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Key Financial Performance Indicators (compiled
from HCFA’s original Web Site) *Net
worth ($). Net worth equals total assets minus total un-subordinated
liabilities. This ratio shows an organization’s excess of assets over
its liabilities. It indicates the value of the firm with respect to
equity. *Total
revenue ($). This figure reveals how much revenue the organization generated
from all of its business plus investment, interest, and aggregate (miscellaneous)
income. *Operating
revenue ($). Operating revenue
equals total revenue less revenue from investments, interest, and other
miscellaneous sources, plus co-payments. This figure reveals how much
revenue the organization generated from its primary lines of business.
Operating profit or loss (dollars). *Operating
profit or loss equals operating revenue - the sum of direct medical
costs and administrative costs. This value indicates the $ the org.
has after covering its direct medical and administrative expenses for
a particular period. It reveals how well the organization is covering
all of its costs of operations. *Net
profit or loss ($) = total revenue - direct medical costs less administrative
costs - taxes and extraordinary expenses. This value is simply the operating
surplus (or deficit)
after considering taxes and extraordinary costs. *Medical
expense ratio. (Also called Medical Loss Ratio) = medical and hospital
expenses divided by operating revenue. This ratio reveals the % of the
org’s premium revenue needed to meet its direct medical costs for a
particular period. *Administrative
expense ratio = administrative
costs divided by operating revenue. This ratio reveals the % of the
org’s premium revenue needed to meet its administrative costs for a
particular period. *Overall
expense ratio = direct medical costs plus administrative costs divided
by operating revenue. This ratio reveals the percentage of the organization’s
premium revenue needed to meet its direct medical and administrative
costs for a particular period. *Operating
profit margin = operating revenue minus direct medical and administrative
costs, divided by operating revenue. This ratio reveals the percentage
return the organization achieved on its operations for a particular
period. It measures how effectively an organization is performing with
respect to its ability to cover its fixed and variable expenses. The
higher the ratio, the better is an org’s financial performance. *Overall
profit margin = total revenue minus direct medical costs, administrative
costs, taxes, and extraordinary expenses, all divided by total revenue.
This ratio reveals the percentage return the organization achieved on
its operations for a particular period when taxes and any extraordinary
expenses are taken into account. It measures how effectively an organization
is performing with respect to its ability to cover its fixed and variable
expenses as well its tax liability. The higher the ratio, the better
is an organization’s financial performance. *Debt-to-service ratio = the sum total of net income, provision for income taxes, nterest expense, and depreciation, divided by the sum of interest expenses and current loans and notes payable. This ratio indicates how effectively the organization is meeting its annual principal and interest charges on its outstanding debt. *Current
ratio = current assets divided by current liabilities This ratio measures
an organization’s ability to meet its short-term liabilities with its
current base of short-term assets. The ratio is short-term assets divided
by short-term liabilities. Specifically, an org. must be able to convert
its short-term assets such as investments and premium receivables to
cash to cover its liabilities as they come due. A thumbnail standard
for a desirable current ratio is a ratio greater than 1-to-1 (meaning
that an organization has short-term assets equal to or greater than
short-term liabilities). However, a current ratio of less than 1-to-1
does not imply that an org. cannot meet its obligations as they come
due. *The
sum of current assets and long-term bonds divided by current liabilities.
This ratio takes into account the fact that many organizations move
a good deal of their spare cash to longer-term assets, such as Treasury
and blue chip corporate bonds. Because organizations receive cash (premiums)
up front, they have a period of time to invest in longer-term assets
such as Treasury bonds, which generally offer a greater return than
shorter-term instruments such as certificates of deposit (CDs). Therefore,
many organizations move their spare cash out of the short-term investments
to take advantage of the higher return. However, this has the effect
of making an organization appear, from the current ratio analysis, as
if it did not have adequate resources to meet short-term obligations.
