Getting the Most Out of Benchmarking and Key Performance Indicators (KPIs)

With the ever-growing financial challenges that all healthcare organizations now face, how can the various performance indicators be best utilized to increase cash flow, reduce bad-debt charge-offs and improve overall revenue cycle performance? Although there are many factors and undertakings that may be needed within an organization to get the revenue cycle to peak performance (technology needs, training needs, payer relationships, employee incentive programs, etc.), the ongoing need for increased / financial class specific benchmarking data will increase as operating margins decrease.

For example, payers that make up a very small percentage of total gross patient revenue may not be getting analyzed and evaluated like larger payers; however, there could be significant dollars in lost recovery within these smaller payer groups affecting the revenue cycle. Even HARA (the benchmark in hospital receivables) doesn’t break out payers such as workers compensation, Tricare or motor vehicle claims into their own financial class. With less and less resources available, there is no longer the luxury available to only look at some areas of the revenue cycle. More benchmarking and utilization of additional key performance indicators (KPIs) to help identify areas that need improvement, along with the ability to drill-down into these identified problem areas may be necessary to design effective solutions to get and keep the revenue cycle at peak performance.

KEY PERFORMANCE INDICATORS

Days in A/R

With technology increasing, along with the higher volumes of data available, benchmarking and KPIs shouldn’t only be looked at as a tool for financial performance improvement, but also for process performance improvement. As we analyze different KPIs, we may find that our organization is not performing at best-practice standards due to process and operational changes needed. For example, if our overall A/R days are higher than our peers, we need to know the specifics on what is causing that problem. We may find out that our A/R days are out of line primarily due to not having an electronic exchange with a specific payer whose volume has grown over the past year. This is why it is necessary to look not just at overall A/R days, but A/R days by payer class. An organizations’ overall A/R days may look fine, but that may be due to a much higher Medicare mix, or a lower self-pay population than their peers. We need to be looking at all payers to establish key performance indicators for each payer type to make sure we are operating as closely to best practice standards for all of them, not just in aggregate. Once we know what the benchmark should be for each payer, we can then quickly identify areas that may need attention, and also monitor ongoing performance.

Payer Mix

As mentioned previously, knowing the breakdown of where an organization’s revenue is coming from, how a change in mix will effect overall A/R days, having KPIs for each payer type, and then utilizing those KPIs to identify trends can help improve or maintain optimal performance. For example, if your commercial payer gross A/R days average around 60 days, and then slowly starts growing, you are now alerted that a problem is developing within this payer class rather than just identifying that overall days are growing. If you only looked at overall A/R days, your growing commercial A/R days may not be recognized due to another payer class performing better than normal, thus offsetting gross A/R days in aggregate. By recognizing trends and developing problems early in the cycle, the identification of the specific causes can be addressed and dealt with as soon as possible. With the advent of Consumer Directed Health Plans, self-pay days may start to grow for many organizations; thus, affecting cash-flow, bad-debt, outsourcing, etc. However, by recognizing this trend early in the cycle, and by having KPIs for this payer group, action can be taken tailored specifically to the self pay group.

Cost to Collect

The Hospital Accounts Receivable Analysis (HARA) reports healthcare organizations’ cost to collect by bed size, geographic location, geographic settings, etc. However, it does not report cost to collect by payer group. Since this number is an aggregate across all payer mixes, it makes it difficult to recognize what is causing the cost increases or decreases driving this aggregate number. Most organizations agree that it is less costly to process a Medicare claim than a self-pay claim for a variety of reasons, but how can they recognize that cost to collect may be increasing due to complex payer contracts or more tools needed to manage the contract (contract management software, additional staff, etc.) from an aggregate number? Without being able to drill-down the cost to collect by payer, making informed decisions becomes more difficult. By looking at cost to collect by financial class, we may spot a trend — identifying growing costs in a specific area. For example, if we have set a best practice cost to collect number for our commercial payer financial class, and then notice that it has started to grow, we can now drill down to find out what has caused it to grow. We may identify that a certain commercial payer has added more administrative tasks to its contract (more hoops to jump through) thus driving up our costs in this specific financial class. This issue can now be addressed at contract negotiation time. We may notice that cost to collect in certain financial classes is high and can be done more cost-effectively by outsourcing. By utilizing KPIs and benchmarks for all financial classes, and by having the ability to drill down when necessary, we can improve the revenue cycle by making better informed decisions and recognize problems / trends in their early stages. Benchmarking can be a valuable tool.

