May is the typical filing period for most agencies before the typical summer slowdown for many agencies. As cost reports are due at the end of the month, the data within them usually gets ignored and forgotten. Gathering the cost report data takes a while and usually seems like an annoyance. However, the data you gather about your agency is actually quite valuable.
Besides basing future reimbursement on the outcome of your cost report, the data contained within the report should be used to benchmark. Benchmarking your agency against your historical data, year to year, is important. Metrics that the cost report can contain are only part of the benchmarking processing though. Internal, monthly tracking should also be done within your agency.
Cost report data can look very confusing and doesn’t resemble typical financial statements such as the balance sheet and profit and loss/income statement. However, the data contained within the cost report comes directly from those two reports, so digging a little deeper, you will have financials in a format that the government created.
The cost report will break out costs based on strict Medicare services provided versus the rest of the services you provided (Medicaid, private insurance, commercial insurance and private duty, etc.). This data is critical to your operations. Monthly, you should also be tracking this data to see how much your average reimbursement changes from month to month. The trends will tie into how well your agency is coding, how well your agency is completing the OASIS and how well your clinicians actually understand your agency.
Direct clinical expenses need to be constrained and understanding how your revenue is generated and where that revenue comes from will be great help. Direct expenses are the salaries and per visit costs paid to employees and contractors. Additionally, medical supplies and the associated payroll taxes related to direct clinical employees need to be included. If this rate is greater than 40-50% of your total revenue, operations need to change!
Your overhead rate is also critical to understand and succeed. If you agency’s overhead is greater than 30-40%, cuts must be made! Overhead (office expenses, occupancy, insurance, administrative staff) needs to be contained and can be. If you have excess staff in your office, it is time to look at internal processes and make sure they line up with your software. Usually, the way an agency operates and the way the software operates are at odds and may create the imaginary need for additional staff.
Controlling your office wages, office expenses, occupancy expenses and other small items that pop are all controllable. Ignoring small expenses as they arise will add up quickly. Positions should be evaluated to ensure that workflow and operations are efficient and are based on procedure rather than one particular person. To get the most out of your money, staff should be cross trained in order to quickly pick up a process handled by another employee. But don’t overdo it – agencies frequently have more than necessary amounts of office staff. Outsourcing can greatly add flexibility to your agency while savings vast amounts while achieving the same or better result.
Profit margins are not something that should be dreamed about – they should be reality. Managing your direct clinical expenses and overhead expenses will produce a profit margin and profit. Likely when you see a profit margin, you will also see your cash flow improve. Profit margins for home health agencies range from losses (negative profit margins) to 10-15% for the most well managed agencies. For every $1 brought in by the agency, 50 cents is spent on clinical expenses, 35-40 cents is spent on overhead and 15 cents of that dollar is yours – profit.
To make the process much easier, and not so daunting, the following items should be reviewed each month. Proper setup of you agency’s accounting records will go a long way in making sure that you understand what is going on and are able to manage overhead, direct expenses and your profit.
Monthly Items to Monitor:
- Visits and Utilization by Discipline and by Service Line
If your agency provides Medicare, Medicaid, private duty, private insurance, hospice and other services such as Medicaid Waiver – you want to make sure all of these visits are accounted for separately and tracked independently of each other.
- Revenue by Payer Class
Similar to visit tracking, you should record your revenue in your accounting records from the revenue summary reports from the agency’s billing software. Each type of payer should have its own account. Medicare, Medicaid, Medicaid Waiver, private duty, etc…all should be in their own account for tracking purposes. Medicare will also require additional adjustments for deferred revenue and deferred receivables.
- Direct Costs
Your clinical expenses should be broken out by discipline. Nursing wages, physical therapy wages, occupational therapy wages, home health aides, and office staff should all have their own expense accounts. Clinical wages and contractor costs for direct clinical staff should be grouped together. If possible, the associated payroll taxes and expenses related to these employees by class such as health insurance should also be grouped together. The more detailed your accounting records are, the more information you have to make decisions and to see where you are doing well making money and losing money.
- Overhead Costs
Office wages, rent, utilities, software, supplies, marketing and advertising – all of the items that it takes to run your agency administratively, including the clinical staff who never leave the office are all overhead expenses. Their payroll taxes, benefits and other costs will be overhead. These items should all be listed separately under their own accounts in your accounting records.
- Statistics – Combine Financial Data with Operational Data
Taking all of the data accumulated – it is time to create statics. The statistics generated will only be as accurate as the information from which they are derived. You need to look at revenue per patient, direct costs per patient, indirect/overhead costs per patient, HHRG scores, average reimbursement by payer class per patient, visits per episode and the list goes on. The more information at your fingertips – the better you will be at able to understand what is really going on.
Tortolano & Company has a unique dashboard set up for home health agencies just like yours so you can monitor progress and make the necessary changes to ensure success.