Most home health agencies know their revenue each month. They know their expenses. And they know the resulting net income or loss.

In other words, they see the top line, and they see the bottom line.

But how well do they understand everything that happened between those two numbers—and why?

That is where much of the information needed to improve financial and operational performance resides. And that is where the opportunity for greater understanding begins.

Knowing that revenue increased, salaries increased, or margins declined tells management what happened. It does not necessarily explain why it happened. Understanding why enables management to determine whether something should be done—and, if so, what should be done to create the desired change.

That is the purpose of what I refer to as a Monthly Financial-Operational Analysis/Review, or Monthly FOA Review.

Financial Analysis Is Only Part of the Picture

A Monthly FOA Review differs from traditional financial analysis because it brings financial and operational information together.

Financial information tells us about revenue, salaries, benefits, expenses, margins, and other financial results.

Operational information tells us about census, admissions, visits, disciplines, productivity, utilization, and other activities occurring throughout the organization.

Analyzing them together tells us something more.

It produces the unit costs, productivity measures, utilization measures, revenue-per-unit measures, and other Key Performance Indicators (KPIs) management needs to help guide the agency forward and generate the desired results.

Consider a Cost Per Visit (CPV).

Cost is financial information. Visits are operational information. Bringing the two together produces a unit cost that can help management evaluate financial and operational efficiency. CPVs are among the basic KPIs that should be calculated consistently over time and can serve as a foundation for further analysis.

But even the KPI itself is only information.

Suppose an agency’s Nursing CPV declined significantly. That sounds positive.

But what if it declined because the agency began providing substantially more Nursing visits than were actually necessary? More visits in the denominator could reduce the CPV while the organization simultaneously became less operationally efficient.

So, is the lower CPV good?

Maybe.

Maybe not. We need to understand:

Why did it change?

That is where the analysis begins.

And that is the heart of FOA.

What Happened? Why Did It Happen? What Should We Do About It?

Identifying a variance is one thing.

Understanding why the variance occurred makes it actionable—and actionable in a much more precise way.

Suppose management approves an across-the-board 3% compensation increase. Salary and wage expense subsequently increases.

That was expected.

But was the increase approximately what management expected based upon the 3% compensation adjustment?

If salaries increased 6%, management should want to understand the additional increase.

If they increased only 1%, management should want to understand that, too.

An expected change in a number does not mean the magnitude of that change should go unquestioned.

The same concept applies throughout the organization.

Nursing salaries increased. Why?

Perhaps Nursing visits increased.

But why did visits increase?

Did census increase? Did visits per patient increase? Did patient acuity or discipline mix change? Did productivity decline? Was there more overtime? Were the additional visits planned? Did reimbursement increase sufficiently to support the additional utilization?

Each answer may create another question.

And that matters because what management initially identifies may be a symptom rather than the underlying cause.

An unfavorable Cost Per Visit may be a symptom. Declining productivity may help explain it—but declining productivity may itself be a symptom of something else.

Why did productivity decline?

The objective is to continue asking questions until management has developed a reasonable understanding of the underlying cause. Treating a symptom may temporarily change what management sees, but if the underlying cause remains, the symptom—or another symptom of the same problem—is likely to remain or return.

The same principle applies when the aberration is favorable. If performance suddenly improves, management should want to understand why. Identifying and understanding the cause may enable the organization to preserve the improvement, replicate it elsewhere, or build upon it.

Understanding the symptom tells you where to look. Understanding the cause helps you determine what to do.

• What happened?
• Why did it happen?
• What, if anything, should we do about it?

A properly developed and consistently performed Monthly FOA Review helps management move through all three.

The Details Matter—but So Does the Big Picture

Don’t evaluate financial and operational results in a vacuum.

Suppose Nursing salaries increased 8%.

Is that bad?

Not necessarily.

Perhaps admissions increased 15%, visits increased 12%, productivity improved, and Nursing CPV actually declined.

Now consider the opposite situation. Nursing salaries increased only 3%.

That may initially appear reasonable.

But what if census declined 10% during the same period?

The individual number does not provide enough information.

Management needs to see the big picture while working in the details—and stay cognizant of the details while evaluating the big picture.

Losing either perspective can result in inappropriate assumptions.

Inappropriate assumptions can lead to the right action for the wrong problem—or the wrong action for the right problem.

