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Part 3—Long-Term Care & Senior Living Key Performance Indicators: CareWork Looks at Finance

This is the third in a series of articles exploring the importance of setting and monitoring key performance indicators (KPIs) in long-term care and senior living organizations. Throughout the series, we explore KPIs specific to skilled nursing, assisted living, memory care, independent living, and CCRCs in labor, census, finance, procurement, clinical, and quality. We discuss how your operations can benefit from setting goals and using your data strategically.

With this post, we are looking at finance as a KPI category.

Financial KPIs are arguably the oldest KPIs in the book and are used in every industry. We wanted to narrow down the list and talk about the KPIs that matter (or should) for long-term care and senior living operators. This is by no means a comprehensive list of all financial KPIs but hopefully you’ll leave with a few takeaways.

Finance as a Key Performance Indicator in LTPAC and Senior Living: Why it is Important

Skilled Nursing and Senior Living operators look at financial KPIs for the business in a number of ways. There’s the obvious (are we profitable?), and this applies to for-profit and non-profit organizations alike. A wise businessman once said, “You can’t lose a nickel on every sale and make it up on volume.” Financial metrics are used for profit and loss analysis and budgeting as a standard. But what if we could take financial KPIs a little bit further and use them to answer critical business questions to make data-driven decisions that granularly improve operations?

Financial outlooks in long-term care and senior living have been in question since the pandemic, although the outlook has begun to improve.

The American Health Care Association (AHCA) released a report in March of this year that outlined the financial impact of the COVID-19 pandemic on nursing homes. The key takeaways were:

  1. Increasing costs due to labor and inflation

  2. Negative margins: the median 2022 year-end operating margin was projected to be negative 4.8%

  3. Increased risk for closures

  4. Challenges with access to capital

According to Mike Acton during a National Investment Center for Senior Housing and Care (NIC) panel in May, “It’s going to take a while to repair the margins, but I think we’re on the way…”.

Operators and leadership teams need to use every tool in the tool kit to identify and reduce inefficiencies to maintain healthy financial operations. We’ll cover a few of the financial KPIs, but first, let’s look at some of the reasons why they are important.

  • Financial data can answer critical questions.

o What drives revenue?

o What impacts financial improvement?

o Should we expand our services?

o Should we invest additional dollars and where?

o Where should we cut back on spending?

  • Monitoring Financial KPIs helps identify inefficiencies. This applies to all operational areas. Are we staffing intelligently? Are we managing procurement in an efficient way? Are we wasting resources and do our processes need to be improved? Are we collecting accounts in a timely manner?

  • Financial KPIs eliminate surprises. Savvy operators constantly evaluate, and course correct if needed.

  • Setting and monitoring goals helps you improve services and the bottom line.

  • KPIs increase visibility and improve buy-in across the organization. When goals are clearly outlined and teams have a way to self-monitor using real data, employees feel empowered to own the performance of their facility or community.

Everyone’s Part of the Team

As much as possible, each manager should be aware of the financial KPIs most directly tied to their part of the operation. The closer a particular KPI is linked to the performance of a department, the more that department and its staff will be vested in that KPI. Teams should know what impacts financial improvement. Dollars, efficiency, resource management? Get input. Operationally speaking, it’s the folks on the floor every day who might have the best insight on what’s inefficient. As much as possible, everyone should evaluate progress toward goals and focus on the areas that will have the most significant impact. Staff that have this sense of belonging will be more likely to:

  • Identify and reduce inefficiencies

  • Evaluate process and guide course correction if needed

  • Improve services and the bottom line

  • Discover opportunities to improve

  • Drive performance

Stressing the Need for Accurate Record Keeping

Working with financial KPIs requires a base set of statistics and accurate record keeping is key.

The data needed comes from all functional areas. Clinical charting and quality tracking, revenue cycle management, business development, staffing and labor, and procurement. This information might be housed in the electronic health records (EHR), accounting software, customer relationship management (CRM), time and attendance, scheduling, or human resources information (HRIS) systems. Organizations that do not have these systems in place may be gathering information manually. Wherever the data lives, these statistics should be compiled daily to use in financial KPIs.

  • Invoice / bill dates by payor type

  • Amounts invoiced by payor type

  • Aging

  • Payment received date

  • Payments received by payor type

  • Cash on hand

  • Operating expenses

  • Non-cash expenses

  • Bad debt write off amounts and dates of write off

  • Average length of stay by payor type

  • Census by payor type

  • Average Daily Census by payor type

  • Average daily rate by payor type

  • Per-Patient Day (PPD) revenue by payor type

Financial Health

Average Days to Collect / Days Sales Outstanding (DSO)

This measurement counts the number of days it takes to convert receivables into cash. I invoiced on this day and collected on that day. While measuring this as a whole (total days to collect across all payor types) is important, it’s equally important to set goals and measure results at the payor-type level. How long does it take to collect Medicare or Medicaid and what is my monthly goal? By what day of the month do I want to have private pay or insurance co-pay collected? Even small improvements to the company’s DSO can have a large impact on cash flow.

Once you start looking at this consistently and goals are communicated with the business offices teams, you will celebrate together as you watch that number get smaller and smaller.

Receivables Turnover

This measures the effectiveness of your team’s revenue collection. Typically AR turnover is measured as a ratio that compares your net credit charges against how many times you’ve collected receivables over a period of time.

