health care finance week 6

Part VII: Tools to Plan, Monitor and Control Financial Status

CHAPTER 18: ESTIMATES, BENCHMARKING & OTHER

MEASUREMENT TOOLS

• According to the dictionary, “to estimate”: “…implies a judgment, considered or casual, that precedes or takes the place of actual measuring or counting or testing out” (Merriam Webster’s Collegiate Dictionary, 10th ed., s.v. “Estimate”)

Definition of Estimate

Estimates

• Such estimates may be of:

• Amount

• Value

• Size

Estimates

• The first question should be: “Is it capable of being estimated?

• If so, using an estimate often involves a trade- off, such as gaining a quick answer that is less accurate.

• So relying on estimates for input to reports means sacrificing some degree of accuracy.

• Four common uses of estimates are typically due to:

• Timeliness considerations

• Cost/Benefit considerations

• Lack of data

• Internal monthly statements

Estimates

• Certain healthcare organizations (or departments such as pharmacy) require accounting for inventory. Internal monthly statement usually use ending inventory estimates.

• The following slide (Figure 18-1) illustrates steps in the ending inventory computation.

Estimating the Ending Pharmacy Inventory

Figure 18–1 Estimating the Ending Pharmacy Inventory

The Scope of Estimates

• Estimates can be extremely general, or they can reflect considerable judgment and well- thought-out detail.

• An example of a general estimate and its subsequent impact due to unrecognized indirect costs is illustrated in the next slide.

• Refer to the chapter (along with Figure 18-2) for full details about this example.

Figure 18–2 Estimated Economic Impact of a New Specialist in a Physician Practice

Other Estimates

• Other commonly used computations are actually estimates.

• For example, the weighted average inventory cost described in Chapter 8 is in fact an estimate.

Performance Measures

• A variety of performance measures must be in place for the organization.

• Many types of such measures are available. Generally different organizations lean toward using one type over another.

Performance Measures

• Adjusted performance measures over time.

• We have previously discussed the advantages of comparative analysis — the comparison of various time periods, one to another.

• Measures that compare performance over various time periods are especially effective.

• Figure 18-3 illustrates measures over time combined with a 2-part case mix adjustment.

Financial Benchmarking

• Benchmarking is the continuous process of measuring products, services, and activities against the best levels of performance.

• The best levels may be found inside the organization or outside it.

Benchmarking

• There are 3 types of benchmarks

• A financial variable reported in an accounting system.

• A financial variable not reported in an accounting system.

• A nonfinancial variable.

• Benchmarks are used to measure performance gaps.

Benchmarking

• How do you benchmark? Three possible methods include:

• Studying the methods and results of your prime competitors;

• Examining the process of noncompetitors with a world-class reputation; or

• Analyzing processes within your own organization that are worthwhile to replicate.

• Financial benchmarking compares financial measure among benchmarking groups. It is the most common type of peer group method used in health care.

• Statistical benchmarking is another related method.

• See Table 18-1 for an example of financial benchmarking.

Benchmarking

Measurement Tools

• Pareto analysis is a measurement tool based on the Pareto Principle.

• The Pareto Principle is often called the “80/20 Rule.”

• For example, “80% of an organization’s problems are caused by 20% of the possible causes.”

Measurement Tools

• Pareto Analysis is an analytical tool that aids managers to improve some steps in a process.

• The analysis quantifies these steps through construction of a Pareto diagram.

• Figure 18-4 and accompanying text explain how to construct and interpret a Pareto diagram.

Figure 18–4 Pareto Analysis of Billing Department Data

Measurement Tools

• Reporting by quartiles is an effective way to show ranges of either financial or statistical results.

• Quartiles are based on a quantitative method of computation and can effectively illustrate a variety of performance measures.

• Chapter text plus Table 18-1 illustrate how to compute and construct a report using quartiles.

• Remember, several types of performance measures will be in use in the organization.

• Familiarity with the use of such measures lets the manager do a better job analyzing performance.

Performance Measures