Three Reasons Why Benchmarks Matter
Posted On: February 28th, 2017
Vice President, Simione Financial Monitor
Early on, we learn the futility of comparing ourselves to others—someone will always be stronger, smarter or have a nicer car. Ironically, it’s the opposite in business. Without knowing how comparable organizations are faring in our fast-changing industry, it’s hard to feel confident about our choices.
Fortunately, there are a number of resources for home health statistics such as cost per visit, days claims are outstanding and the all-important gross margin. Those sources include the National Association for Home Care & Hospice (NAHC), the National Hospice & Palliative Care Organization (NHPCO), OCS Homecare, Strategic Health Programs (SHP), cost report from the Centers for Medicare & Medicaid Services and our own Simione Financial Monitor.
Whichever resource you use, it’s imperative to achieve an apples-to-apples comparison. For example, when we work with home care organizations, we calculate their gross margin by subtracting their direct expenses from their direct revenue. We include the following in direct expenses: salaries, payroll taxes, worker’s comp, benefits, contract, mileage and supply cost from direct patient care.
If you don’t include one or more of those items in your direct expenses and you’re using our benchmarks, your numbers will be off. Benchmarking is important enough to consider changing your process to include things like benefits (which some organizations do not) and other items with the goal of being able to easily compare your organization to national figures.
Improving gross margin
Simione Financial Monitor’s national benchmarks for 2016 Q2 put home health gross profit margin at 40.04% and hospice at 43.33%. Of course, benchmarking figures are the median, so your goal should be higher than that (striving to be in the top 10% or 20% is probably realistic).
To that end, here are some steps to consider if your gross margin is at or below the benchmark:
- Review your payer mix (do you work with a lot of payers that are only providing a 20% or 25% gross margin?)
- Review your case-weight mix
- Examine your volume (if your volume increases, will your gross margin go up or down?)
- Review worker productivity
- Review direct costs such as contract-worker rates, salary vs. pay per visit or contract, benefit costs, mileage costs and supply ancillary contracts.
Before making changes to improve gross margin, ensure everyone on your staff understands gross margin and what it means to them. Focus on the idea that you want to grow the organization—not cut costs. Then set targets in productivity and admission goals that will help you meet your gross-margin target. You may want to use gross-margin gains as an incentive for pay increases, bonuses and non-pay incentives.
Improving revenue cycle
Billing is one area that can greatly benefit from benchmarking. Compare the average number of days your company takes to collect revenue with Simione Financial Monitor’s national benchmarks for 2016 Q2 of 63 days (56 for Medicare) or the hospice benchmark of 55 days (42 for Medicare).
If you are at or below the benchmark, consider the following:
- Are you billing daily? Some organizations bill on a schedule set arbitrarily by someone in the department to simplify their work—but this practice is antithetical to positive cash flow.
- How streamlined are your processes? Once the admission visit is completed, the Outcome and Assessment Information Set (OASIS) is properly coded, and a plan of care created and sent to the physician, the request for anticipated payment (RAP) can and should be submitted.
- Do you enforce timely turnaround on all visit notes? Notes should be submitted within 24 hours of the visit for more accurate billing and better revenue management.
Benchmarking IT spend
One tough question facing home health organizations is how much to spend on IT. Simione Financial Monitor’s national benchmarks for 2016 Q2 put the national average at 1.1% of revenue. What’s perhaps more interesting is the point of diminishing return.
Organizations that spent less than 1% of revenue on IT had an average gross margin of 38%, according to our index. Compare that to organizations that spent between 1% and 2.5% of their revenue on IT—they had an average gross margin of 47%!
After that, we see the numbers go down, according to our national benchmarks. Home health organizations that spent 2.5% to 5% of revenue had an average gross margin of 39%, and those that spent 5% or more had an average gross margin of 30%.
Potential improvement in this area centers around three things:
- Educating and training your clinicians and back-office staff on how to best use the EMR to create efficiencies
- Considering outsource hardware and server support
- Researching technology that can boost efficiency (e.g., patient portals and telehealth systems)
Don’t attempt a benchmarking program without involving every stakeholder, from executive management and financial directors to clinical and administrative staff. Consider starting with an analysis of what would happen if your expenses remained the same but the industry changes being predicted actually occurred, as a way of determining the degree to which change is necessary.