DNP-804-ECONOMICS & FIN. ASPECTS OF HEALTHCARE
Module 3: Discussion
Topic: Strategic Planning
Assignment Description:
Review the income statement provided below and address the following questions:
- According to this income statement, the net margin for the organization has shown strong growth over the past year. What factor/s is/are driving this improved performance?
- What concerns do you have regarding the current financial performance of this organization?
- As an executive leader within this organization, what priority issues should this organization address?
- Is your impression of the reported financial performance generally favorable or unfavorable? Explain your position.
PEER RESPONSES
According to this income statement, the net margin for the organization has shown strong growth over the past year. What factor/s is/are driving this improved performance?
The organization has experienced an increase in revenues and a decrease in bad debt throughout the past year. These factors have contributed to the organization’s increase in net margin. Waxman and Knighten (2023) inform that bad debt is payment for care that is expected to be paid, but is not. This had decreased throughout the year. Also, revenue exceeded the operating expenses of the facility. This provides an increase to the net margin.
What concerns do you have regarding the current financial performance of this organization?
The organization did have an increase in spending on operating expenses. As displayed by the income statement, there was an increase on salaries, benefits, supplies, and maintenance. As patient census increases, payment to staff salary will need to increase as well (Waxman & Knighten, 2023). If these expenses continue to increase, and there is a loss in patient revenue, this could lead to a loss in profit. As the organization continues to grow, it is hopeful that revenue will continue to increase and expenses will remain less than profit.
As an executive leader within this organization, what priority issues should this organization address?
An issue to address with the organization is the cost of spending on supplies. The cost of supplies doubled in the last year. As a leader within the organization, a report should be conducted on what supplies is used the most. Also, it should be investigated how patients are charged supplies. Is this calculated into their stay? Is staff responsible for charging the supplies to the patient? If so, are they actually doing it? Comparisons could be made to the cost of different brands of supplies. A less expensive, but suitable supply brand may have to be used to help drive down the cost of supplies.
Also, there could be an increase in the charge for routine services. There should be a discussion at the executive level explaining the costs of services, how long these costs have been active and the availability to increase service charges. There was only a five percent increase in revenue from routine services. Increasing the charge of services could aid in increasing profit. However, insurance contracts with the organization should also be considered.
Is your impression of the reported financial performance generally favorable or unfavorable? Explain your position.
In my opinion, the organization had a favorable financial performance. The percent in net revenue increased throughout the last year due to the organization’s ability to keep their revenue above the operating costs. The organization may have experienced an increase in patient demand. This would explain the increase in costs of salaries, benefits, supplies, etc. However, as patient demands increase, it is important for the organization to remain diligent in their spending.
Reference
Waxman, K., & Knighten, M. (2023). Financial and business management for the doctor of nursing practice (3rd ed.). Springer Publishing Company.
The organization saw a 97% increase in the net income from operations within the period under review. This facial value represents a robust financial performance by the organization, Jayathilaka (2020). Net profitability is vital since revenue increases do not always translate to increased profitability. Net profit shows the actual bottom line of how much money is left at the organization’s disposal. From the report, the major factors driving this improved performance are an increase in the revenues from inpatient ancillary like imaging tests (e.g., x-rays, MRI, CT scan, ultrasound) and lab tests and outpatient ancillary such as ambulance services and ambulatory surgery center (ASC) services by 27% and 22% respectively. In the same period, Medicare reimbursement increased by 17% while the organization remarkably improved its debt collection- its bad debt decreased by 16%.
Significant concerns identified with the organization’s financial performance this fiscal year include high operating costs and poor revenue from insurance contracts managed care. Total operating cost increased by 22% with a 100% increase in supplies, 52% increase in purchased services, 34% in medical fees, 21% in maintenance, and 19% in depreciation, among others- this operating cost may not be financially sustainable in the long run. Again, the organization is lagging in tapping into a significant area of revenue generation- the organization had an 8% decrease in revenue from commercial insurance companies.
As an executive within this organization, I will focus on cost containment and improving revenue generation. The organization should streamline its procurement process by centralizing the purchasing and supply chain to reduce waste and competitively negotiate for supplies prices to reduce the cost of supplies drastically. The organization should consider using competitive bidding for third-party vendors in outsourcing to reduce purchased services’ costs. Clinicians must be provided with the needed tools such as clinical decision support tools and data, to do their jobs efficiently and, in effect, enhance productivity, patient outcomes, and lowering costs. In managing maintenance costs, the right technology needs to be employed, and maintenance should be mainly preventative instead of curative. The Organization can maximize revenue by improving its understanding of payer contracts, language, centralizing contracts, and being prepared for negotiations.
In the short run, the organizational financial performance is favorable. Still, the overall financial viability of the organization is in doubt in the long run unless the organization reduces its overhead cost dramatically, improves revenue mobilization, and avoids over-reliance on a single revenue source- Medicare. The organization may need to invest in innovative technology to enhance care delivery, track revenue and reduce costs.
Reference
Jayathilaka, A. (2020). Operating profit and net profit: Measurements of profitability. Open Access Library Journal 7(12), pp 1-11. DOI:10.4236/oalib.1107011
In reviewing the profit and loss (P&L) statement, this organization has made some positive strides to improve their financial index and net revenue from 2016 to 2017. Some noteworthy improvements include gross patient revenues. Both inpatient (27%) and outpatient (22%) ancillary services have increased likely in providing more elective outpatient procedures and elective admissions. According to Khullar, et al. (2020), in a 2014 report, elective admissions can account for 30% of total inpatient hospital revenue. Additionally, payment deductions such as bad debt, or payment that is expected to be paid, but not paid yet, has gone down from $21,500 in 2016, to $18,000 in 2017, accounting for an increase in revenue by $3,500. Diagnosis-related group (DRG) reimbursement has also improved 17%, which may be attributed to improved documentation, and billing for specific diagnoses and procedures. A 14% increase in salary from 2016 to 2017 was also likely a lucrative incentive leading to improved employee performance.
