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Mini MBA for the OR Manager
The 6 secret benchmarks of financially successful surgery centers.
Beverly Kirchner
Publish Date: October 10, 2007

This just in: Your surgery center might be losing hundreds of thousands of dollars in profits through inattention to six financial benchmarks. The concept is deceptively simple. All you have to do is look more closely at how your center handles these six financially sensitive areas:

1. Man-hours per case/cases per full-time equivalent
2. Supply cost per case
3. Office supply cost per case
4. Salary and benefit costs to net revenue
5. Days in accounts receivable
6. Days in inventory

Potential Cost Savings

January Cases
321

February Cases
215

Man-hours worked per case

10.56

12.63

Personnel and benefit cost for the month

$39,939.00

$77,357.00

Personnel and benefit cost per case

$308.22

$359.80

Total hours worked

3,392.75

2,715.86

Savings in hours for February, if man-hours goal met

135.86

Potential savings based on personnel and benefit costs per case

$4,347.52

Consider each of these six budget categories as items over which you have partial, if not total, control. As you begin our crash course on running your surgical facility like a business school grad, let's look at each benchmarked area.

Meeting your man-hour goals
In analyzing man-hours per case, we have to consider hours worked divided by surgical cases performed - by day, week, month and year. Man-hours fall into three categories: Direct man-hours include all aspects of patient care provided by nurses, scrub techs and, in some facilities, central supply techs. Indirect man-hours are those worked by administrators, business office personnel, schedulers, billers and coders, collectors and the reception staff. Paid man-hours refer not only to the hours worked by an employee, but also their paid time off - including sick leave, vacation, holidays and educational opportunities.

There are two benchmarks to shoot for with regard to man-hours:

  • 12 man-hours or less when you handle up to 250 cases a month and
  • 10 man-hours or less when you handle more than 250 cases per month.

Surgery Center Staff Tracker

Employee Name

2/3/2005

2/4/2005

2/5/2005

2/6/2005

2/7/2005

ADMINISTRATION

Administrator

8.0

8.0

8.0

8.0

8.0

Business Office Manager

8.0

8.0

8.0

8.0

Total Administration

8.0

16.0

16.0

16.0

16.0

Total Admin Hrs/Case

.8

2.29

.67

.94

2.0

BUSINESS OFFICE

Office person

8.25

8.5

8.0

8.0

7.25

Office person

7.75

8.25

7.5

7.75

Office person

8.0

8.0

8.25

8.0

7.0

Total Business Office

16.25

24.25

24.5

23.5

22.5

Total Business Office

1.63

3.46

1.02

1.38

2.81

NURSING STAFF

Nursing Staff

8.25

6.25

9.25

Nursing Staff

6.5

7.5

8.75

7.25

7.25

Nursing Staff

8.0

8.5

8.0

9.25

8.0

Total Nursing Staff

22.75

22.25

31.0

16.5

15.25

Total Nurs Hrs/Cases

2.28

3.18

1.29

.97

1.91

Total Cases

10

7

24

17

8

Total Hours

47.0

62.5

71.5

56.0

53.75

Total Hrs/Cases

4.7

8.93

2.98

3.29

6.72

Additionally, if your center is younger than five years old, add one man-hour to one-and-a-half man-hours per case for paid man-hours. For centers five years and older, where there is longevity in staffing, add two hours to three hours for paid man-hours. See "Potential Cost Savings" to view potential profitability when man-hour goals are met.

See "Surgery Center Staff Tracker" for a staffing breakdown by day for direct, indirect and total man-hours per case per day and month.

Our benchmark for number of cases per full-time equivalent is 18. Some centers use FTEs per case instead of man-hours per case. You can track both ways. See "Cases per FTE" to see how difficult it is to meet this goal.

Cases Per FTE

January Cases
321

February Cases
215

Total hours worked

3,392.75

2,715.86

FTE hours for month

176.0

160.0

FTE's for month

19.28

16.97

Cases per FTE

16.65

12.67

Minding the store
As benchmarks for securing a center's financial health, here are average supply costs per case in three kinds of surgery centers:

  • Multi-specialty center $260/case
  • Single specialty, GI or pain center $65/case
  • Orthopedic specialty center $350/case

When you aim for supply costs at these levels or less, you have increased your chances of retaining profitability.

Cash Flow Performance

July Net Revenue
$479,452

August Net Revenue
$487,206

September Net Revenue
$315,502

Should Collect 25% of April
$134,075

Should Collect 25% of May
$146,358

Should Collect 25% of June
$147,630

Should Collect 50% of May
$292,716

Should Collect 50% of June
$295,261

Should Collect 50% of July
$239,726

Should Collect 50% of June
$147,630

Should Collect 50% of July
$119,863

Should Collect 50% of August
$121,802

Estimate to Collect
$574,421
Minus $64,654
= $509,767

Estimate to Collect
$561,482
Plus $8,358
= $569,840

Estimate to Collect
$509,158
Minus $326
= $508,832

Collected
Difference

$501,409
($8,358)

$570,166
$326

$486,627
($22,205)

Now to reach these recommended benchmarks, apply these three methods to support your goal:

  • Research group purchasing organizations and choose the one that best matches your facility's clinical supply and financial needs.
  • Educate your physicians and nurses on supply costs and what drives them (see "If They Only Knew What Supplies Cost" on page 28). Keep the educational process easy by using games where participants can guess the cost of an item. Use your pharmacy consultant to update medical staff on pharmaceutical advances and their related costs. Finally, enlist staff participation in developing and maintaining preference cards. These cut down on duplication, support standardization and provide one more way for staff to understand and control supply costs.
  • Purchase supplies by "walking around." In other words, go through the center and look for supply gaps, waste and overstocking. Then determine your true supply needs.

