expense Depreciation Medical supplies and drugs Professional liability Other Total expenses NET INCOME $ 12.245 $ 12.468 $ 13.994 1.830 2.408 2.568 1.181 1.598 1.776 2.350 2.658 2.778 0.622 0.655 0.776 0.140 0.201 0.218 9.036 10.339 11.848 $ 27.404 $ 30.327 $ 33.958 $ 2.629 $ 2.102 $ 2.458 Exhibit 24.2 Marion Community Hospital: Balance Sheet (in Millions of Dollars) 2015 2016 2017 ASSETS Cash and investments Accounts receivable (net) Inventories Other current assets Total current assets Gross plant and equipment Accumulated depreciation Net plant and equipment Total assets LIABILITIES Accounts payable Accrued expenses Current portion of long-term debt Total current liabilities Long-term debt Net assets Total liabilities and net assets $ 4.673 $ 5.069 $ 2.795 4.359 5.674 7.413 0.432 0.523 0.601 0.308 0.703 0.923 $ 9.772 $ 11.969 $ 11.732 47.786 55.333 59.552 11.820 14.338 17.009 $ 35.966 $40.995 $ 42.543 $45.738 $ 52.964 $ 54,275 $ 0.928 $ 1.253 $ 1.760 1.460 1.503 1.176 0.110 1.341 1.465 $ 2.498 $ 4.097 $ 4.401 15.673 19.222 17.795 27.567 29.645 32.079 $_45.738 $ 52.964 $ 54.275 Exhibit 24.3 Marion Community Hospital: Statement of Cash Flows (in Millions of Dollars) 2016 2017 $ 2.102 $ 2.458 2.633 2.756 (1.315) (1.739) (0.091) (0.078) (0.395) (0.220) 0.325 0.507 0.043 $ 3.302 $ 3.357 (0.327) $ (7.686) $ (4.328) CASH FLOWS FROM OPERATING ACTIVITIES Net income Depreciation and noncash expenses Change in accounts receivable Change in inventories Change in other current assets Change in accounts payable Change in accrued expenses Net cash flow from operations CASH FLOWS FROM INVESTING ACTIVITIES Investment in plant and equipment CASH FLOWS FROM FINANCING ACTIVITIES Change in long-term debt Change in current portion of long-term debt Net cash flow from financing NET INCREASE (DECREASE) IN CASH BEGINNING CASH ENDING CASH Note: "Depreciation and noncash expenses" and "Investments in plant and equipment" data in the statement of cash flows are somewhat different than they would be if calculated directly from the other financial statements because of asset revaluations $ $ 3.549 $ (1.427) 1.231 0.124 4.780 $ (1.303) $ 0.396 $(2.274) $ 4.673 $5.069 $ 5,069 $ 2.795 Exhibit 24.4 Marion Community Hospital: Revenue and Expense Allocation (in Millions of Dollars) 2015 2016 2017 $ 26.117 $ 29.148 $ 33.216 6.535 9.130 11.912 $ 32.652 $ 38.278 $ 45.128 $ 1.729 $ 5.196 $ 7.516 2.127 2.506 3.030 3.856 $ 7.702 $ 10.546 $_28.796 $ 30.576 $ 34.582 $ OPERATING REVENUE Gross inpatient service Gross outpatient service Gross patient service revenue Contractual allowances Bad debt and charity care Total revenue deductions Net patient service revenue OPERATING EXPENSES Inpatient services Outpatient services Total operating expenses Medicare discharges Total discharges Outpatient visits Licensed beds Staffed beds Patient days All-payer case mix index Full-time equivalents 9.187 $ 20.573 $ 22.229 $ 24.771 6.831 8.098 $ 27.404 $ 30.327 $33.958 2,721 2,860 2,741 8,784 8,318 8,576 32,285 32,878 36,796 210 210 210 193 197 178 44,085 42,434 40,062 1.2869 1.2993 1.3161 610.8 625.8 619.3 Exhibit 24.5 Marion Community Hospital: Selected operating data Medicare discharges Total discharges Outpatient visits Licensed beds Staffed beds Patient days All-payer case mix index Full-time equivalents 2015 2,721 8,784 32,285 210 193 44,085 1.2869 610.8 2016 2,860 8,318 32,878 210 197 42,434 1.2993 625.8 2017 2,741 8,576 36,796 210 178 40,062 1.3161 619.3 -Quartile 0.53% 0.40% 0.62% 0.18 1.48 6.24 35.20% 26.90% 1.14 1.76 Exhibit 24.6 Marion Community Hospital: Industry Financial Ratios (200-299 Beds) +Quartile Median Profitability Ratios Total margin 5.58% 3.48% Return on assets 5.80% 3.10% Return on equity 15.66% 6.01% Deductible ratio 0.34 0.26 Liquidity ratios Current ratio 2.53 1.99 Days cash on hand 32.35 15.89 Debt