There are some noteworthy concerns. In reviewing the organization’s operating expenses, there has been a significant increase in the supplies and “other” (100%) expenses, and a significant increase in paying for medical fees and purchased services in 2017 compared to 2016. In 2017, the depreciation of the organization’s assets has increased by 19%. I would assume that this depreciation of assets is related to buildings or equipment, even supplies that have generally worn out and depreciated in value, as it appears that the organization has spent double the amount on supplies from $13,600 in 2016 to $27,200 in 2017. Perhaps these purchases were to replace the depreciated value of the organization’s equipment. It is prudent to note that the maintenance costs from 2016 to 2017 have also gone up to 21%, likely paying for building and equipment maintenance. According to Waxman & Knighten (2023), prematurely replacing capital equipment before it truly depreciates in value can cause a significant write down in assets, as appears evident in comparing depreciation changes from 2016 to 2017. A more careful review of such expenses may need to be broken down to determine true depreciation of assets and/or balancing maintenance costs with replacement of equipment altogether.
As mentioned earlier, a priority issue that I may want to further investigate would be the operational expenses, particularly with supplies, “other” and the depreciation of assets. Carefully reviewing the organization’s capital assets and determining true depreciation value, and what items can be replaced or simply maintained to cut down on operational expenses may be helpful. According to Waxman & Knighten (2023), depreciation is typically calculated at the hospital level. Working with the organization’s finance department, it would be helpful for units to breakdown their capital assets to determine careful planning process for replacing the capital assets or restructuring expenses. Additionally, improving routine (preventative) services may also help generate more revenue and offset some of the costs. It appears that there was only a marginal increase to 5% improvement from 2016 to 2017 in routine services provided. Developing programs to promote preventive health and reduce preventable hospitalizations would not only improve overall patient outcomes, but cut down on healthcare costs.
Overall, the 2017 P&L statement has shown slightly favorable financial gain by 1.42% compared to 2016, and an overall 97% net income compared to 2016. It would be ideal to see more revenue perhaps by means of research grants, and improved value based reimbursement to allow for more projects that would improve overall patient revenue, and reduce operational expenses to see an even higher financial yield for the following year.
References:
Kullhar, D., Bond, A.M., &Schpero, W.L. (2020). COVID-19 and the financial health of US hospitals. JAMA. 10.1001/jama.2020.6269
Waxman, K.T., Knighten, M.L. (2023). Financial and business management for the doctor of nursing practice. 3rd ed. Springer.
This income statement shows strong growth in the past year due to a few major factors. According to the income statement Gross Patient Revenues, especially inpatient and outpatient ancillary services, are elevated significantly from 2016 with only a slight increase in deductions from revenue.
One major concern recognized in this income statement is the drastic increase in operating expenses. Areas such as supplies, purchased services, medical fees, and other are elevated significantly from 2016 to 2017. This may be due to a significant increase in inpatient and outpatient services or from poor stewardship of resources. Along with the increase in supplies and purchased services there is a significant depreciation of assets, it would be anticipated that the increased investment in supplies, maintenance, and other would help stabilize the depreciation cost over time. Depreciation a key indicator on a budget’s performance and is calculated at a hospital level, which may have an impact if new equipment is being purchased as opposed to replacing older equipment (Waxman & Knighten, 2023).
As an executive leader the priority issues I would address would be the operating expenses that grew the most over the year including supplies, purchased services, and other. First it would be important to understand what the “other” category included, then perhaps evaluate what purchased services includes and identify services where alternative options are available such as performing the services in house or finding cheaper service providers. The next thing to be analyzed would be supplies, this category was up 100% from the previous year, which is quite alarming. It would be crucial to audit supplies by department to see where the increases are originating from and work to decrease costs by investigating more cost effective supplies or implementing other cost saving strategies. Some solutions may be implementing recycling programs where rebates are given to the hospital for recycled supplies, an initiative to remind staff to be good stewards of their resources, process improvement plans that include eliminating expensive single items and opting for bundled kits- for instance central line dressing change kits often contain all of the material needed for a dressing change cheaper than pulling individual supplies, and more. As an executive leader it may also be important to recognize the reason for the exponential growth in inpatient and outpatient services. One question to raise is “will these trends continue?” One article found that the aging population may cause an increase in not only patient volumes, but prices intensity and coverage of care for older adults (Williams et al., 2019). Are these service levels sustainable, perhaps the hospital is responding to the growing aging population and need for these new services or are they responding to something more temporary such as a harsh flu season, or maybe a pandemic.
Generally, this is a favorable financial performance, there is a steady increase in the margin, which is reassuring, however it is obvious that operating expenses may need to be investigated and cost saving solutions implemented as needed. According to Waxman & Knighten (2023) healthcare margins are typically 0-5%, so the current margin of 3.82% is expected and normal. One contributing factor to the heavy increase of operating expenses could be due to the rapid growth in inpatient and outpatient services, perhaps a lot of the operating margins are related to start up costs for opening new units or offering new services and may steady out over time, however it will still be important to monitor for the coming year.
References
Waxman, K.T., Knighten, M.L. (2023). Financial and business management for the doctor of nursing practice. 3rd ed. Springer.
Williams, G., Cylus, J., Roubal, T., Ong, P., & Barber, S. (2019). Sustainable health financing with an ageing population: Will population ageing lead to uncontrolled health expenditure growth? World Health Organization.