Thus, as the user of the financial statements, we must recognize that
these longer-term bonds are valued at the current market price and are
extremely liquid. They can be converted to cash to cover short-term
obligations as easily as the short-term investments *Days
of cash on hand is computed under the following formula: cash + short-term
investments) / ([total medical and hospital expenses plus total administrative
expenses] / 365). This measure is the average number of days of cash
an organization currently maintains on hand with respect to its current
direct medical and administrative costs. It reveals the number of days the organization is able to cover operating expenses with its current cash on hand. Specifically, this yardstick allows one to better evaluate the organization’s cash management policy, which directly reflects the org’s ability to immediately meet its obligations as they come due without the need to liquidate any investments. All other things being equal, a rising ratio is considered positive (signifies increasing liquiidity). Cash-to-claims-payable ratio = the sum of cash and cash equivalents, divided by claims payable. This ratio indicates the organization’s ability to pay off (cover) its health, medical, and accounts payable with its available cash and cash equivalents. *Days
in premiums receivable = premiums receivable divided by (total premium
revenue [commercial, Medicare, and Medicaid] plus FFS revenue, divided by 365). This measures the
amount of premium revenue (measured in terms of days) due to the organization
from the members. Additionally, it measures the org.’s ability to convert
its receivables to cash. If the org’s days in premiums receivable figure
is getting higher (more and more days of premiums receivable), the organization
may be having difficulty converting the receivables to cash and could
encounter future liquidity problems. *Days
in unpaid claims = claims payable divided by (total medical and hospital expenses, divided by 365). This ratio indicates the number of days of claims an organization owes its members. This ratio is useful for determining whether an organization is meeting its health and medical liabilities effectively and efficiently (in a timely manner). An upward trend in this figure could indicate that the organization is becoming less able to meet its obligations as they come due (that is, the organization’s liquidity is decreasing). Benchmarking: The
primary issue that surfaces once key indicators are identified and understood,
and plan financial data can be obtained from public reports or regulatory
agencies, is how to benchmark the data. And this is where significant
caution must be exercised. Remember that HCFA stated they are use they
data to measure performance against organizations with similar characteristics,
and not against the average of all health plans. One hard and fast benchmark
number per indicator will not always serve an evaluator’s purposes.
Why? A)
Cyclical financial performance: Due to the premium cycle, there are
cycles of years when most plans relatively better or worse. A benchmark
that identifies the bottom 10% during an up cycle might identify the
bottom 50% or more during a down cycle. B)
Product Mix: A plan with a heavy Medicare or Medicaid mix will typically
yield different indicators than a primarily Commercial-based plan. Medical
Loss Ratios for Medicare plans a typically higher than commercial plans,
while administrative ratios can be lower (because there is significantly
higher pmpm revenue.) Premium receivables obviously are affected by
product mix. Other indicators are impacted as well. C)
Plan Size: The size of plan can have a major effect on various indicators,
and potentially provide significant economy of scale to improve medical
and administrative expense ratios. D)
Plan Age: Young plans tend to experience more negative financial performance,
often both due to lower plan size, as well as increased debt load. E)
Plan Location: The region a plan resides in is a triggering indicator
affecting both revenue and medical expenses pmpm, which in turn impact
various indicators. F)
Parent Organizations: Even if a plan’s indicators are weak, but the
plan is financially guaranteed by a strong parent with deep pockets,
there may be less cause for concern. Then again, there may still be
a reason to be worried, depending upon how willing the parent is to
continue underwriting the plan. G) Offsetting indicators: A plan with poor current medical and administrative expense ratios but heavy reserves may weather the storm find. A plan with fairly reasonable medical and administrative expense ratios but weak reserves may still fail. Key
financial information about M+C organizations. The indicators on the
worksheet will be used to measure an organization’s performance and
financial health over several periods and against other M+C organizations
with similar characteristics (e.g., size, geographic location). The indicators alone do not necessarily signal whether an M+C organization is going to go insolvent; they simply provide a way of evaluating the org’s financial condition and performance at a point in time. This worksheet also will be used for desk review purposes." |