However, when it comes to cost to collect benchmarking,standardization of what goes into the number may be masking real problems. Some organizations may only include their business office expenses while others may include items like technology costs, overhead, etc. With organizations not being required to report the data the same way, this overall cost to collect percentage can become much less effective for benchmarking purposes. When we prepare our income taxes, the IRS clearly defines what needs to be reported as income and what doesn’t, so everyone would benefit from an industry standard on this issue. There really needs to be an industry standard to address this issue. Along with the ability to identify cost to collect by financial class, there is also the need to identify that as claims age, the costs to collect them also increase. By having benchmarks that identify costs by financial class and the age of a claim, we can now make better decisions regarding resources such as staffing, additional process changes needed, etc.

Collection Ratios

Organizations are able to recognize collection problems by looking at indicators such as overall A/R days, percentage of bad debt, A/R days greater than 90, etc. However, by looking at both gross and net collection ratios by payer, you can establish KPIs by financial class. By setting these up, and then utilizing other KPIs like cost to collect, better decisions can be made regarding improving the revenue cycle. By having the ability to drill down into the details of the data, along with having KPIs by payer (as many as deemed necessary), we can quickly answer questions like: is my overall cost to collect growing due to my payer mix, industry changes, added resources? Is this increased cost to collect a negative factor or a positive one? My cost to collect may be higher than my peers, but my net collection ratio may also be higher; thus, justifying this higher than normal cost to collect My organization could also have a lower than average cost to collect which could indicate a positive factor. However, it could also indicate a negative factor if other KPIs are not where they should be. An organization could also be doing a great job collecting in a particular financial class. However, they may not be doing it cost-effectively. With just looking at KPIs in the aggregate, we cannot answer many of these questions.

The Global Benchmarking

Global benchmarking is the process of identifying best practices in organizations anywhere in the world to seek information that can help an organization to measure and compare its performance against those best practices in order to improve its operations. A benchmark is a reference point for taking measures against. Best practices are the techniques that have worked reliably in different situations to achieve their desired purpose in the most efficient and effective way. The best practices are demonstrated to repeatedly work in different situations and can be replicated in different situations with more or less the same results. The process of benchmarking is aimed at finding the best practices within and outside the industry to which an organization belongs.

The purpose of benchmarking is to find the best performers in an area so that one can match them and even surpass them. Thus, if Dell is thought to have the best supply chain management practices or Toyota the best manufacturing processes, organizations of any type, anywhere in the world, can benchmark their own practices and processes against these and make improvements in their own practices and processes. Global benchmarking is a subset of benchmarking, which is a generic term that refers to the systematic and continuous process of measuring and comparing an organization’s practices, products, or services against best practices demonstrated to be effective by industry leaders.

The American Productivity and Quality Center gives an interesting interpretation of the term benchmarking by proposing that it is “the practice of being humble enough to admit that someone else is better at something, and being wise enough to learn how to match and even surpass them at it.” An often cited example of benchmarking is that of Xerox when it was facing trouble in the 1980s. It decided to implement benchmarking to identify ways to improve its performance. Xerox benchmarked against L. L. Bean for distribution procedures, Deere & Company for central computer operations, Procter & Gamble for marketing, and Florida Power & Light for total quality management.

By the early 1990s, Xerox was benchmarking 240 functions against comparable areas in other companies. Benchmarking is credited with dramatically improving Xerox’s performance. 758 Global Benchmarking In the United Kingdom, Lucas Industries is widely reported as a company using benchmarking, looking outside their own organization when measuring performance and generating targets. Managers at Lucas are required to prepare competitive action plans on an annual basis. These plans provide targets for performance designed to align the business unit with leading international competitors in a particular function and explain how the business unit will achieve such performance levels.

