October  2004
CPA Leadership Report
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Financial Benchmarking and Ratio Analysis 
in the Health Care Industry

By Robert James Cimasi, ASA, CBA, AVA, FCBI, CM&A, CMP  

 

There are many factors that determine the success or failure of a healthcare business or professional practice in today's dynamic regulatory, reimbursement, and competitive environment. One of the most important of these factors is management’s ability to react to changes by making timely, informed decisions regarding the organization’s operational direction and financial performance. Among the most useful management tools available to achieve this objective is benchmarking, a well established financial analysis process.

This article is presented in two parts. Part I, presented here, deals with sources of benchmarking data. Part II, presented in our November issue, will cover benchmarking a subject entity’s data against the industry. 

Introduction

Benchmarking can not only identify the existence of nonstandard performance and anomalies in costs, levels of productivity, and financial ratios, but it can also help you discover their underlying causes. Once the driving factors for aberration from the norm are determined, they should be further investigated and assessed as to the potential weaknesses and risk factors, as well as the potential strengths they pose for the subject entity going forward. While this benchmarking process is essential for internal managers seeking to adjust business methods to optimize performance, it is also an invaluable tool for valuators and consultants.

The successful financial benchmarking analysis process may be divided into three categories:

First, historical subject benchmarking compares the subject entity’s current or most recently reported performance with its past performance, a process that involves adjusting and comparing past data with current data. This method provides the basis for the most accurate comparison by avoiding the complications of accounting/reporting differences that arise when comparing subject entity data with industry survey data. Historical subject benchmarking examines performance over time to identify changes in performance within a subject entity, to identify anomalies — such as extraordinary and non-recurring events — and to predict future performance.

Second, benchmarking to industry norms compares subject entity data with survey data from other entities in the same industry sector and subsector. This method provides the basis for comparing the subject entity to similar entities to identify its relative strengths, weaknesses, and related risk measures.

As a required step precedent to these two benchmarking methods, the subject entity’s operating data is first “common sized.” In other words, it’s converted and expressed as a percentage or ratio of some measure, in one of several ways. Methods of common-sizing include expressing items on income and expense statements in terms of: 

  1. Percentage of revenue or per unit produced — e.g., Relative Value Unit (RVU);

  2. Per provider — e.g., physician; 

  3. Per capacity measurement — e.g., per square foot; or

  4. Other standard units of comparison.

A third type of benchmarking is financial ratio analysis. These ratios are typically calculated as measurements of various financial and operational characteristics that illustrate the subject entity’s financial status. They’re evaluated in terms of their comparison to generally established industry norms expressed as ranges of positive or negative trends for that industry sector. A “current ratio” of less than 1.0, for example, might be considered “suspect.” When compared with ratios derived from survey data from the comparable industry sector, it may indicate that the subject entity’s resources are inadequate to meet its current obligations. 

Healthcare industry survey benchmarking data may be obtained from several publicly available sources, enabling an analyst to compare detailed financial, operational, and clinical performance with similar peer group data. The survey data should be as current as possible. Publication delays of a year or more are not uncommon, so it’s easy to mismatch data from different years, diminishing the efficacy and applicability of the analysis to current and projected future operations. This is particularly true for medical practices because year-to-year changes can be significant and material in a rapidly changing reimbursement and regulatory environment. 

I. Sources of Benchmarking Data

There are a wide variety of published data sources for comparing the financial aspects of healthcare enterprises with the historical performance of industry peers on a national and regional scale. The following surveys represent some of the more widely accepted sources.

I.A. American Medical Association (AMA) Surveys  

I.A.1. Physician Characteristics and Distribution in the U.S. (annual) 
American Medical Association.

The AMA maintains the most comprehensive database of physician information in the U.S., with data on almost 800,000 MDs. Started in 1906, the AMA updates its “Physician Masterfile” annually through the Physicians’ Professional Activities questionnaire and the validation efforts of AMA’s Division of Survey and Data Resources. “Physician Characteristics and Distribution in the U.S.” is based on a variety of demographic information from this source. The database contains the largest sample of solo and small group practitioners.