Net Credit Charges / Accounts Receivable = Receivables Turnover Ratio

A higher ratio indicates a more efficient business office. The receivables turnover ratio should be calculated quarterly at a minimum and should be monitored and tracked to determine if a trend or pattern is developing over time.

Days’ Cash on hand

Days’ cash on hand is the number of days your facility or community can cover operating expenses using the cash available in the business right now. This metric ultimately tells you how long you could continue to operate if there was no new cash coming in. Days’ cash on hand tells you how well you are managing expenses and what your safety net is in the event of a crisis. This metric can also indicate whether there is a need to pay special attention to reducing costs.

Days’ Cash on hand = Cash on Hand / (Operating Expenses – Non-cash Expenses) / 365

The calculation divides the cash available by the amount of cash outflow per day.

Percentage of Bad Debt

Bad debts are amounts owed that have not been collected after multiple attempts. Accounts that are more than 180 days late typically fall into this category, although organizations may handle this differently. Aging should be reviewed often by the business office and can be used to spot trends in problematic admissions and change management processes.

Long-term care and senior living operators should set a benchmark for the percentage of bad debts each facility or community should not exceed. An acceptable percentage is typically 2% or less.

Bad debts = Write off amount / Total patient service charges

The percentage of bad debt should be monitored and tracked monthly and, if the percentage is above the acceptable threshold, the underlying issue should be examined. There are ways to reduce the percentage of bad debt. Organizations should have policies and procedures in place to ensure that each patient or resident has a valid billable payor source at the time of admission and when changes occur after they are admitted.

Comprehensive AR Solutions, a full-service accounts receivable management company centered on the Skilled Nursing Facility and related services industry, described some key ways to reduce bad debt expenses in an article for Leading Age New York:

Aside from having proper policy and procedure for internal communication, here are some other key ways to reduce bad debt expenses:

  • Properly educating the admissions department in understanding payors

  • Having a billing team up to date on all insurance, Medicaid, and Medicare policy changes

  • Having a strong process for claim scrubbing prior to billing

  • Having ample staff in place to proactively and thoroughly work on Medicaid applications

  • Having a strong health maintenance organization (HMO) case management team to ensure continued authorization for length of stay

Forecasting & Projections

KPIs are tied to targets and monthly revenue targets are essential to financial success. Setting revenue targets by payor type and monitoring them throughout the month give you the information you need to adjust before the end of the month when targets might be missed. Forecasting revenue is not an exact science but teams can use averages to get indicators that tell you if you’re on track. Forecasting can be done using the average daily census and month-to-date revenue for each payor type.

Revenue Projection for Payor Type = Month-to-date (MTD) Average Daily Census for (payor type) x MTD Average Daily Rate for (Payor Type)

Set Financial Goals and Measure Performance

The importance of setting financial goals and measuring them (often if not daily) cannot be stressed enough. Financial KPIs should reflect both the organization’s priorities and tangible goals. The key word is tangible. What are reasonable goals for your long-term care or senior living operation? As we pass through the latter stages of the pandemic, some operators have a primary goal of controlling losses as much as possible. This is not easy, given census figures are down as much as 11 percent industrywide. Additionally, there is the challenge of finding and maintaining an adequate labor pool of front-line workers.

Information is power. You have vast amounts of data that can be used to more effectively determine the cause of problems and solve them before they get out of hand. Once you’ve organized the data to provide the KPIs you need, you can use those metrics to trend results and to compare successful facilities and communities to one another to better understand what’s working and what is not.

CLAConnect, an accounting firm that specializes in healthcare, among other industries, described the urgency of staying on top of how trends affect KPIs in their 34th SNF Cost Comparison and Industry Trends Report:

If skilled nursing facility (SNF) operators have learned anything over the past several years, it’s that the status quo will not suffice. The magnitude of pace and change we’re seeing in the industry today is requiring operators to gather new data, accept new risks, and respond to changing market conditions with an unprecedented sense of urgency.

What is interesting to note is that this report was published in 2019. COVID was not even in our lexicon. Pandemic was a word in the dictionary.

MORAL: Yesterday’s management style might not be pertinent today and using your data to manage proactively is a must.

Now it is time to set financial goals beyond mere survival. Keep in mind returning to pre-pandemic numbers may take time. The goal is to see incremental improvements. You can start paying more attention to the KPIs we’ve covered in-depth but also things like:

  • Operating margins

  • Net margin ratio

  • Wages per compensated hour

  • Hours per resident day

  • Total cost per resident day

  • Salaries per resident day

  • Costs by payor

  • Productivity – labor time and cost to produce the volume of output

Remember, recovery from the last few years is a process. It will not happen overnight. But it is essential to know which way your organization is going.

Here’s how CareWork helps

Managing statistics and data sets can be a time-consuming process. We take the manual effort out of KPI management. You have a lot of data out there, it’s just not in one place. We connect the systems you already use, tie your data together, and give you a 360-degree view of finance, census, labor, procurement, clinical and quality using combined information.

CareWork is the first holistic operational platform for long-term care and senior living operators.

The CareWork platform gives your teams an easy way to access data and complete tasks from multiple systems in one place, as a service, without the need to hire in-house IT experts.

We envision a world where long-term care and senior living operators, leaders, and staff can focus on care more than work. Where we eliminate duplicate work and manual administrative tasks, unify data, and automate insight all from a single platform that is so easy to use it becomes the home base for all senior living and long-term care operations.

Now your management teams have precisely what they need to catch problems before they happen, work faster, and hit their targets – all in one place. Visit our website to learn how we can help you work more strategically and efficiently.

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