Cashing in: How to boost your hospital's liquidity

As a financial analyst, the first thing I review on a hospital's financial statements is the operating margin; the second is the cash position. The operating margin gives me an idea about the market and management's ability to generate future cash flow. But the cash position is more important in assessing if a hospital is able to undertake any significant projects or address potential risks and emergencies.

Most healthcare managers recognize the importance of liquidity, but many fail to take the necessary steps to increase it. We often hear the litany of factors that can undermine a hospital's operations: payer reimbursement, economic conditions, competitive landscape, cost and supply of labor, demographics of the market, etc. Considering the difficulty in dealing with these issues, it is important to recognize the areas where management can influence the cash flow, liquidity and strength of the credit profile.

In particular, managing the payment cycle can help cash flow, but it is also a signal to potential creditors. A consistent focus on improving payment cycle measures shows that management is competent and attentive to issues that it can affect. Conversely, large fluctuations in bad debt expense and/or days in accounts receivable (AR) or a large percentage of "old" receivables raises questions about the competency of management and the integrity of the historical income statements.

Uncovering trapped cash

With limited options for intervention on the revenue side and the challenges for affecting change on the expense side, you should look at cash tied up in working capital as an area where dramatic improvement is possible. In fact, decreasing just five days in the payment cycle can have huge impact on a company's balance sheet.

Although the example may appear trivial, five days of accounts receivable (AR) represents more than $4 million in this case. We see many providers showing changes of this magnitude in six months to one year, with proper attention and a focus on gradual improvements. This example also demonstrates the increased margin of safety from turning over AR. If an emergency occurred, this organization would not have sufficient cash to cover its obligations. Reducing the days in AR by 10 percent effectively creates an emergency fund.

This sounds like a good idea, but many people are not sure where to start; the process of filing and collecting claims is lengthy. Unfortunately, many focus solely on the tail end of the process (i.e., collections). Collecting for services rendered is vital, but there are several steps prior to collections that provide an opportunity to eliminate waste. This is an area where hospitals can learn from process improvement techniques used in other industries.

Process Improvement

Using lean manufacturing techniques, providers focus on eliminating waste and making the process more efficient. As with any process, there is an opportunity to eliminate waste at every stage and there are many different kinds of waste: transportation, inventory, motion, waiting, overprocessing, overproduction, defects, resources and talent.

One point that most effective providers emphasize is precertification. Obtaining authorization before a patient even arrives is a key to eliminating waste later in the process. Taking extra time and devoting resources before the patient arrives can eliminate the need to hassle patients or negotiate with insurers later and more importantly, upfront authorization greatly reduces bad debt due to misunderstanding over coverage or inability to pay. The reduced uncertainty also tends to help with patient satisfaction. Failure to establish and follow precertification procedures creates waste of overproduction and overprocessing.

Another key aspect of efficiency is education and training. Constantly evolving technology and system infrastructure can create a stressful environment for those responsible for managing the billing and payment system. Keeping the workforce confident that they are performing the job accurately is important and training is vital in this regard. Perhaps equally important is ensuring that the staff is accountable for and empowered in performing the tasks from scheduling through billing and collections. Generally, billing errors are the result of poor training or a failure of institutional focus on the importance of quality. Errors of this type are known as "defects" in lean manufacturing terminology and this is perhaps the most expensive form of waste as defects often lead to repeating a task multiple times.

Ideally, work teams are cross-trained to ensure a full understanding of the process and the organizational structure is arranged to minimize hand-offs between departments. Movement of activities between departments tends to create waste by "inventory" build-up and "waiting" times and increases the risk of "defects."

Many providers despair of the inability to make significant reductions in bad debt or days in accounts receivable, but as with any task, advancement is a gradual evolution of marginal improvements. Considering the demands on time of management and staff, it may seem difficult to justify devoting resources to process improvement, but the benefit of increased liquidity and demonstration of management effectiveness can greatly enhance a provider's credit profile.