Skilled nursing facilities (SNFs) have been greatly impacted over the past few years by the loss of census due to the pandemic, a challenging labor market, and inflation trends that are not matched by reimbursement increases. These pressures have resulted in a significant negative impact on financial performance. In order to survive and thrive, it is critical for SNFs to maximize operational efficiency and control costs.
Financial benchmarking, if performed and used correctly, can be a valuable tool to improve operational efficiency and financial performance.
Preparing a Benchmark Analysis
Benchmarking provides a high-level comparison of key indicators and statistics to those of your industry peers. For SNFs, benchmarking is a good way to evaluate occupancy, payor mix, revenues and expenses per patient day, nursing hours per patient day (NHPPD), agency nursing utilization, wage scale, employe benefits, and other critical operational and financial metrics. Benchmarking will help to identify variances to industry peers that may result in opportunities for improved operational efficiencies and financial performance.
In order for benchmarking projects to provide value, it is important to have access to reliable internal and external data and know how to use it properly. The old saying “garbage in, garbage out” definitely applies to benchmarking and conducting statistical analyses. The following are four key elements to performing an effective benchmark analysis.
Benchmark Data Sources
Selecting a reliable data source is an important first step in the benchmarking process. Having access to comprehensive and customizable data that is collected in a standardized format will improve the credibility of the analysis. Medicare cost report data is the most commonly used data source because it contains data for over 14,000 SNFs and is reported in a standardized format. When used properly this can be a great source of data to develop the framework for a benchmark analysis.
Developing Comparison Groups
Comparing an individual facility to national benchmark data limits the reliability of the analysis. National data does not account for differences in operating and financial indicators driven by geographic location. A 30 bed not-for-profit SNF in a small or mid-sized market will have a very different operational and cost profile than a 300 bed SNF in a large metropolitan area. When performing a benchmark analysis, it is important to compare your facility to groups of similar facilities.
It is important to develop customized comparison groups based on geographic location, bed size, ownership type, or other criteria. This can be done by effectively using the Medicare cost report database or other data sources that have the same versatility. Comparing your facility to one or more of these groups, in addition to state and national averages, will result in a more reliable analysis.
Alignment of Internal Data
A benchmark analysis will only produce reliable results if internal data is aligned properly with the benchmark data to provide an apples-to-apples comparison. It is important to organize internal data to mirror the benchmark data source. For example, if the Medicare cost report database is used as the benchmark data source, you will want to make sure your internal cost data is consistent with the cost data of the Medicare cost centers being used as benchmarks.
Variance Analysis
Identifying variances to benchmarks is the first step in determining opportunities for improved operational efficiencies and financial performance. It would not be wise to stop here and assume that all negative variances are opportunities for improvement. The next step involves drilling down into the details of those areas with a variance that exceeds a materiality threshold to determine the root cause.
Once you confirm the internal data is accurate, you can attempt to isolate what is driving the variance. For example, if the dietary cost per patient day exceeds the benchmark, you should isolate staffing and non-salary expenses to determine if the cause of the variance is related to high staffing levels and/or wages, food costs, or unfavorable management contracts.
Isolating the root cause of a variance will allow you to determine if opportunities for improvement exist or if the circumstance is beyond the facility’s control.
Using a Benchmark Analysis
A benchmark analysis will identify areas of potential opportunity. The results should be used as a tool to sharpen the focus of an operational assessment, which will determine the actionable opportunities for improvement. The operational assessment may validate the results of the benchmark analysis, or it may identify circumstances that justify a negative variance. It is risky to make strategic decisions based solely on the results of a benchmark analysis.
In addition to using benchmarking results to complement an operational assessment, the results could also be used to inform vendor contract reviews, wage scale analysis, Medicare rate optimization analysis, budget preparation, financial pro forma development, and acquisition due diligence.
Summary
If performed correctly and used properly, a SNF benchmark analysis can be a valuable tool in identifying opportunities to improve occupancy, payor mix, reimbursement, and cost efficiencies. It may also uncover things you were not even aware of in your operations. Having the right process in place and using data in the right way will enhance the reliability of a benchmark analysis and hopefully result in improved operational efficiency and financial performance.
About Us
Health Dimensions Group (HDG) has successfully assisted dozens of skilled nursing facilities with operational assessments, strategic planning, turnaround engagements, and other financial improvement initiatives. If you would like to learn more about how HDG can assist you as a solution in today’s challenging health care environment, please contact us at 763.537.5700 or info@hdgi1.com.
