3 critical financial indicators to watch
Understanding and measuring these three metrics provides leaders with a snapshot of their organization’s financial health
A number of financial indicators are used by experts to look at the strengths and weaknesses of organizations. Multiple ratios are calculated to determine an organization’s liquidity, profitability, debt, operations, cash flow, and valuation. While these are important for the accountants, investors, chief financial officers and other “bean counters,” they may often mean little to those who are responsible for the day-to-day operations of ambulance services, but have received little formal training in finance.
There are three financial performance areas that should be focused on by these leaders: revenue, costs and cash. For each of these components, complex algorithms and analyses can be developed to provide mountains of data including spreadsheets, graphs, and trends. These are helpful for detailed analysis of an organization’s performance, but they still do not provide the “snapshot” needed to make immediate decisions and take appropriate action.
According to the Cornerstone Survey conducted by Fitch & Associates and EMS1 in 2016, which asked about 500 EMS leaders questions about data use and metrics, many EMS agencies already track critical financial information. However, a significant number still don’t—meaning they might have little idea how much their agency would be impacted by changes in reimbursement policy or their payer-base. The most commonly tracked financial metric was collection rate—an important number, but not one that necessarily gives you a picture of the costs of doing business relative to revenue.
Ultimately, managers need to be aware of three essential financial indicators on which to base operational decisions: net revenue per transport, unit-hour costs, and days cash on hand. Knowing these straightforward metrics can help you understand the financial implications of a decision.
Net Revenue per Transport
The net revenue per transport represents the cash received, on average, for a patient transport. The amount is affected by the payer mix (e.g. Medicare, Medicaid, commercial or third-party insurance, or self-pay) and service mix (e.g. ALS or BLS, emergency or non-emergency). About 72 percent of Cornerstone survey participants stated they tracked this metric.
This information is essential in evaluating new opportunities as well as supporting existing operations. For example, as a manager, if you know that 911 calls typically generate revenue of $500 per transport and non-emergency calls bring in $250, you can make decisions about expanding service areas, assess new contracting opportunities, and provide guidance on responding to the daily demand for services.
Remember that the cash collected per transport is not the same as average charges per transport. Charges are likely to be three to five times the actual amount collected.
A unit-hour represents a 60-minute period when an on-duty ambulance is staffed and ready to respond or is engaged on a call. Many different methodologies are used to identify the costs associated with the staffed unit-hour. From my perspective, there are two unit-hour cost calculations that are helpful. The first represents the direct unit-hour costs that only include staffing, vehicle, supplies, etc. This would represent a “marginal” cost, in that it would represent the actual costs incurred if the organization added an additional staffed hour of ambulance time.
The second unit-hour calculation fully allocates all costs of the organization to each staffed unit-hour. It would include all costs of the organization including dispatch, billing, training, administration, etc. For example, if a service staffed 10,000 unit-hours per year and had total expenditures of $2,000,000, the fully allocated unit-hour costs would be $200 per hour ($2,000,000 divided by 10,000 unit-hours).
As an example, a manager should know that the organization’s marginal unit-hour costs are $87, while the fully allocated unit-hour costs are $188, in order to understand the financial implications of his decisions.
Using Net Revenue per Transport and Unit-Hour Costs
If the manager knows her cash collected per transport and unit-hour costs, she can determine how many staffed hours are funded by a single transport. The following question can also be answered: If I add 8 unit-hours per day, will the costs be covered by an increased number of transports, or will they represent an unfunded expense? This basic financial information can quantify the impact of decisions.
Days Cash On Hand
This metric reveals the vulnerability of the organization to fluctuations in call volume or reimbursement. It reflects the number of days that an organization can continue to pay its expenses if no revenue is received. The metric is calculated by dividing the cash in the bank and readily available investments by the average daily expenses incurred by the service.
For example, if the organization spends $300,000 per month, its average daily expenses are $10,000 ($300,000 ÷ 30 days). If the organization has $450,000 in available cash, it will have 45 days of cash on hand ($450,000 in cash ÷ $10,000 per day).
We have seen organizations operating from 15 days to 6 months or more of days of cash on hand.
The organization with 15 days of cash will not be able to meet its next payroll if additional funds are not collected in the next two weeks. This would indicate a vulnerable service that is living “paycheck to paycheck.”
Another service has established a goal of 6 months of cash. About half of this service’s income is based on sales tax receipts that will sunset in 10 years. The service is preparing to be able to continue operations if the initial referendum is unsuccessful in order to mount another campaign for the continuation of the tax or to have an orderly transition to another system design.
Commonly, services target 30 to 60 days of cash in order to be able to respond to decreases in volume or reimbursement. In two months a service with 60 days of cash can cut back unit-hours to respond to permanent decreases in volume. Similarly, it can adapt to Medicare decreases or delays in Medicaid or Medicare reimbursements.
While numerous financial indicators are available and useful in planning and projecting an organization’s performance, three are critical to aid managers in their day-to-day actions. The three highlighted indicators answer the following three questions:
- How much cash do we receive for each transport?
- How much does it cost for us to staff an ambulance for one hour?
- How many days can we operate with the money we have in the bank?
These critical pieces of financial information can be used to determine the lost revenue for declining transports, the impact of adding or decreasing staffed unit hours, the financial desirability of expanding the service area, and help in assessing the value of new contracts. Regardless, the knowledge will be invaluable in making decisions that impact the service’s financial performance.
About the author
Anthony Minge, MBA, is a partner at Fitch & Associates. He has extensive experience in health care finance, specializing in managing billing and collections functions in multiple areas, including pharmacy, home health, hospital, lab, and ground and air medical transport. Prior to joining the firm, he was the business manager for Northwest MedStar in Spokane, Wash., one of the largest air medical programs in the Pacific Northwest. He is currently writing his dissertation for a Doctorate of Education in Organizational Leadership.
This article, originally published on July 20, 2016, has been updated.