The American healthcare system is facing a complex and uncertain future. Already grappling with an aging population and rising levels of acuity, many healthcare institutions are struggling to navigate challenges that directly impact their financial health. Even as inflation stabilizes, costs for labor, drugs, and supplies continue to outpace inflation. These rising costs are not being offset by commensurate increases in reimbursement rates. In addition, healthcare institutions are facing mounting reimbursement challenges including excessive coding and documentation requirements and the complexities of navigating varying reimbursement rates across different payers.  

As the industry shifts towards value-based care payment models, organizations are feeling pressure to improve their performance or face severe financial consequences. Healthcare institutions continue to grapple with the financial strain imposed by the Affordable Care Act (ACA), including reduced reimbursements, increased costs, and the administrative burden of compliance. While each healthcare institution’s situation varies greatly depending on location, size, and the specialty offerings that they can provide, we are seeing a growing trend consolidation as organizations seek to gain economies of scale in order to survive.  

In this article we examine three primary areas of focus for healthcare institutions: key performance indicators, potential red flags, and recommended corrective actions. We also provide an overview of the top financial and operational indicators that any healthcare operator should measure and review frequently, as well as detail top red flags that could potentially indicate your healthcare organization is going into cardiac arrest, and key survival strategies.  

Top financial indicators

1. Revenue cycle metrics such as denial rates, collection efficiency, claim submission times and accounts receivable days, are essential to evaluate how well the institution manages billing and collections. The faster you can collect your money, the better for your cash flow; and the more accurate your billing, the less delays or eventual write-offs you will experience.  Provider productivity measured by Relative Value Units (RVU’s) helps assess physician and clinical staff productivity. These units measure the value and complexity of medical services and help determine how much doctors and other healthcare providers should be paid for the services they provide. When combined with compensation levels, they allow for the institution to understand the profitability (or not) of each clinician.  
2. Cost per episode of care (CPE) provides valuable insights into the efficiency and effectiveness of care delivery, enabling healthcare providers to identify areas for improvement and optimize resource allocation. They measure direct and indirect costs and. can help both healthcare providers and payers identify areas where costs can be reduced without compromising quality of care.

Top operational indicators:  

• Length of stay (LOS) is essential for resource allocation, cost management, assessment of quality of care, among other benefits. LOS data helps hospitals better predict demand and allocate resources accordingly. Understanding LOS metrics and managing them while maintaining care quality can potentially lead to increased profitability. Recent trends are seeing LOS fall as providers and payers are using technology to increase the number of procedures that can be done on an outpatient basis. This reduces the cost for the payer but places financial strain on the provider as it reduces revenue.  
• Staffing ratios, overtime hours, and use of agency staff help assess the workforce efficiency and patient care capacity to improve resource planning. Excessive staffing levels, premium overtime hours, and higher cost agency staff all add pressure to providers’ bottom lines.  

Top 5 red flags

A healthcare institution in financial distress can be likened to a patient experiencing cardiac arrest. The five red flags below could signal that you are heading towards crisis and need immediate attention:

1. Decreased patient volume: In a competitive healthcare market, patients can choose alternative providers if they encounter issues such as prolonged wait times, unsatisfactory treatment experiences, or poorly maintained facilities. They will also gravitate towards providers that have specialties or where they can obtain a range of treatments in one location.  
2. Negative operating margins: A persistent negative operating margin, meaning that your organization is spending more than it earns, is a strong indicator of financial trouble and needs to be addressed.  
3. High employee turnover: This is a critical early warning sign. Physicians and nurses are highly sought-after professionals who are more likely to leave an organization that is struggling either financially, operationally, or in both areas.  
4. Delayed or unpaid bills: Cash flow problems may result in vendors not being paid in a timely manner. This can cause delayed supplies and have a direct impact on patient care.  
5. Rising debt-to-equity ratio: A provider that relies too heavily on debt reduces their ability to weather financial storms.  

A prescription for survival

When a healthcare institution has identified key red flags, it is critical that they take immediate action to remedy the situation. Below are some key steps you can take: 

1. Analyze patient data to identify reasons for declines in patient volume, such as changes in insurance coverage, competition, or patient satisfaction issues. Treat patients as customers and focus on improving their patient experience to drive referrals and loyalty.  
2. Conduct a financial review to identify the root causes of negative operating margins. These could be revenue-based such as decreased patient volume, reduced reimbursement rates, or increased bad debt. Identify the specifics and develop a plan to address each in turn. This could mean adding new service lines, opening up negotiations with payers, or analyzing your revenue cycle operations. Negative operating margins could also be caused by rising expenses from higher labor costs, higher cost of supplies, or increased overhead costs for items such as insurance or utilities. Look for ways to reduce expenses, such as renegotiating contracts, improving supply chain management, and optimizing staffing levels while also developing strategies to increase revenue, such as expanding services in profitable areas and improving patient satisfaction.  
3. Conduct employee surveys to gather feedback from employees to help identify underlying causes of high turnover. Aim to address root causes such as improving working conditions, compensation, or other identified reasons and develop a plan to address them both in the short and long term. Engage with the staff during this process so that they feel included in the changes.  
4. Delayed payments to vendors are a symptom of insufficient cash flow. Ensure that you communicate honestly and openly with suppliers, even if you need to implement short-term payment plans. Delayed payments often go hand in hand with collection issues and high levels of aged receivables. Implement more effective collection strategies to recover outstanding invoices.  
5. Review the existing debt structure and look for ways to either refinance with more favorable terms or to extend maturities for near term payment relief. Communicate honestly and openly with your lenders.  

Conclusion

The American healthcare system is navigating a complex and uncertain future. Traditional annual budgeting and reviews are no longer sufficient. This new reality requires healthcare institutions to adapt operations and proactively monitor key financial and operational metrics daily, weekly, and monthly to identify potential issues early and address them before they escalate. While the primary goal remains delivering world-class healthcare, a renewed focus on continuous improvement across clinical and administrative operations is essential for survival in the current environment.