One of the most important groups of business fundamentals is financial fundamentals. Financial fundamentals are those activities that enable an organization to project, measure, analyze, and manage itself.   All businesses that are successful over the long term utilize various (most, if not all) financial fundamentals.  Finance (via the financial fundamentals used) forms the backbone of the decision-making process for all successful organizations.  A sound, reliable decision-making process relies on the financial fundamentals of the organization; which include the likes of:

●   Budgeting                                              ●   Forecasting

●   Financial Statement Presentation     ●   Revenue Cycle Management

●   Financial Statement Reviews              ●   Trending of KPIs/Operational Metrics

●   Federal Policy Reviews/Analysis         ●   Risk Management

●   Supply and Demand                             ●   Opportunity Costs, et al

Financial fundamentals form the foundation of any organization and are the building blocks upon which successful business strategic and tactical decisions are made.  By using the results derived from applying financial fundamentals, organizations improve their competitive position in their market. They are also more able to quickly adjust to industry changes, laying the foundation for short- and long-term success.

Regarding the home health industry (as well as hospice), I would opine that most (but not all) know of at least some of these financial fundamentals.  I would also opine that most (but not all) do not properly implement these financial fundamentals in their operations; greatly limiting their ability to be successful in the long term.  I have worked in the Home Health and Hospice industries since 1992 and I have worked with upwards of 1,000 Home Health agencies (HHAs) and Hospices over that time.  Based on my first-hand knowledge and experience I can safely say that the vast majority of agencies (HHAs & Hospice) do not properly employ financial fundamentals thereby self-creating obstacles to the agency’s success.  CMS and market competition create enough obstacles to an agency’s success, do not add to those obstacles yourself!

Let’s consider a few of the financial fundamentals identified above:

Budgeting

Budgeting is one of the two most valuable financial fundamentals woefully underutilized in Home Health (and Hospice).

My experience leads me to believe that less than 50% of all HHAs prepare an annual budget each year and that over 80% of those that do, prepare a budget that’s not used to manage the business during the budgeted year.  This is a lost opportunity (see Opportunity Costs above).  Budgeting allows an agency to better manage its-self during the budgeted year and to react more quickly to issues that arise.

I believe that most agencies do not prepare budgets because during the early years of the Prospective Payment System (PPS), the Medicare payment rates were extremely generous.  Being profitable was almost as easy as having an operating agency, and this is why budgeting and most other business and financial fundamentals fell out of favor in the industry.  Why incur the cost, when we’re already profitable?

I also believe that, again, from my perspective, most agencies would have been more profitable than they were had they employed these financial fundamentals.  Furthermore, I believe all agencies would have fared better (faced fewer difficulties) over the years as CMS began to ratchet down the Medicare payment rates.

Those who budget each year better understand their agencies, enabling them to make more timely, prudent decisions.  Keep in mind that a budget is a static document that once approved is not changed during the budgeted period.  It is from the financial and operational results of the budget that the agency can measure and manage its actual results each month (and budgeted monthly results are NOT annual results divided by 12).

Forecasting

Forecasting is an unutilized (not under-) tool in the industry.

To use a Forecaster, one has to use a sound, industry-specific budget.  Over 50% of the industry is immediately eliminated.  Then, over 80% of those who do a budget each year are excluded because they do not prepare an industry-specific budget.  This kind of budget can pass for management and Board review/approval. However, it does not enable the organization to properly measure and manage itself during the budgeted period.

In a simplistic sense, a Forecaster is a ‘living budget’.  A living budget, in that each month’s actual results are entered into the tool, with the budgeted information included for the remaining months.  Additionally, it should have the capability to adjust future assumptions.  The Forecaster is a tool, that if utilized properly enables an agency to more accurately project what their year-end results will likely be.

Financial Statement Reviews and Trending KPIs/Metrics

Here I am going to discuss two financial fundamentals because they are intricately interwoven and should be done together.

• Financial Statement Review is the analysis that should take place each month.  One can peruse the financial statements, but one generally gets little out of that view besides what Total Revenues, Expenses, and the Net Income/Loss was.  The financial statement review should entail an analysis of the financial and operational results for that period (I usually recommend for each month and by year-to-date).  Many metrics should be regularly identified during these reviews (I call these FOA Reviews).
• Trending KPIs/Metrics is a by-product of the FOA Reviews.  KPIs (short for Key Performance Indicators), are also known as Metrics and Benchmarks.  The Trending of the KPIs presents the monthly calculated KPIs side-by-side for each month, year-to-date.  This helps you see what is happening each month as opposed to just seeing what the results are on a year-to-date basis, which can hide information you’d rather not be hidden.