Either can make an existing problem even worse.

Partial understanding is not the same as understanding.

The space between financial results and the operations that produced them is where I have spent much of the last 30 years—trying to understand not simply what changed, but why it changed and what could be done about it.

Did Management’s Changes Produce the Expected Results?

This is a question I believe organizations should ask much more frequently:

Are actual changes in line with the expected results of changes made by management?

Organizations make decisions constantly.

Compensation is changed. Productivity expectations are revised. Staffing models change. New technology is implemented. Processes are redesigned. Service areas expand. Utilization initiatives are introduced. New payer contracts are signed.

Each change is made with some expectation of what should happen.

But did it?

It is not enough to observe that something moved in the expected direction.

Management should understand whether the magnitude of the change was reasonably consistent with what should have occurred.

Otherwise, an expected change can unintentionally provide an explanation for a much larger, or much smaller, change that remains unexplained.

A Monthly FOA Review helps create the feedback loop between what management expected to happen and what actually happened.

Without that feedback loop, organizations can continue implementing changes without really knowing whether those changes are producing the intended financial and operational results.

Why “Monthly” Matters

Problems do not arise according to a convenient management schedule.

• They do not wait until quarter-end.
• They do not wait for budgeting season.
• They do not wait until year-end.

And if management is not regularly reviewing its financial and operational information, a developing problem may go unnoticed until it becomes significant enough to make itself obvious.

By then, a relatively manageable issue may have become something much larger.

That is one of the primary reasons I emphasize Monthly Financial-Operational Analysis.

Year-to-date information is important, but YTD results can also obscure something that has recently begun to change.

Suppose an agency performs exceptionally well from January through August, but an issue arises in September that begins eroding the agency’s efficiency and profit margins. Nine months of strong performance may keep year-to-date results looking healthy for a while, potentially obscuring the developing problem.

If management focuses primarily on year-to-date results, the issue may continue—and worsen—before becoming readily apparent. But if management reviews both monthly and year-to-date results, the September results are much more likely to reveal that something has changed, allowing management to understand why and address the issue in a timely manner.

Historical success can mask current deterioration.

That is why both perspectives matter.

Year-to-date results provide perspective. Monthly results help identify changes as they occur. An effective FOA Review needs both.

One of the greatest values of a Monthly FOA Review may simply be shortening the time between when something begins to change, when management understands that it has changed and why, and when management can make an informed and timely decision about what—if anything—should be done about it.

Small Problems Have a Way of Becoming Big Problems

Consider a recurring $15,000 monthly performance issue that begins later in the year and may initially be obscured by otherwise favorable year-to-date results.

Identified and addressed after one month, it may be relatively manageable to fix.

Allowed to continue for twelve months, it becomes a $180,000 issue—and potentially much more challenging to fix.

But time is not the only multiplier.

Growth can magnify inefficiency as well.

A relatively small inefficiency when an agency generates $500,000 in annual revenue can become a significantly larger problem as the agency grows to $2 million, $5 million, or $20 million.

And a four-times-larger organization does not necessarily make the problem only four times more difficult to fix.

By then, the inefficient process may involve more employees, managers, locations, systems and workflows. It may have become embedded in the organization’s culture and operating practices.

The time and effort required to correct it can grow disproportionately.

And management time spent unwinding a problem that could have been addressed years earlier is time that cannot be spent improving another part of the organization, pursuing an opportunity, developing employees, or addressing another challenge the organization faces today.

Small inefficiencies have a way of becoming embedded in growing organizations. And once embedded, the cost and effort required to remove them can increase much faster than the organization itself.

Monthly FOA Reviews improve the opportunity to identify those inefficiencies before they reach that point.

Cost Cutting Is Not the Same as Becoming More Cost-Effective

When an agency decides it needs to improve profitability, one common approach is to work down the income statement looking for expenses that can be reduced.

• What can we cut?
• What can we eliminate?
• Where can we spend less?

Sometimes those are appropriate questions. Some costs should be reduced or eliminated.

But there is an important difference between cutting costs and becoming more cost-effective and efficient.

Cost cutting asks:

“What can we spend less on?”

Financial-operational improvement asks:

“How can we accomplish what needs to be accomplished more efficiently and effectively—and do more with less?”

The second question can also reduce costs, but it approaches the problem differently.