Back to GPOs for a moment. Here are the questions to ask as you shop for the organization that will best serve your center:

  • Is there a monthly or annual fee associated with the contract?
  • Does the GPO contract with vendors I use?
  • Are the GPO-contracted supply costs less than what I have negotiated on my own?
  • Is the GPO contract user-friendly?

Short tips on office supply costs
Have you remembered to factor in non-medical supply costs when you set your benchmarks? Every marketing brochure, letterhead, envelope, package of printer paper, carton of pens and box of forms carries considerable cost. Your goal should be $11 or less in office supply cost per case.

Here are some smart ways to curb your office supply expenses:

  • Once again, find out if your selected GPO also carries office supplies at a favorable cost to you.
  • Wherever you purchase office supplies, always ask if there is a price break for ordering a certain quantity or product brand.
  • In the expensive area of printing, ask your vendor to show you price breaks given on quantities of forms, stationery and brochures. For example, your first price break on stationery usually comes at 500 - the number of paper sheets contained in one box of the product.
  • Finally, strongly consider standardizing your office supplies. Stick with one brand of stapler, one kind of ballpoint pen, etc. Standardization brings supply costs down and makes for more efficient stocking.

The 20-percent solution
Most likely, you already know that employee salaries and benefits should comprise 20 percent or less of net revenue (see "Compensation as % of Net Revenue"). This center missed the goal of 20 percent for the month. You can figure out the savings 1 percent would have made to the bottom line. If your center's salary levels are running above the 20-percent benchmark, then re-evaluate your total compensation packages. You'll want to adjust salaries, reduce benefits costs, eliminate overtime, review man-hours per case and increase revenue by adding new services.

Follow the money
Probably the primary area where you risk the most loss is in your accounts receivable (A/R). This is where you must track, estimate and collect on a daily basis. The current benchmark for days in A/R is 45, yet because of electronic billing, this time is dropping to 35 days in efficient centers. See "Cash Flow Performance" for an example of an easy way to track cash flow from month to month.

When you focus on collections, be sure to set a collection goal for each month. When collectors meet or exceed the goal, give them an incentive bonus to keep up the good work. Consider a base-level incentive of $250.

Compensation as % of Net

Salaries

$79,628

Payroll Taxes

$5,857

Benefits

$13,455

Total Compensation

$98,940

Net Revenue

$479,902

Percentage of Net

21%

Remember, you must review account aging monthly. Days in A/R are determined by your A/R balance, divided by annual revenue and divided by 360 (or quarterly or monthly revenue). Typically, we break down aging groups as 0 to 30 days for current accounts, and 31 to 60, 61 to 90, 91 to 120, 121 to 150 and 151 days. Here are four important things to know about these aging groups:

  • When accounts fall into 91 days to 120 days and older, your chances of collecting decrease rapidly.
  • When your A/R reaches 151 days and older, you chance of collecting diminishes to a mere 5 percent.
  • Moreover, banks will not lend money on A/R of 121 days or older.
  • Remember that 75 percent of your A/R should be less than 90 days old.

There are simple ways to improve your A/R and give your center a healthy cash flow:

  • First, collect estimated deductibles and co-pays before surgery.
  • Bill the case within 24 hours of the procedure being performed.
  • Send all bills electronically, automatically reviewing all coding for compliance with payer requirements.
  • Set follow-up guidelines for collectors and bonuses when they meet or exceed goals.

Check your closets
If you've ever bought one black suit, then proceeded to buy four more without checking your closet, then you understand the waste and frustration associated with overstocking surgery center supplies. The benchmark for days in inventory is 30 days or less. Your formula for determining days in inventory is to multiply the period-ending inventory balance by the number of days in that time period and divide by the total cost of the supplies.

To diminish days in inventory, first stock only what you need, plus two backups. Set par levels on every item in stock. Only order when you're below par level and only order what you need. On big-dollar items such as implantable devices, ask your vendor to place them in your center on consignment. Thus, you only pay as these items are used.

It all adds up to drive losses down
Even if your surgical center is setting records for profitability, don't be so sure that you've plugged every leak and exorcised waste.

It's right to sweat the small stuff and take a closer look to see how well your center aligns with these six benchmarks. Remember that there is hidden wisdom in your financials. Every month, put the whole picture together. Add up time spent, cases handled, direct and indirect costs, salaries and benefits as they relate to revenue. Financial success has a great chance of being yours when you literally follow the money.

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