Implementing New Service Lines: Strategies and Tips You Should Know
When small and rural hospitals are looking to open new service lines, the potential service lines, new service line needs, community needs, operational concerns, and financial measures are considered.
This document serves to provide tips for strategically implementing new service lines into your facility.
Potential Service Lines
Many small or rural hospitals consider adding swing-beds, assisted living and long-term care facilities, specialty clinics, wound care, rural health clinics, senior behavioral health, hospice services, outpatient rehabilitation, advanced diagnostic testing, telemedicine, retail pharmacy, home health, ambulance/transportation service, treatment for pain medication addiction, and durable medical equipment.
New Service Line Needs
Hospitals and facilities are seeing constraints due to the Corona Virus, leading them to search for new revenue avenues. Rural hospitals have myriad reasons for adding new service lines—some of them are looking to increase patient volume, capture market share, generate new revenue, hub their hospital to multiple rural health clinics, stem outmigration, proforma development/cost analysis, or conduct feasibility studies.
Often hospitals want to do things that the community cannot or will not support due to volumes. It is very important to ask the community what they need. This is most often done with community needs assessments. Another component of determining your community’s needs will be by asking what your stakeholders (County Commissioners, board members, key business leaders, etc.) really desire. It is also vital to discuss this with current medical staff to discern whether the specialties being looked at are available. For example, considering whether It will be necessary to recruit for positions.
Labor force, available physical space, and medical staff specialties are three major operational concerns.
- Labor Force: Settle whether your local labor force is experienced and trainable for the potential new service lines, whether they are available to work for you, whether you have the resources to attract them to your facility, whether your facility could reasonably manage the service line if there needed to be a replacement in the labor force, and whether these options would only be available through a contracted labor company.
- Available Physical Space: Determine whether your facility has space that can be readily converted to fit the needs of the new service line or whether the new service line would require new construction or possibly leasing a space nearby.
- Medical Staff Specialties: Make sure that, in the specialties the new service line would require, you have the medical staff available in your community, the ability to have shared services with another facility, or the option to recruit if there is recruitment required for the position.
One of the most important aspects of deciding whether a new service line is feasible for your facility is your facility’s finances. Understanding the operation finances of a project and how it impacts the total organization is imperative for both the future of the service line and facility. This can be done through a detailed proforma analysis, including income statement work, balance sheet work, and cash flow information from both the potential project (service line) and the overall operations of your hospital. Different financial measures that can be used to give you an idea of the financial nature of the project you are planning to implement are found below with national medians (for comparison)—
- Total Margin- measures the control of expenses relative to revenues of the entire enterprise
- Formula: Net Income/Total Revenue
- National Median 1.6%
- Cash Flow Margin- measures the ability to generate cash flow
- Formula: (Net Income + Depreciation)/Net Patient Revenue
- National Median 5.7%
- Operating Margin- measures the control of operating expenses relative to operating revenues
- Formula: Net Operating Income/Operating Revenue
- National Median 0.2%
- Current Ratio- measures the number of times short-term obligations can be paid using short-term assets. Two things that can make a big difference in this number is how you handle your Medicare cost reports when they have been filed and auditing your billing and collecting office.
- Formula: Current Assets/Current Liabilities
- National Median 2.5X
- Days Cash on Hand- measures the number of days an organization could operate if no cash were collected or received
- Formula: Cash/ ((Total Expenses-Depreciation)/Days in the Period)
- National Median 75.9 days
- Days in Net Accounts Receivable- measures the number of days that it takes an organization to collect its receivables
- Formula: Net Patient Accounts Receivable/ (Net Patient Service Revenue/Days in the Period)
- National Median 50.8 days
- Capital Structure
- Equity Financing- measures the percentage of total assets financed by equity
- Formula: Net Assets/Total Assets
- National Median 59.7%
- Long-Term Debt to Capitalization- measures the percentage of total capital that is debt
- Formula: Long-Term Debt/ (Long-Term Debt + Net Assets)
- National Median 30.8%
- Cost Indicators
- Salaries to Net Patient Revenues- measures the percentage of patient revenue that are labor costs
- Formula: Salary Expense/Net Patient Revenue
- National Median 45.1%
- FTEs per Adjusted Occupied Bed- measures the number of full-time employees per each occupied bed
- Formula: (Number of FTEs/ (Adjusted Occupied Beds/Days in Period))
- National Median 5.6
- Average Age of the Plant- measures the average age in years of the fixed assets of an organization
- Formula: Accumulated Depreciation/ (Depreciation Expense*Days in Period)
- National Median 11.5 years
CAH Financial Indicators Report: Summary of Indicator Medians by State
Small Rural Hospital and Clinic Finance 101