I.A.2. Physician Socioeconomic Statistics — AMA (CE) (annual)
American Medical Association (AMA).

This survey publication is the result of the merger in 2000 of the following two AMA annuals:

  1. Socioeconomic Characteristics of Medical Practice; and

  2. Physician Marketplace Statistics

The merged survey is based on the AMA’s annual core survey of the Socioeconomic Monitoring System. Random samples of physicians from the Physician Masterfile were given a questionnaire and interviewed by telephone concerning a wide range of economic and practice characteristics. The annual publication reports data in the following categories:

  1. Age profiles of physicians

  2. Weeks and hours of practice

  3. Utilization of physician services

  4. Fees for physician visits

  5. Professional expenses

  6. Physician compensation

  7. Distribution of revenue by payor

  8. Managed care contracts and

  9. Other physician marketplace statistics

I.B. Group Practice Associations Compensation and Production Surveys

Table 1 identifies the measures of revenue data provided in the various compensation and production surveys described in this section.

Table 1: Surveys Including Revenue Benchmarking Data

Types of Revenue Data

AMA (CE)

AMGA (C)

MGMA (C)

NAHC

1.      Accounts receivable

 

 

X

X

2.      Collections

X

X

X

X

3.      Compensation

X

X

X

X

4.      Gross charges

 

X

X

X

I.B.1. Medical Group Compensation and Productivity Survey — AMGA (C) (annual) 
American Medical Group Association

The American Medical Group Association (AMGA), formerly the American Group Practice Association, has conducted this compensation and production survey for more than 17 years. Survey cosponsor McGladrey & Pullen surveys more than 2,600 group practices nationally. For the 2003 survey, 182 medical groups, representing almost 28,000 physicians, responded. Compensation and production data is provided for medical specialties by group size, geographic region, and single versus multi-specialty practices.

I.B.2. Physician Compensation and Production Survey — MGMA (C) (annual) 
Medical Group Management Association.

The Medical Group Management Association’s (MGMA) membership compensation and production survey has been conducted annually since 1987 and is one of the largest with approximately 1,800 practice respondents. Data is provided on compensation and production for 105 specialties with detailed summaries of the 20 largest, including breakdowns for years in specialty, single or multi-specialty practice, geographic regions, and percentage of at-risk managed care revenues. Beginning with the 1997 report, the survey data is also published on CD by John Wiley & Sons ValueSource. The additional levels of detail available in this media provide better benchmarking capabilities.

Table 2: Compensation Criteria

Compensation Criteria

AMA (CE)

AMGA (C)

MGMA (C)

NAHC

1.      Demographic classification

 

 

X

X

2.      Employment status

X

 

X

 

3.      Gender

 

 

X

 

4.      Geographic section

X

X

X

 

5.      Group type

X

X

X

 

6.      Hours worked per week

 

 

X

 

7.      Medical specialty

X

X

X

X

8.      Method of compensation

X

 

X

 

9.      Percentage of capitation revenue

 

 

X

 

10.  Size of practice

X

X

X

X

11.  Weeks worked per year

 

 

X

 

12.  Years in specialty

 

 

X

 

Table 3: Gross Charges Criteria

Gross Charges Criteria

AMA (CE)

AMGA (C)

MGMA (C)

NAHC

1.      Employment status

 

 

X

 

2.      Gender

 

 

X

 

3.      Geographic section

X

 

X

X

4.      Group type

 

 

X

X

5.      Hours worked per week

X

 

X

 

6.      Medical specialty

X

X

X

X

7.      Method of compensation

 

 

X

 

8.      Percentage of capitation revenue

 

 

X

 

9.      Size of practice

X

 

X

 

10.  Weeks worked per year

X

 

X

 

11.  Years in specialty

 

 

X

 

