Benchmarking Ambulatory Businesses

How do I measure up? Against what criteria? Who is the judge to say that we meet or not meet standards? Who establishes the standards? These are common questions when the topic of benchmarking is raised within the health services management community. It sounds good in principle, but how many managers really want to be measured? And if they do, how good are the measurements of the standards of practice?

 

The purpose of this article is to describe a method that is an objective, yet practical method to use quantitative data to compare a healthcare organization's performance against a set of standards that will ultimately result in better financial and management performance for the healthcare organizations.

 

Benchmarking is a phrase used to describe the activity of measuring one's performance against standards of performance. Many times it is hard to find such legitimate standards for similar businesses. If such standards exist, such as the MGMA's Cost Survey Report for group practices, these standards can be of great benefit to improve the organization. However, many times there are not standards for the operations of ancillary businesses such as surgery center, pain management, diagnostic, comprehensive women and men's health centers, complimentary and alternative care centers, or other new programs, or, as I like to call them, ambulatory businesses. It is therefore important to first establish one's own benchmarks of performance and try to improve on them. If a similar database is available, this is can be of great value; however, setting ones own standards are extremely important.

 

Each ambulatory care program should be developed and run like a freestanding business. At the Sloan School of Management at MIT in Cambridge, Mass., research was done on how businesses were run successfully. Being a business school based at an institution strong in engineering, many of the factors were quantified. What resulted in the studies was a remarkably simple, yet powerful tool called "Critical Success Factors" (CSF). CSF should be measured in each business. The premise is that in any given endeavor, including a business, there are no more than a dozen factors that are critical to the success of that endeavor. In examining managers and businesses that had been very successful, those managers identified and focused their and their management team's efforts on the basic principles of the business. It is like the Vince Lombardi school of football: He was a great coach, motivator and manager. The key to the Green Bay Packers success under Vince Lombardi was that Lombardi took very complicated things and he simplified them (not over-simplified them). He stressed performing basic tasks extraordinarily well. He said, "You know whoever runs the fastest, catches the most balls, makes the most tackles, monopolizes the time in the field with the ball usually wins the game." He practiced the fundamental skill sets and concepts of the game, and won a lot.

 

Dr. Warren Bennis, a past professor at MIT and the time who is now at the USC Marshall School of Business, looked at various businesses, and it seems to him that there were no more than maybe 10-12 critical factors for a business to succeed. He called them the Critical Success Factors. He proposed that, "If one does a very good job of those 10 basic things, and executes those tasks well, and measures them routinely, the businesses usually succeed. It is significant to inculcate that thought process into all the people that are on the team. Those in an organization should share those same 10 common denominators, and make them part of that organization's corporate culture."

 

Applying CSF to ambulatory businesses

I have applied CSF in five companies I have run, a 500-bed hospital with 95 different departments and eight satellite ambulatory centers, a division of public company, a separate public company and two private firms representing over 150 different ambulatory care businesses in 40 U.S. states. The process really does work. It is a very inclusive process. There are educational pieces to it, and these factors do change based on the business. I have 10 factors for occupational medicine businesses that I have run which are different ones than for the surgery centers we operate. There is another 10 for diagnostic and breast center ambulatory businesses. As you are measuring different aspects of the business, and every business it's a little bit different than the other, there are different critical factors for success. Each business has it own nuances. It is the manager's role to identify those critical to the success of that particular business. One must build consensus around those factors by educating the staff and physician partners as to why those factors were selected, and then finalize those factors and make them part of the every day priorities of that ambulatory business.

 

If you have similar types of businesses like satellite ambulatory centers, urgent care centers or surgery centers, you can establish your own benchmarks.

 

In our case, we took a look at all of our surgery centers, and defined what 12 factors were critical financially to the success of a surgery center. I first did this in 1979. Over the years, most of the factors have not changed except for managed care. We use the CSF at each center, explaining them in detail to the staff and the physicians that use the ASC. We emphasize that if we implement and focus on these factors to the best of our collective abilities, the smaller issues will take care of themselves and we will succeed. This has been a very successful tool for any ambulatory business where it has been applied.