management ratios Debt ratio 62.90% 48.40% Debt-to-equity ratio 127.00% 64.70% Times interest earned 4.29 2.23 Cash flow coverage 5.32 3.22 Asset management ratios Fixed asset turnover 2.20 1.76 Total asset turnover 1.04 Days in patient A/R 87.53 75.67 Current asset turnover 3.94 3.38 Average payment period (days) 71.24 56.52 Other ratios Average age of plant (years) 8.86 7.39 Calculations: Deductible ratio = Deductions/Gross patient service revenue Current asset turnover = Total revenues/Current assets Avg payment period = Current liabilities/([Total expenses - Depreciation expense]/365) Note: The upper quartile is based on the higher numerical value for the ratio and the lower quartile on the lower numerical value, regardless of whether a high value is good or bad. The interpretation is left to the analyst. 0.89 1.49 0.75 63.33 2.88 45.84 6.14 Exhibit 24.7 Marion Community Hospital: Industry Financial Ratios (200-299 Beds) +Quartile Median -Quartile $ 89.04 $ (21.30) $ (120.08) 6.22 $ 0.66 $ (7.01) $ $ 4,091 $ 3,411 $ 201 $ 139 $ 43.47% 36.60% 7.89% 4.76% 25.27% 20.02% 25.26% 21.03% 2,815 98 31.25% 2.97% 12.12% 17.44% Profit Indicators Profit per discharge Profit per visit Net Revenue Indicators Net revenue per discharge Net revenue per visit Medicare revenue percentage Bad debt/charity care percentage Contractual allowance percentage Outpatient revenue percentage Volume indicators Occupancy rate Average daily census Length of stay indicators Average length of stay (days) Adjusted length of stay Intensity-of-Service Indicators Expense per discharge Adjusted expense per discharge Expense per visit All-payer case mix index Efficiency Indicators FTES per occupied bed Labor-hours per visit 67.12% 173.23 58.10% 144.73 47.84% 114.39 6.80 6.07 .36 5.41 4.52 $ $ 3,937 $ 3,392 $ 2,972 3,417 $ 2,924 $ 2,572 202.23 $ 141.97 $ 111.53 1.2795 1.1756 1.0259 $ 4.59 4.15 5.84 3.77 8.66 4.68 $ $ Unit Cost Indicators Salary per FTE 24,447 $ 22,517 $ 20,347 Employee benefits percentage 19.58% 17.04% 15.18% Liability expense per discharge 80.94 $ 42.05 $ 18.31 Calculations: Profit per discharge = (Net patient revenue - Inpatient expenses)/Total discharges Profit per visit = (Net outpatient revenue - Outpatient expenses)/Total visits Net revenue per discharge = Net patient revenue/Total discharges Net revenue per visit = Net outpatient revenue/Total visits Medicare revenue percentage = Medicare net patient revenue/Total net patient revenue Bad debt/charity care percentage = (Bad debt + Charity care)/Gross patient revenue Contractual allowance percentage = Contractual allowances/Gross patient revenue Outpatient revenue percentage = Net outpatient revenue/Total net patient revenue Occupancy rate = Patient days/(Staffed beds x 365) Avg daily census = Patient days/365 Avg length of stay = Patient days/Total discharges Adjusted length of stay = Avg length of stay/Case mix index Expense per discharge = Inpatient expenses/Total discharges Adjusted expense per discharge = Expense per discharge/Case mix index Expense per visit = Outpatient expenses/Total visits All-payer case mix index= Sum of DRG weights/Total discharges FTES per occupied bed = Inpatient FTES/Avg daily census Labor-hours per visit = (Outpatient FTES x 2,080)/Total visits Salary per FTE = Total salaries/Total FTES Employee benefits percentage = Fringe benefits expense/Total salaries Liability expense per discharge = Inpatient professional liability expense/Total discharges Note: The upper quartile is based on the higher numerical value for the ratio and the lower quartile on the lower numerical value, regardless of whether a high value is good or bad. The interpretation is left to the analyst. Exhibit 24.1 Marion Community Hospital Statement of Operations (in Millions of Dollars) 2015 2016 2017 $ 28.796 $ 30.576 $ 34.582 1.237 1.853 1.834 $ 30.033 $ 32.429 $ 36.416 REVENUES Net patient service revenue Other revenue Total revenues EXPENSES Salaries and wages Fringe benefits Interest expense Depreciation Medical supplies and drugs Professional liability Other Total expenses NET INCOME $ 12.245 $ 12.468 $ 13.994 1.830 2.408 2.568 1.181 1.598 1.776 2.350 2.658 2.778 0.622 0.655 0.776 0.140 0.201 0.218 9.036 10.339 11.848 $ 27.404 $ 30.327 $ 33.958 $ 2.629 $ 2.102 $ 2.458 Exhibit 24.2 Marion Community Hospital: Balance Sheet (in Millions of Dollars) 2015 2016 2017 ASSETS Cash and investments Accounts receivable (net) Inventories Other current assets Total current assets Gross plant and equipment Accumulated depreciation Net plant and equipment Total assets LIABILITIES Accounts payable Accrued expenses Current portion of long-term debt Total current liabilities Long-term debt Net assets Total liabilities and net assets $ 4.673 $ 5.069 $ 2.795 4.359 5.674 7.413 0.432 0.523 0.601 0.308 0.703 0.923 $ 9.772 $ 11.969 $ 11.732 47.786 55.333 59.552 11.820 14.338 17.009 $ 35.966 $40.995 $ 42.543 $45.738 $ 52.964 $ 54,275 $ 0.928 $ 1.253 $ 1.760 1.460 1.503 1.176 0.110 1.341 1.465 $ 2.498 $ 4.097 $ 4.401 15.673 19.222 17.795 27.567 29.645 32.079 $_45.738 $ 52.964 $ 54.275 Exhibit 24.3 Marion Community Hospital: Statement of Cash Flows (in Millions of Dollars) 2016 2017 $ 2.102 $ 2.458 2.633 2.756 (1.315) (1.739) (0.091) (0.078) (0.395) (0.220) 0.325 0.507 0.043 $ 3.302 $ 3.357 (0.327) $ (7.686) $ (4.328) CASH FLOWS FROM OPERATING ACTIVITIES Net income Depreciation and noncash expenses Change in accounts receivable Change in inventories Change in other current assets Change in accounts payable Change in accrued expenses Net cash flow from operations CASH FLOWS FROM INVESTING ACTIVITIES Investment in plant and equipment CASH FLOWS FROM FINANCING ACTIVITIES Change in long-term debt Change in current portion of long-term debt Net cash flow from financing NET INCREASE (DECREASE) IN CASH BEGINNING CASH ENDING CASH Note: "Depreciation and noncash expenses" and "Investments in plant and equipment" data in the statement of cash flows are somewhat different than they would be if calculated directly from the other financial statements because of asset revaluations $ $ 3.549 $ (1.427) 1.231 0.124 4.780 $ (1.303) $ 0.396 $(2.274) $ 4.673 $5.069 $ 5,069 $ 2.795 Exhibit 24.4 Marion Community Hospital: Revenue and Expense Allocation (in Millions of Dollars) 2015 2016 2017 $ 26.117 $ 29.148 $ 33.216 6.535 9.130 11.912 $ 32.652 $ 38.278 $ 45.128 $ 1.729 $ 5.196 $ 7.516 2.127 2.506 3.030 3.856 $ 7.702 $ 10.546 $_28.796 $ 30.576 $ 34.582 $ OPERATING REVENUE Gross inpatient service Gross outpatient service Gross patient service revenue Contractual allowances Bad debt and charity care Total revenue deductions Net patient service revenue OPERATING EXPENSES Inpatient services Outpatient services Total operating expenses Medicare discharges Total discharges Outpatient visits Licensed beds Staffed beds Patient days All-payer case mix index Full-time equivalents 9.187 $ 20.573 $ 22.229 $ 24.771 6.831 8.098 $ 27.404 $ 30.327 $33.958 2,721 2,860 2,741 8,784 8,318 8,576 32,285 32,878 36,796 210 210 210 193 197 178 44,085 42,434 40,062 1.2869 1.2993 1.3161 610.8 625.8 619.3 Exhibit 24.5 Marion Community Hospital: Selected operating data Medicare discharges Total discharges Outpatient visits Licensed beds Staffed beds Patient days All-payer case mix index Full-time equivalents 2015 2,721 8,784 32,285 210 193 44,085 1.2869 610.8 2016 2,860 8,318 32,878 210 197 42,434 1.2993 625.8 2017 2,741 8,576 36,796 210 178 40,062 1.3161 619.3 -Quartile 0.53% 0.40% 0.62% 0.18 1.48 6.24 35.20% 26.90% 1.14 1.76 Exhibit 24.6 Marion Community Hospital: Industry Financial Ratios (200-299 Beds) +Quartile Median Profitability Ratios Total margin 5.58% 3.48% Return on assets 