I.C. Medical Practice Expense Surveys  

I.C.1. Cost Survey — MGMA (E) (annual) 
Medical Group Management Association

MGMA’s Cost Survey is one of the best known surveys of group practice income and expense data. It’s been published, in some form, since 1955 and currently has more than 1,600 respondents. Data is provided for a detailed listing of expense categories and is also calculated as a percentage of revenue and per FTE physician, FTE provider, patient, square foot, and Relative Value Unit (RVU). RVUs are a measure of physician labor and the direct and indirect expenses necessary to perform a procedure. The survey provides information on multi-specialty practices by performance ranking, geographic region, legal organization, size of practice, and percentage of capitated revenue. Detailed income and expense data is provided for single specialty practices in 19 specialties. John Wiley’s ValueSource division also publishes this survey on CD.

I.C.2. Medical Group Financial Operations Survey — AMGA (E) (annual) 
American Medical Group Association.

This survey was created through a partnership between RSM McGladrey and the American Medical Group Association (AMGA). It provides critical benchmark data on support staff salaries and benefits, physician salaries, staffing profiles, and other key financial indicators. For the 2003 survey, AMGA received responses from 166 medical groups, representing 25,784 physicians. This information, including data as a percentage of managed care revenues, per full-time physician, and per square foot, is subdivided by specialty mix, size of practice, and geographic region, with detailed summaries of single-specialty practices in 30 specialties. These specialty summaries provide compensation and expense data per full-time physician and per square foot.

I.C.3. Statistics: Medical and Dental Income and Expense Averages (NAHC) (annual) 
National Association of Healthcare Consultants.

This survey — produced by Practice Asset Management, LLC and SH Systems, Inc. — is developed through a joint service agreement between the Society of Medical Dental Management Consultants (SMD) and the National Association of Healthcare Consultants. It has been published annually for a number of years and the 2002 Report Based on 2001 Data included detailed income and expense data for 2,800 practices in 56 specialties. The Data is divided into four geographic regions and by solo or group practice.

Table 4: Surveys Including Expense Benchmarking Data

Types of Expense Data

AMA (CE)

AMGA (E)

MGMA (E)

NAHC

1.      Accounting

 

 

X

 

2.      Administrative costs

 

 

X

X

3.      Advertising

 

 

X

X

4.      Automobile

 

 

 

X

5.      Business professional fees

 

 

 

X

6.      Dues and education

 

 

 

X

7.      Equipment

 

X

X

X

8.      Insurance

X

X

X

X

9.      Laboratory

 

 

X

X

10.  Occupancy costs

 

X

X

X

11.  Other expenses

 

X

X

X

12.  Professional promotion

 

X

X

X

13.  Staffing costs

 

X

X

X

14.  Supplies

 

X

X

X

15.  Taxes

 

 

 

X

16.  Telephone

 

 

 

X

Table 5: Equipment Criteria

Equipment Criteria

AMA (CE)

AMGA (E)

MGMA (E)

NAHC

1.      Depreciation

 

 

 

X

2.      Interest

 

 

 

X

3.      Maintenance

 

 

 

X

4.      Other

 

 

 

X

5.      Rental

 

 

 

X

Table 6: Staffing Costs Criteria

Staffing Criteria

AMA (CE)

AMGA (E)

MGMA (E)

NAHC

1.      Administrative support

 

 

X

X

2.      Clinical laboratory

 

 

X

X

3.      Housekeeping, maintenance, security

 

X

X

X

4.      Information technology

 

X

X

 

5.      Licensed practical nurses

 

X

X

 

6.      Medical assistants, nurses aides

 

X

X

X

7.      Other medical support

X

 

X

X

8.      Radiology and imaging

 

 

X

 

9.      Registered nurses

 

X

X

 

10.  Retirement

 

X

 

X

Table 7: Surveys Including Utilization Benchmarking Data

Types of Utilization Benchmarking Data

AMA (CE)

AMGA

MGMA

NAHC

1.         Total RVUs

 

 

X

 

2.         Work RVU

 

X

X

 

I.D. Subdivision of Benchmarking Data by Criteria

Tables 8 through 16 illustrate a variety of available financial data. Each category of benchmarking data (e.g., revenue, expense, utilization) is followed by one or more subtables that further describe an individual data category.