These Monthly FOA Reviews are the second of the two most valuable financial fundamentals woefully underutilized in Home Health (and Hospice).

Those who prepare monthly FOA Reviews tend to understand their operations better than those who do not; significantly so.  They better understand their business trends throughout the year and can more readily make timely, sound business decisions for the benefit of their agency.  Additionally, each year an organization prepares its Monthly FOA Reviews, the ability to build higher-quality budgets increases (quite significantly in the early budgeting years).  Therefore, each benefits from the other.

Additionally, each year an agency completes its Medicare Cost Report (MCR), it should identify the KPIs therein.

Revenue Cycle Management

This starts with the admission.  Most include coding as an accurate OASIS (for Medicare) ensures proper revenues to be received.  This ends with collections.  So Revenue Cycle Management (RCM) exists throughout the entire patient care engagement, through to when payment is made by the payor for the services rendered.  RCM should not be construed as Financial Management, as it is but a small piece of the financial management of an organization.  A very important one, yes, but only one piece of a much bigger puzzle.

My focus with RCM is cash management; particularly cash flow.  Cash is king for any organization.  Profitability is important, but without collections, there is no profitability in the long run (which is not necessarily all that long).  Few agencies manage their cash flow properly, as most only look a day or so forward. As you improve your use of financial fundamentals, you will extend the period of time you can project your cash flow for.

As you provide services to your clients, you are earning revenue.  This earned, but uncollected revenue creates/increases Accounts Receivable (A/R).  A/R represents the uncollected earnings of the agency.  This is a simplistic view of the revenue-earning process.  However, that’s only a part of RCM; with arguably the most important part of RCM still to come: collections.

Managing your RCM processes should include cash flow and A/R management.  When done properly, an agency is always aware of their upcoming cash in-flows (and out-flows) and what is happening with the receivables by payor by patient (i.e., collections, or the lack thereof).  Too many times I have seen agencies with inadequate controls in this area grow their revenues while becoming cash-starved.  You want to ensure that you have proper controls in place to make sure that you convert you’re A/R balances to cash receipts as soon as possible.  Look at:

• A/R balances by payor, by patient, by time frame (i.e., 0-30 days; 31-60, 61-90, etc.)
• Days of A/R and compare to
• Days of Accounts Payables (A/P) as a starting point

Federal Policy Reviews/Analysis        

Every year CMS comes out with new rules and regulations, including their Proposed and FINAL HH PPS Rule for the upcoming year.  This is significant in that these rule changes impact your operations and your Medicare PPS payment rates every year and sometimes these changes can be significant.

Something that I want to point out that is much too often presented improperly is that in the HH PPS Proposed and FINAL Rule each year CMS identifies a $ amount and % change to Medicare spending.  For example, for CY2025 CMS is projecting a 1.7% reduction to HH Spending.  Many times this is presented as the impact that HHAs can expect to their Medicare revenues for the upcoming year.  This is and has always been incorrect.  The impact projected is to industry-wide HH Spending, not what it will be at the agency-level.  In fact, based on my analyses, payment rates per the CY 2025 Proposed Rule can change anywhere from a:

• 20.1% increase, to a
• 7.9% decrease

The only way to know what the impact per the Proposed and FINAL Rule will be is to calculate it yourself (if you want help w/this calculation, let me know as I have been doing this since 2001).  This is something that everyone should be doing every year for both the Proposed and FINAL Rules.  Doing this for the:

• Proposed Rule can give you up to five-months to prepare
• FINAL Rule can give you up to a month to prepare

Sometimes these impacts can be significant!  Be sure to account for the impact due to the HH Value-Based Performance Model as well.

But, since CMS did cap the reduction in the Wage Index from one year to the next to 5%, the wild swings that existed pre-2023 (reductions in payments up to/greater than 20%) are not occurring any more.

Summary/Conclusion

Properly and timely utilizing financial fundamentals is key for your agency’s current and future success.  These fundamentals should be a part of the everyday operating life of your agency.  Once you have implemented these fundamentals, you will find  that success and profitability are not as difficult as they once appeared.

If you would like some assistance in utilizing any of these (or other) financial fundamentals in your agency, please reach out to us here at IFS4hh to see how we can help you improve your operational and financial results.