When an organization is interested in finding out what is to be compared, there are three types of benchmarking: performance, process, and strategic benchmarking. Performance benchmarking is to compare one’s own performance with that of some other organization for the purpose of determining how good one’s own performance is. Process benchmarking is to compare the methods and practices for performing processes. Strategic benchmarking is to compare the long-term, significant decisions and actions undertaken by other organizations to achieve their objectives. When an organization looks to compare itself to other organizations, four other types of benchmarking may be used.

Internal benchmarking is comparison between units or departments of the same organization. Competitive benchmarking is direct comparison of one’s own performance against the best competitors. Functional benchmarking is comparison of processes or functions against noncompetitive organizations within the same sector or technological area. Generic benchmarking is comparison of one’s own processes against the best practices anywhere in any type of organization. Global benchmarking is generic benchmarking as it involves comparisons with any type of organizations anywhere around the world. A firm can attempt benchmarking at several levels using the different types of benchmarking.

The major application of benchmarking is for performance improvement. It can also be used to find out the relative cost position of an organization in comparison with competitors. Benchmarking is a good learning experience for an organization because it helps to bring in new ideas and facilitates sharing of experiences. The main purpose of benchmarking is to find out the best practices so that one can conform to them. But before one conforms, benchmarking is enough to show where a firm excels or lags behind. This is helpful in assessing the strengths and weaknesses of an organization and finding ways to gain strategic advantage.

Benchmarking involves these steps: Selecting a product, service, or process to benchmark Identifying the key performance metrics such as efficiency of a process Choosing functions, business, departments, or internal areas to benchmark Collecting data on performance and practices Analyzing the data and identifying opportunities for improvement Adapting and implementing the best practices, setting reasonable goals, and ensuring companywide acceptance. Despite its popularity in industry and elsewhere, benchmarking has some limitations. First, it is a tough process to use, is time consuming and expensive, and requires a high level of sustained commitment.

How to Use Benchmarking With Balanced Scorecard for Your Business

Business benchmarking is the process wherein you determine which company is the best, the one that sets the standard and identify the standard. Basically, you compare your own processes and the metrics that you use with your competitors. However, benchmarking is not only about concentrating on your rivals. You will actually take a look at the wide industry itself and compare it with the other industries. That is certainly a difficult thing to do and being tasked to do so means that you have to take a look at a wide variety of dimensions including quality, time and price. When you benchmark, you will be able to do things better, quicker and much more cost effective. In this case, business benchmarking is a crucial process for organizations. Even though it is tricky and complex, you can simplify the whole procedure by means of benchmarking with balanced scorecard.

The balanced scorecard is known for being one of the most versatile business tools ever invented. You can measure the efficiency and the performance of the most important factors that affect and may affect the success of your business. Using key performance indicators, you can create performance based management and use that system to monitor the efficacy of various processes. The BSC takes on the customer, the internal processes, staff efficiency and growth and not only the financial capabilities of your company.

Now, how do you use benchmarking with balanced scorecard? The answer here is simple: you will need your company data and use them to compare against your toughest rivals in the industry. Thus, you will have to measure your products, services and practices that are similar with the top firms in the world. This will allow you to determine the reasons as to why those companies are seen as progressive and productive. Knowing such elements and details will also enable you to incorporate your present knowledge about how to run the company better.

Those enterprises that are considered at the top of their game know what they are doing. This is why you also have to know yours. In this case, you have to be fully aware about the standards so that you can compare yourself against them.

Benchmarking with balanced scorecard lets you compare and evaluate your business against the other firms so that you can improve the situation of your business. You can use the information that you have obtained to enhance not only on your profitability but also in attracting new customers, retaining them and in meeting their expectations. In addition, you can also help your staff acquire more knowledge and develop their skills in selling products or performing their jobs. In this case, you are able to manage your company better through the benchmarking with balanced scorecard.