Table 8: Collections Criteria

Collections Criteria

AMA (CE)

AMGA (E)

MGMA (E)

NAHC

1.      Adjusted fee-for-service collection %

 

 

X

 

2.      Fee-for-service collection %

 

 

X

X

Table 9: Accounting Criteria

Accounting Criteria

AMA (CE)

AMGA (E)

MGMA (E)

NAHC

1.      Accounts receivable

 

 

X

X

2.      Assets

 

 

X

 

3.      Current assets

 

 

X

 

4.      Current liabilities

 

 

X

 

5.      Liabilities

 

 

X

 

6.      Working capital

 

 

X

 

Table 10: Dues and Education Criteria

Dues and Education Criteria

AMA (CE)

AMGA (E)

MGMA (E)

NAHC

1.      Conventions/seminars

 

 

 

X

2.      Dues/journals

 

 

 

X

Table 11: Insurance Criteria

Insurance Criteria

AMA (CE)

AMGA (E)

MGMA (E)

NAHC

1.      Business

 

 

 

X

2.      Malpractice

X

 

X

X

Table 12: Occupancy Cost Criteria 

Occupancy Cost Criteria

AMA (CE)

AMGA (E)

MGMA (E)

NAHC

1.     Building depreciation

 

 

 

X

2.     Building interest

 

 

 

X

3.     Janitorial

 

 

 

X

4.     Rent

 

 

 

X

5.     Utilities

 

 

 

X

Table 13: Supplies Criteria

Supplies Criteria

AMA (CE)

AMGA (E)

MGMA (E)

NAHC

1.      Clerical

 

 

 

X

2.      Clinical

 

 

X

X

Table 14: Taxes Criteria

Taxes Criteria

AMA (CE)

AMGA (E)

MGMA (E)

NAHC

1.      Income

 

 

 

 

2.      Payroll

 

 

 

X

3.      Other

 

 

 

X

Table 15: Total RVU Criteria

Total RVU Criteria

AMA (CE)

AMGA (E)

MGMA (E)

NAHC

1.      Group type

 

 

X

 

2.      Hospital ownership

 

 

X

 

3.      Percentage of capitation revenue

 

 

X

 

4.      Physician compensation per total RVU

 

 

X

 

5.      Physician compensation per total RVU by group type

 

 

X

 

Table 16: Work RVU Criteria

Work RVU Criteria

AMA (CE)

AMGA (E)

MGMA (E)

NAHC

1.      Group type

 

 

X

 

2.      Hospital ownership

 

 

X

 

3.      Percentage of capitation revenue

 

 

X

 

4.      Physician compensation per physician work RVU

 

X

X

 

5.      Physician compensation per physician work RVU by group type

 

X

X

 

Benchmarking Data Sources for Hospitals, ASCs, and Other Types of Healthcare Entities  

I.E.1. Hospital Surveys

AHA Hospital Statistics (annual) 
American Hospital Association. One North Franklin, Chicago, IL 60606; (800) 242-2626. www.aha.org.

The 2003 edition of this hospital survey notes that it has been conducted for more than 50 years. The survey targets all U.S. hospitals and had an average response rate of 83% from 1999 to 2003. Data is included for a limited number of high-level financial and operating variables that are reported by a range of subdivisions and classifications, including state level data and by hospital type. Five years of data are provided, the most recent (2001) lagging the publication date by two years.

The Almanac of Hospital Financial & Operating Indicators — A comprehensive Benchmark of the Nation’s Hospitals (annual) 
Ingenix www.ingenix.com 

As of 2002, the Almanac was in its 22nd annual edition. It incorporates data from approximately 6,000 Medicare Cost Reports, 3,000 audited financial statements, and strategic operating indicators obtained directly from the 1,700 hospitals surveyed. The almanac presents data on 35 financial and 46 operating indicator ratios in these categories: Profitability, liquidity, capital structure, asset efficiency, and other financial. This survey also reports five years of data, the most recent lagging the publication date by two years. Each of these data points are reported according to a range of subdivisions and classifications, including hospital type and median, as well as for the latest year, upper quartile, lower quartile, 10th percentile, and 90th percentile. 