 

The best part of the CSF system is it focuses all of the key players of the business on the important things. We stay on point. We all share in the joy of "exquisite execution" of those key factors. It simplifies work in a creative and productive way. It allows employees to measure their success objectively each month. We can jointly look at the factors at the end of the month and know how well we did or what areas in which we can do better. You cannot hit the bull's eye of a target unless you can see the rings clearly. CSF focuses all the team on the bull's eye.

 

Each year we ask ourselves what would be the things in this practice (ambulatory business) that would contribute most to its success. That is what we basically do each year. We then measure those factors. Many times the financial ones are very similar, such as productive hours per patient, net revenue per patient, cost of medical supplies and drugs per patient, inventory levels and revenue per square foot.

 

One needs to established measurable, critical success factors. I will discuss the ones that we came up with for surgery center business.

 

Measuring ASC financial results

Every month, we review our financial results, and every month, we measure these by applying CSF. The critical success factors reflect staffing issues, quality issues, supply and contracting issues — all the variable costs one needs to control in a very volume sensitive business. We take the total number of patients, not procedures, as our base quantified number for an ASC. Procedures are how many CPT codes click on the computer, but the number of patients is really the variable that matters the most in an ASC. Patients or cases represent the number of people seen. We want to use patient count because it is the basis for determining space and equipment needs, which impacts our business, supplies and staffing of our ASC business. Multiple procedures are performed at the same time on a patient, but the patient is the common denominator.

 

When we examined our ASC business, there really was less of a correlation to the success factors related to procedures than patients. We measure procedures, because they are important as you will see later in this article, but they are not our base factor by which all factors are measured. In developing CSF, you have to dissect the business in this way to get the really critical factors.

 

In the ASC, we calculate the average number of patients per day. We want to measure that because most of my nurses think in days and staffing, and it helped for staffing purposes, so we broke it down to days. We want to know the number of procedures because it is an intensity factor. It also helps us measure specialty mix. The more procedures per patient we had, the more acute and intense the treatment of our patients.

 

Financially, we measure both gross revenue and net revenue in our financial statements. We want to know what we are billing and the net revenue after discounts. Net revenue per case is calculated from our contractual allowance and bad debt. We want to know how much we are writing off and if we need to raise prices or reduce managed care contracts. It allows us to identify a problem, and then go deeper into the business to find the solution. CSF serves as flags to tell you where to focus for solutions to problems in the business.

 

We want to know the net revenue per patient; it is an important number and it also tells us about our specialty and patient mix. We are able to compare that number with our costs to make sure our profit margin stays intact. This is obviously important. Since net revenue per patient is a critical number for our budget, we really focus on it as a CSF. It is critical that we track it.

 

Analyze staffing

We look at total worked (or productive, not paid) full-time equivalent (FTEs) employees for staffing. Staffing hours per patient, and FTEs per patient (staff hours per patient.) are both important measures. If it is too low, we know our patients are not getting the attention necessary. If it is too high, we are either overstaffed, we had a heavy mix of acute patients or we incurred too much overtime. We balance this CSF with number of procedures to measure intensity and acuity of patients so we can see the whole picture of the business.

 

CSF support one another. Key elements of an endeavor are interlocked. To start, we began looking at our own measures of staffing. We discussed this measure with the physicians and asked patients (via surveys) if they felt they had adequate attention and care. We then found a few other ASCs that were similar to us and asked them to measure the same staffing factor to gain an idea of their performance. You find that there is a pretty narrow range of staffing per patient given a standard, multi-specialty ASC. There are different ranges for different specialties and different caseloads, but for similar caseload (number of patients) and similar specialty centers, the staffing CSF ranges from the 11 man-hours per patient down to 8.5. It is not uncommon for a new center to experience 12-14 man-hours per patient because they just are not as efficient with staffing and the physicians are not settled into their block times yet.

 

The point is the staffing CSF helps you understand multiple, critical parameters of the business and what to focus upon when it is too high. As an aside, productive work-hours per patient run 8-8.5 for some of the large patient volume surgery centers that are at the 5,000 caseload and above. Normally, a surgery center experiencing 2,500 cases is usually in the 11-12 range, 11 if it is well run. This includes a full business office. If the ASC is group-practice based and the group has integrated the business office of the ASC into the group's business office (which is common), you take account for the FTE's in the business office when making your calculation.

