Mid-Month Financial Projections

Medical employees work hard, making it a grim reality when hospital management teams find out, two weeks after month-end, that financial results equate to a net operating loss. Producing projected income statements mid-month, and making the hospital’s senior management team aware of the expected financial results, is critical. Each month, the earlier that the management team has a reliable financial projection, the sooner they can take action steps to manage and improve business results. Learning about the bottom line, long after the month ended, and after the finance department has closed the books and presented financial statements, is frustrating. It also wastes time, eliminating the opportunity to take corrective action.

Most successful CEOs and CFOs begin mid-month to review projections for the current monthly income statements. They continue to monitor financial indicators until the new month starts. CEOs and CFOs need to have an agreed-upon method to project how a month will end up financially. Some leaders tend to be optimistic and prefer to plan for an increase in volume, based upon historical trends. Others prefer to project budgeted amounts for the remainder of the month. However, CFOs and other financial leaders need to ensure that projections are reasonably conservative. The satisfaction of net income exceeding projected results is much better than the pain of actual results coming in significantly worse.

Many hospital teams do not have standardized processes in place during the month to predict month-end results for gross revenue, revenue deductions, operating expenses, and net operating income. Each hospital’s management team should determine a methodology for projections; methods range from the use of sophisticated software to excel spreadsheets established by the finance department.

Throughout the month, many hospital information systems will provide essential volume and financial indicators for the current month, such as total admission, outpatient visits, emergency department visits, total surgeries, and month-to-date gross inpatient and outpatient revenue. This information is trackable and is usually reviewed and analyzed by the finance department to determine common denominators and relationships for income and expense. This data can be used month-to-month for projecting financial results. For example, inpatient admissions per calendar day and average inpatient revenue per admission, as well as the number of outpatient cases per day and gross outpatient revenue per case or calendar day, can be compared to targets, or recent historical trends, as a basis for measuring month-to-date total revenue results. This information is also useful in projecting month-end numbers. If projected patient volume and gross revenue are substantially below target by the second week of the month, action steps, such as reducing controllable expenses, are needed. It is also imperative to determine a reason for the revenue shortfall. Communication with admitting providers is especially relevant when patient volumes are not meeting expectations. 

There are a variety of methods used to project deductions from revenue. The hospital’s historic payment-to-charge ratio (PCR) is an excellent place to start. Reviewing recent month’s total discounts and allowances as a percentage of gross patient revenue is a starting point. If gross revenue by the payor or by financial class information is available at mid-month, it is important to look for swings in the payor mix. For example, significant shifts to or from Medicare to Medicaid or self-pay or indigent care will have a substantial impact on the PCR and net revenue. Hospital CFOs or controllers may begin with a simple method for projecting deductions from income, based on the information available and refine the method over time. One or two percentage points variances in the PCR creates a significant financial impact on the projected economic outcomes. 

Operating expenses are forecasted during the month using current information about what drives each expense category. Labor cost is usually the most substantial portion of operating expenses, projected using hours worked, and paid full-time equivalent employees (FTEs) and the average salary per FTE. Most hospitals have bi-weekly payroll periods. Total worked hours and paid FTEs can be projected from payroll data. Payroll and general ledger numbers also provide the information needed to calculate the average salary expense per FTE. Timekeeping systems may not record time for contract labor or for other temporary employees, but it is essential to estimate and project these expenses. It is also important to track the time to compare against invoices for payment once received. Fringe benefits can be projected based on the percentage of the trending benefits of salary expense or benefits expense per employee. Fringe benefits expense projections should allow for material changes in benefit programs and unusual items. Examples include employer cost increases for employee and family medical claims or premiums, training sessions, and holiday gifts to employees.

Supply expense is usually the second-highest expense category for most hospitals. There are a variety of ways to project the cost, including as a percentage of net revenue or per adjusted discharge. When estimating monthly supply expenses, it is helpful to look at the type of surgery cases and high-cost procedures completed and expected for the month. Supply expenses projected using a percentage of net revenue will often miss the mark if there is a big swing in volumes for cardiology, oncology, orthopedics, and other such treatments. Supply expense projection should be tweaked when adding new physicians, providers, and services.

The hospital CFO or controller should have information about commitments for physician fees, legal fees, other purchased services, insurance premiums, rents, leases, and more. Expense projections should be related to duties documented in contracts, logs, or other control tools in place. Repairs and maintenance costs should follow trends for regular expenditures. The projection for repairs and maintenance expenses should ramp up when significant repair jobs occur. Things like parking lot work, roof repair, and HVAC repair can be costly. Depreciation and interest expenses should be projected based on schedules usually maintained by the finance department staff. The CFO or controller should be aware of high, unusual costs as they occur.

It takes time to complete financial projections for the current month during the month. However, experience shows that this is time well spent. The sooner a management team has a reliable forecast for operating results; the earlier appropriate action steps can begin.