5.80% 3.10% Return on equity 15.66% 6.01% Deductible ratio 0.34 0.26 Liquidity ratios Current ratio 2.53 1.99 Days cash on hand 32.35 15.89 Debt management ratios Debt ratio 62.90% 48.40% Debt-to-equity ratio 127.00% 64.70% Times interest earned 4.29 2.23 Cash flow coverage 5.32 3.22 Asset management ratios Fixed asset turnover 2.20 1.76 Total asset turnover 1.04 Days in patient A/R 87.53 75.67 Current asset turnover 3.94 3.38 Average payment period (days) 71.24 56.52 Other ratios Average age of plant (years) 8.86 7.39 Calculations: Deductible ratio = Deductions/Gross patient service revenue Current asset turnover = Total revenues/Current assets Avg payment period = Current liabilities/([Total expenses - Depreciation expense]/365) Note: The upper quartile is based on the higher numerical value for the ratio and the lower quartile on the lower numerical value, regardless of whether a high value is good or bad. The interpretation is left to the analyst. 0.89 1.49 0.75 63.33 2.88 45.84 6.14 Exhibit 24.7 Marion Community Hospital: Industry Financial Ratios (200-299 Beds) +Quartile Median -Quartile $ 89.04 $ (21.30) $ (120.08) 6.22 $ 0.66 $ (7.01) $ $ 4,091 $ 3,411 $ 201 $ 139 $ 43.47% 36.60% 7.89% 4.76% 25.27% 20.02% 25.26% 21.03% 2,815 98 31.25% 2.97% 12.12% 17.44% Profit Indicators Profit per discharge Profit per visit Net Revenue Indicators Net revenue per discharge Net revenue per visit Medicare revenue percentage Bad debt/charity care percentage Contractual allowance percentage Outpatient revenue percentage Volume indicators Occupancy rate Average daily census Length of stay indicators Average length of stay (days) Adjusted length of stay Intensity-of-Service Indicators Expense per discharge Adjusted expense per discharge Expense per visit All-payer case mix index Efficiency Indicators FTES per occupied bed Labor-hours per visit 67.12% 173.23 58.10% 144.73 47.84% 114.39 6.80 6.07 .36 5.41 4.52 $ $ 3,937 $ 3,392 $ 2,972 3,417 $ 2,924 $ 2,572 202.23 $ 141.97 $ 111.53 1.2795 1.1756 1.0259 $ 4.59 4.15 5.84 3.77 8.66 4.68 $ $ Unit Cost Indicators Salary per FTE 24,447 $ 22,517 $ 20,347 Employee benefits percentage 19.58% 17.04% 15.18% Liability expense per discharge 80.94 $ 42.05 $ 18.31 Calculations: Profit per discharge = (Net patient revenue - Inpatient expenses)/Total discharges Profit per visit = (Net outpatient revenue - Outpatient expenses)/Total visits Net revenue per discharge = Net patient revenue/Total discharges Net revenue per visit = Net outpatient revenue/Total visits Medicare revenue percentage = Medicare net patient revenue/Total net patient revenue Bad debt/charity care percentage = (Bad debt + Charity care)/Gross patient revenue Contractual allowance percentage = Contractual allowances/Gross patient revenue Outpatient revenue percentage = Net outpatient revenue/Total net patient revenue Occupancy rate = Patient days/(Staffed beds x 365) Avg daily census = Patient days/365 Avg length of stay = Patient days/Total discharges Adjusted length of stay = Avg length of stay/Case mix index Expense per discharge = Inpatient expenses/Total discharges Adjusted expense per discharge = Expense per discharge/Case mix index Expense per visit = Outpatient expenses/Total visits All-payer case mix index= Sum of DRG weights/Total discharges FTES per occupied bed = Inpatient FTES/Avg daily census Labor-hours per visit = (Outpatient FTES x 2,080)/Total visits Salary per FTE = Total salaries/Total FTES Employee benefits percentage = Fringe benefits expense/Total salaries Liability expense per discharge = Inpatient professional liability expense/Total discharges Note: The upper quartile is based on the higher numerical value for the ratio and the lower quartile on the lower numerical value, regardless of whether a high value is good or bad. The interpretation is left to the analyst