 

Payroll, supply costs, patient costs and A/R

Payroll expense as a percentage of net revenue is usually at 25-27 percent range on average. We do experience ASCs in the 18-19 percent range due to the low pay rate or with extraordinarily high case volume. This CSF is also a function of the revenue. So, if you have very high revenue, your expenses over-revenue is going to lower the CSF. The lower percentage of staffing ranges for staff as a percentage of net revenue may also occur with ASCs that are mostly out-of-network with payprs since their net revenue is usually much higher than contracted ASCs.

 

We also measure medical supply and drug (including anesthesia drugs) costs per patient, total expenses per patient and accounts receivable days outstanding. We always try to be no greater than 50 days, with a goal of 45 days. This is an achievable CSF due to electronic billing, especially with Medicare. Operating income, operating income per patient, operating margin and inventory are all CSF.

 

We want to keep the inventory down, and at all of our centers below 3,000 cases we try to keep the inventory below $100,000. Now with just-in-time inventory, we can actually do better than that. We make sure the nurse doesn't buy 15 boxes this month and then nothing the next month. Critical to our success is cash flow management. Inventory is key to this. I tell our nurses to think of the supplies in sterile storage as cash on the shelf. If it is on the shelf, neither the partners nor them can access it for bonuses, nor can I use it to invest in the business or buy more equipment for them. If you are only seeing 10-15 patients a day, and you have $50,000 on the shelf, you are using up the group's cash. Remember, "cash is king".

 

The CSF are used for performance review on all employees. We tell the director of nursing that she is paid for the making certain critical success factors happen, and the CSF is our tracking system.

 

Critical ASC benchmarks

To summarize, here are the critical factors we track monthly in a spreadsheet at our ASCs:

 

Volume

- Total number of Cases

 

Revenue

- Net patient revenue

- Net patient revenue per patient

 

Staffing/payroll

- PTO hours paid

- Productive staff hours worked

- Total paid FTEs based on hours worked

- Productive staff hours per patient

- Payroll expense

- Total payroll as a percentage of net revenue

- Payroll $ per case

 

Other expenses

- Medical supply cost

- Medical supply cost per patient

- Total supply costs as a percentage of net revenue

- Total operating expenses

- Total operating expenses per patient

 

Profit

- Total A/R

- A/R days outstanding

- Net income

- Collections

 

Maximizing benefits of CSF

The clinical analogy of CSF is lab test ranges. A male between 25 and 35 should have a normal white count of a certain range. In a surgery center, running 2,500 cases with a standard mix of specialties should have a staffing in a certain range. If you're outside of that range, the CSF doesn't tell you that you're wrong — it says you have to look at it. It is a way of measuring on a consistent basis and flagging those areas where your best practices may not be best. You want to go back and look so you can stay on your best practice target ranges as defined first your own CSF and then against others if such pertinent standards exist. First you define the CSF, and then you quantify them.

 

It is ideal if the group or ambulatory business owners will share the profit with the employees if the budgeted profit is met or exceeded. This reinforces CSF as a management tool even more. In this way, all involved with achieving the profit gets to share in that profit. It's the American way. I've done that almost in every center, group practice or hospital in which I have worked and in both for-profit and non-profit organizations. It is good to take some portion of the profit and share the wealth with those who helped you make it. It could be only 1-2 percent; it doesn't have to be a large amount of money. Even a $300-$400 check at the end of the year if it's earned is meaningful, more obviously the better. One of the best parts about using CSF is the employees and the doctors only make money if they did the right things.

 

Using CSF to assist managing your ambulatory business is a valuable tool. It takes great thought to identify the truly critical factors for the success of your business. In this article, I have concentrated upon the business aspects that are critical to an ambulatory business, but that is the domain of the manager. We are charged to create good value by making sure the business is on sound financial footing and motivating the employees and the medical staff to focus on issues that will ensure the success of that business. CSF help us all focus on a few key points, allow us to measure our progress, and allow us to savor the effort which results in success of our joint efforts.

 

Robert Zasa is a founder and principal of ASD Management. He is experienced in all phases of business development and multi-service ambulatory care facilities, group practices, ASCs and hospitals. Contact him at rzasa@asdmanagement.com and learn more about ASD Management at www.asdmanagement.com.

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