If an agency reduces Nursing CPV through sustainable improvements in productivity, scheduling, staffing deployment, or other operational changes, it has not simply reduced an expense.

It has improved the economics of delivering care.

And if that improvement is maintained, the financial benefit can continue month after month and year after year—and potentially become more valuable as the organization grows.

The most sustainable cost reductions often aren’t the result of cutting costs. They result from eliminating the inefficiencies that created unnecessary costs in the first place.

That is one of the significant long-term opportunities created by continual financial-operational analysis.

How Did Home Health Get Here?

There is also some history worth remembering, particularly because many of today’s home health financial and operational leaders were not in leadership positions when Medicare’s Prospective Payment System (PPS) began.

When PPS was implemented in October 2000, the financial environment changed dramatically.

Many HHAs generated substantial profits right away, as Medicare reimbursement under the new PPS was quite generous.

At the time, many agencies still performed management activities carried forward from the prior reimbursement environment—budgeting, detailed cost analysis, financial analysis, operational analysis, and various forms of financial-operational review.

Those activities also required resources—and cost money to perform.

As agencies were generating strong margins under PPS, some organizations understandably began asking why they should continue spending money on activities that did not appear necessary to produce those profits.

Therefore, many of those activities were reduced or eliminated.

And, initially, that worked.

Eliminate an administrative or management cost and, ceteris paribus, the savings move directly to the bottom line.

For a period of time, the financial results could appear to validate the decision, as good profits continued-for a while.

But something else was happening that was much harder to see on the income statement.

Organizations were also reducing some of the activities that helped management continually understand costs, operations, unit economics, variances, and the relationships between operational activity and financial performance.

Years passed.

The home health environment became more challenging. Reimbursement changed. Costs increased. Labor pressures intensified. Margins came under pressure. Organizations increasingly needed to become more efficient and effective—they needed to do more with less.

And many of today’s leaders entered the industry or positions of leadership during those intervening years.

They did not make the original decision to discontinue these activities.

Some entered organizations in which those activities had already disappeared years earlier. They inherited management environments where detailed budgeting or financial-operational analysis was not being done.

After enough time, the activity disappears.

Then the institutional knowledge surrounding the activity can disappear.

Eventually, its absence becomes normal.

The current leaders didn’t know what they didn’t know.

And in many cases, how could they? They had never been exposed to these activities or to the understanding those activities could provide.

That history matters because it helps explain how we arrived where we are today.

The absence of an immediate financial consequence does not mean a management decision has no long-term cost.

Short-term profitability can conceal the long-term cost of abandoning sound business fundamentals—an issue that many agencies are struggling with today.

What appears to be cost reduction today can become considerably more expensive tomorrow if what was eliminated contributed to the organization’s ability to understand and better manage its performance.

The underlying business fundamentals did not stop being important simply because agencies stopped performing them and strong profitability temporarily made their absence easier to tolerate.

Your Best Benchmarks May Be Your Own

Industry benchmarks can be extremely useful.

They provide an external perspective. External KPIs can be compared with internal KPIs. They can help identify areas where an agency differs from peers and point management toward issues worth investigating.

But industry benchmarks also come with limitations.

How comparable are the organizations? How consistently were the underlying costs classified? How good is the data? What differences exist in geography, payer mix, staffing models, organizational structure, utilization, or accounting practices?

Any of these differences can affect how meaningful an external benchmark really is. Therefore, external benchmarks should be considered ‘with a grain of salt‘, some professional skepticism.

An agency generally knows much more about the quality and circumstances surrounding its own information.

That is why the most valuable benchmarks an organization develops may ultimately be its own.

A consistently prepared Monthly FOA Review creates that history.  KPIs and trends tell a story.

After 12 months, management knows more about how its organization behaves.

After 36 months, it knows more.

After 48 months, more still.

After 60 or 120 months, the organization has potentially accumulated years of experience understanding how its own performance responds to changes in census, staffing, wages, productivity, utilization, reimbursement, payer mix, service areas and innumerable other factors.

Consider that Nursing CPV again.

Suppose the agency’s current Nursing CPV is better than an industry benchmark.

Good?

Perhaps.

But what if the agency’s own Nursing CPV was substantially better three years ago?

Why did it change?

