Kada Health News & Insights

The greatest source of financial stress often comes when the value of balance sheet assets declines concurrent with a deteriorating operating environment where revenues and/or margins fall. Kada Health offers a short list of initial steps to take that protect your organization and help you achieve rapid improvement in financial performance.

Key Takeaways

1. Minimize balance sheet risk (review equity & long-term bond allocations).
2. Focus on revenue growth even during difficult times. Prioritize patient access as an immediate growth strategy.
3. Rapidly identify, then defer, reduce, or eliminate non-essential expenses (capital, general expenses, and labor).
4. Communicate the problem and the solutions so that all staff are engaged in the improvement effort.

Sometimes markets crash and new risks to financial performance emerge. Nobody can say when these events will happen. They often seem to catch us by surprise. It is always the right time to take appropriate steps to reduce financial risk and take immediate actions that improve margin.

The Challenge: Creating a New Pace for Change (Make Good Decisions…. Faster)

Executive teams work every day to improve operating and financial performance. It is difficult for leadership teams to create a new pace for change. Where should leaders turn and how should they focus their time when a “turnaround” pace is required? When new financial pressures emerge (cuts in federal funding, reduced payment rates, rising costs), leaders must act with urgency to increase revenue and reduce expenses for improved profitability.

The Solution: An Accelerated Pace for Defense and Offense

To address these challenges, leaders can focus on two key areas: (1) Defend the Balance Sheet and (2) Improve the Income Statement.

DEFEND THE BALANCE SHEET

Some organizations perceive an inappropriate level of comfort when they have “sufficient” days cash on hand. For a more conservative view, calculate your “liquid days cash net of debt and liabilities.” In this calculation, the total of cash and liquid investments is compared to the sum of your short-term liabilities and long-term debt. Warren Buffett notoriously keeps large sums of cash in the form of treasury bills. This allows him to earn a modest income on assets that are unlikely to decline in value. He has access to cash at any time so the organization can invest when the market presents opportunities. The Investment Committee of your health system should strive to create a similar Fort Knox-like environment, ensuring that the health system is well-supported financially and always in a conservative financial position that allows it to fulfill its mission of providing the clinical services your community needs. Investment in equities and long-term bonds expose the organization to assets that can decline in value right when you need them the most. Such investments are only advised after a liquid days cash exceed the organization’s liabilities and long-term debt.

IMPROVE THE INCOME STATEMENT

There are two readily immediate areas of focus when it comes to rapidly improving operating income performance.

1. DEFENSE: Shut off unnecessary cash expenses.
   1. Shut down non-essential capital purchases (or simply delay them for 6 to 9 months).
   3. Eliminate non-essential general expenses (e.g., travel, conferences, etc.).
   4. Evaluate labor and reduce expenses in the near term using the following approach:
      1. Flex clinical labor to adhere to your established ratios and standards.
      2. Review clinical ratios and workflows by an expert outside team. Simply asking all departments to achieve some flat goal for staffing (e.g., 25th percentile) is not sustainable or safe.
      3. Categorize all labor and consider which positions can be reduced, eliminated, or temporarily furloughed without a negative impact on direct patient care or billing. Act on these opportunities at a pace determined by the size of your challenge and the required timeline for improvement.

2. OFFENSE: Focus on immediate growth opportunities.
   1. Work with all leaders who have backlogs to implement solutions that drive growth.
   2. Quickly establish a system (e.g., IdeaScale) for staff to submit ideas for improvement.
   3. Complete a weekly review of charge capture, billing, and accounts receivable systems.

Organizations that are struggling must first recognize that for all of their hard work, leaders must make good decisions… faster. The Kada Health Operating System is a structured model whereby every senior leadership meeting is populated with items requiring approval with a special emphasis on decisions that play DEFENSE and OFFENSE as previously described. This focus is key to achieving the rapid improvement of financial performance.

The Business Impact

Implementing these strategies will strengthen the organization’s financial position by (1) reducing risk to assets held on the balance sheet, (2) reducing non-essential expenses, and (3) creating an intense focus on growth, including added support for all clinical services and programs with a documented backlog or wait-list. Doing all three effectively and concurrently is the starting point for achieving dramatic and rapid improvements in profitability.

Case Examples: An Academic Medical Center and A Community Health System

A comprehensive academic medical center located in an urban east region market made dramatic improvements in top line revenues. By using the Kada Health Operating System and focusing on patient access to care, the organization eliminated a multi-year operating challenge whereby it had been on diversion for its quaternary referral hospital more than 35% of the time for the past four years. Within six months, the organization was off diversion. Top line revenues increased by 10% and resulted in dramatic improvement in operating margin.

A faith-based community hospital and medical group utilized the Kada Health Operating System with a focus on both increasing patient access to services and dramatically decreasing and right-sizing labor to turn a 20% operating loss into operating profit in six months. Clinical labor was optimized and agency labor was reduced using (1) an app-based system to fill open shifts and (2) a next-day pay program for staff who filled shifts.

Conclusion & Next Steps

Rapid financial improvement can be achieved by (1) protecting the balance sheet and (2) improving the income statement with a focus on (a) improving patient access to services and (b) reducing expenses using a carefully designed approach that accelerates the pace of decision-making in the organization.

Kada Health: How We Help

At Kada Health, our experts are proven leaders with CEO and executive experience in high-performing organizations. Using the Kada Health Operating System, we partner with your leadership to implement solutions that achieve the operating and financial results you need to deliver the best care for your patients and your community. For more information, call us at 402-334-5219 or visit our website.

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