Benchmarking for Lean Six Sigma Businesses or Processes for Projects

In 1912, Henry Ford of The Ford Motor Company watched men cut meat during a tour of a Chicago slaughter house. The carcasses were hanging on hooks mounted on a monorail. After each man performed his job he would push the carcass to the next station. Less than six months later, the worlds first assembly line started producing Magnetos in the Ford Highland Park Plant. In other words the idea that revolutionized modern manufacturing and automotive history was imported from another industry.

Benchmarking is simple as a concept but much more involved as a process. The ultimate payoff is that you can become the best of what you do, and continuously improve upon that superiority.
Benchmarking is a means of identifying best practices and using this knowledge to continuously improve our products, services, and systems so that we increase our capability to provide total customer satisfaction.
Today our performance is not of the same world-class standard as a benchmark business. The delta is the competitive gap
Benchmarking and improving our business as a result means a surge in business performance and a Competitive Advantage.

Key Point: Do Not Just Copy, Adopt and Adapt and then Advance

Define Performance Objectives:

What does it mean to Define Performance Objectives?

A performance objective is a statement of your projects output performance level that will satisfy the project Critical-To-Quality CTQ(s). It is the projected reduction in defects you plan to achieve for your process or product. Typically, this is stated in terms of defects per million opportunities (DPMO) reduction and a corresponding target Z-value. In the Lean Six Sigma Measure Phase, you determined the current process performance. In the Analyze Phase you will state what the end results of the Lean Six Sigma project will be by statistically defining the goal of the project. In addition, an estimate of financial benefits is due in Analyze.

Why is it important to Define Performance Objectives?

It is important to identify your improvement goals in measurable terms in order to define the level of improvement you wish to achieve and provide a focused target toward which you can direct your efforts.

If I benchmark, performance standards are based upon:

Closing the gap with the competition
Exceeded projected competitive performance
Similar performance in dissimilar businesses
Gathering best practices from multiple sources to become best in class
Becoming as good or better than a substitute product/service

If I do not benchmark, performance objectives are based upon:

For a process with a 3 Sigma Quality level or less, decrease percent of defects by 10x and for greater than 3 Sigma Quality level, decrease % defects by 2x
If your process is in statistical control (Run Chart or Control Chart), the next improved performance objective comes from a capability investment as in facilities, equipment, digitization, etc.
Corporate mandate
Compliance/legal
Voice of the Customer (VOC) data

Key for best results:

Be creative and think out of the box
Consider all organizations, not just corporations
Review all sectors such as Private, Public and NonProfit
Study domestic and International organizations

Benchmarking is the process of continually searching for the best methods, practices and processes, and either adopting or adapting their good features and implementing them to become the best of the best.

Key Point: Benchmarking is a continuous process of measuring products, services, and practices against the toughest competitors and/or those companies renowned as the leaders

Example: In the 1980s the Remington Rifle Company, a division of giant DuPont Corporation, had a technical issue it was struggling with. Market Research showed that customers wanted the shells of the bullets to be shiny. Plant Managers pay little or no attention to this CTQ, after all Remington had been making quality guns for a very long time. Nearby the plant in Arkansas was a Maybelline cosmetics plant that produced shiny lipstick cartridges about the same size and shape of the rifle shells. Remington realised that the company may have useful information to impart and made a site visit. And thus the problem was solved.

Benchmarking is:

A continuous process
A process of investigation that provides valuable information
A process of learning from others; a pragmatic search for ideas
A time-consuming, labor-intensive process requiring discipline
A viable tool that provides useful information for improving virtually any business process

Benchmarking is not:

A one-time event
A process of investigation that provides simple answers
Copying, imitating
Quick and easy
A buzzword, a fad

How is Benchmarking Used?

Compare performance of an existing process against other companies best-in-class practices.
Determine how those companies achieve their performance levels.
Improve internal performance levels.
A performance objective is determined by using Zbench, short-term, benchmarking, or defect reduction goals.
Benchmarking is a process of identify best practices, measuring our own practices against those best practices, and adapting the appropriate best practices to our own processes.
Revenue & cost implications are also due for benefit analysis.