Or what if today’s CPV looks exceptionally low only because the agency is providing more visits than necessary?

Again:

Why?

Industry benchmarks tell you something about other agencies.

Your own benchmarks tell you about your agency—and a history of Monthly FOA Reviews can help you understand why those benchmarks changed.

That accumulated understanding becomes an organizational asset.

Good Results Are Not Necessarily Optimal Results

There is another danger created by strong profitability:

“We’re making money. What’s the problem?”

Maybe there isn’t one.

But maybe there is substantial opportunity that the bottom line alone cannot reveal.

An agency generating a 10% margin may be performing very well.

But perhaps it could be generating 13%, 15%, or 18% if unidentified inefficiencies were identified, understood and addressed.

A profitable agency can still have improper utilization, unnecessary overtime, poor productivity, inefficient staffing, controllable LUPAs, unnecessary outliers, underperforming locations, or numerous other opportunities hidden within otherwise acceptable overall results.

Good results don’t necessarily mean optimal results.

Optimal performance may be the proverbial unicorn—something an agency may never fully achieve.

But that does not mean it should stop striving for it.

There will always be opportunities to improve efficiency, effectiveness, cost-effectiveness, productivity, utilization, or other aspects of performance.

The objective is not to reach some theoretical point called “optimal,” declare victory, and stop analyzing.

The objective is to continually move closer to that optimal performance, knowing there will always be more opportunities to improve.

And that is why the work never ends.

The Analysis Should Never Stop

A Monthly FOA Review can be an exceptionally valuable diagnostic tool when an agency is struggling.

In fact, financial-operational analysis is often one of the first places I begin in a turnaround engagement once reliable monthly financial statements are available.

But its greatest long-term value comes from making it part of the organization’s normal monthly management activities—performed month after month, whether the agency is struggling, performing adequately, or achieving exceptional results.

Used properly and consistently, that continuing analysis may help prevent an agency from ever reaching the point where a turnaround becomes necessary.

It cannot eliminate every threat. External forces can adversely affect even exceptionally well-managed organizations.

But continual financial-operational analysis can significantly improve management’s opportunity to identify internally developing financial and operational issues while they remain comparatively small—and while management still has more options available to address them.

Monthly FOA Reviews aren’t something an agency should perform until it becomes successful. They are part of how an agency becomes successful—and part of how it remains successful.

• Month 1.
• Month 12.
• Year 5.
• Year 20.
• Good times and difficult ones.

If the agency is operating, the analysis should continue.

Based on what I have seen over the years, most of the industry’s consistently high-performing agencies conduct some form of meaningful financial-operational analysis each month, shortly after their financial statements are closed.

That should not be surprising.

Organizations that continually measure, analyze, question, understand, adjust, and then measure again are better positioned to identify inefficiencies, recognize developing problems, understand opportunities, and continually move closer to optimal performance.

The Ultimate Outcome Is Understanding

The ultimate value of a Monthly Financial-Operational Analysis isn’t another report.

It is understanding.

• Understanding what changed.
• Understanding why it changed.
• Understanding whether the magnitude of the change was what management expected.
• Understanding the relationship between financial results and the operations that produced them.

Understanding which problems require attention, which apparent problems are actually symptoms, and where the underlying causes may lie.

Understanding where opportunities exist even when overall results are good.

And understanding what management can do today to create positive change.

You don’t know what you don’t know—and what you don’t know can hurt you.

A properly developed and consistently performed Monthly FOA Review can help uncover questions management may not otherwise know it should be asking—and, in doing so, help reduce what management does not know about its own performance.

And the process is cumulative.

One review creates understanding.

Years of consistent Monthly FOA Reviews create increasingly sophisticated knowledge about how your particular organization operates, responds, and performs.

That knowledge helps management make better-informed, more timely and more precise decisions. Those decisions can improve efficiency and effectiveness. Those improvements can produce better financial and operational results. And the next month’s FOA Review provides an opportunity to determine whether those results actually occurred as expected—and why.

Then the process begins again.

Because it is a continuous loop.

Understanding is the cornerstone of sustained financial and operational success.

The most successful organizations continually work to minimize what they do not understand about their own performance.

A Monthly Financial-Operational Analysis is one of the most valuable tools management can use to do exactly that.

Do you prepare a Monthly FOA Review? If not, isn’t it time you did?