The Comparative Performance of U.S. Hospitals: the Sourcebook (annual) 
Solucient (fka HCIA) www.solucient.com

This survey’s 2003 edition was the 16th edition published. It included data on 3,400 U.S. nonfederal hospitals, reportedly “virtually every general acute care hospital with 25 or more beds.” The data was compiled primarily from Medicare Cost Reports submitted by the hospitals themselves. Financial and operating data variables are organized into the following categories: Capacity and utilization; patient and payor mix; capital structure; liquidity; revenues, expenses, and profitability; productivity and efficiency; and pricing strategies. This survey also reports five years of data, the most recent (2001) lagging the publication date by two years. Each of these data points are reported according to a range of subdivisions and classifications, including state level data, hospital type, mean, upper quartile, and lower quartile.

I.E.2. Ambulatory Surgery Center (ASC) Surveys

Ambulatory Surgery Center Performance Survey (annual) 
Medical Group Management Association www.mgma.com

The 2003 report based on 2002 data was the fifth annual ASC survey published by MGMA. The American Association of Ambulatory Surgery Centers (AAASC) collaborated with this latest year’s report and provided support for the previous report. The report provides financial and operating data that is very similar to MGMA’s medical group cost survey. Data is presented in the following divisions: As a percentage of total medical revenue, per square foot, per case, per procedure, and per operating room. Each of these data points are reported according to a range of statistical measures of central tendency, including mean, median, upper quartile, lower quartile, 10th percentile, and 90th percentile. Data is further classified by ASC size (by number of annual cases), by ownership type, and by selected specialties.

Outpatient Surgery Center Market Report (annual – formerly published by SMG Marketing Group) 
Verispan www.verispan.com

Since approximately 1990, SMG Marketing Group, now owned by Verispan, has compiled and maintained a database of U.S., freestanding (not hospital-owned) ambulatory surgery centers (ASCs). Until the title changed in 2004, the survey was published as “Report and Directory: Freestanding Outpatient Surgery Centers.” The report contains a directory of facilities and chains with contact and ownership information as well as specialty and number of operating rooms. It’s accompanied by a statistical report on the ASC industry, which includes data on demographics such as utilization, patient volumes, and surgical specialty and procedure analysis. The report also covers managed care and other contracting, growth, and revenue trends and projections.

I.E.3. Management Services Organization (MSO) Surveys

Cost Survey for Integrated Delivery System Practices (annual, continues Management Services Organization Performance Survey) 
Medical Group Management Association (MGMA) www.mgma.com

This survey began as “A National Initiative: The Survey of Hospital-Sponsored Management Services Organizations,” conducted and published by the consulting firm Medimetrix in 1997. In 1998, MGMA and Medimetrix issued the report retitled as the “Management Services Organization Benchmarking Survey: 1998 report based on 1997 data.” Beginning with the next release in 2000, MGMA took over the survey and began publishing it annually. In the 2003 report, the survey was expanded to include data on integrated delivery system practices as well as MSOs, and the report was again renamed as the “Cost Survey for Integrated Delivery System Practices.” The first part of the report provides financial and operating data on medical practices similar to MGMA’s medical group cost survey. The second part is devoted to MSOs with similar types of financial and operating data on these organizations (not their member practices). In both sections, data is presented in the following divisions: Per FTE physician, as a percentage of total medical revenue, per square foot, per total RVU, per work RVU, and per patient. Each of these data points are reported according to a range of statistical measures of central tendency, including mean, median, upper quartile, lower quartile, 10th percentile, and 90th percentile.

Robert James Cimasi is president of Health Capital Consultants. He can be reached at rcimasi@healthcapital.com.

 

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