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Case Study IV Hospital

Profitability Analysis

Executive Summary The Client is a 100 bed speciality and general care hospital in Goa in

existence for around 10 years.

In spite of an enviable location and an established reputation the

Hospital was suffering losses for the last 2 financial years.

The promoter had been forced to run the Hospital by investing large

amounts of money to plug the losses. In addition the Hospital had lost

its place to competing hospitals and was losing on patient trust.

However, inspite of several efforts all seemed lost and the promoter

was entertaining thoughts of a sale.

The main reason was lack of financial analyses prior to decision

making which had let to exorbitant overheads and non contributing

revenue verticals. In addition processes dependent on people had

made the whole system paralyzed and was causing a bad experience

to the patients.

In this respect, the promoter approached MAS to conduct a

profitability analyses and suggest ways and means of turning around

the place.

Process

Review of

Financial history

•The financial statements for the last 3 years were obtained and examined in minute details to understand the cost centres and revenue verticals

•A trend analyses and ratio analyses was conducted to identify the key numbers which were material to the organisations growth and needed urgent attention

Evaluation of Processes

•Processes and controls were understood through interviews with department heads

•The process from the occurrence of a transaction, to the recording of the same and further classification was evaluated

•Controls, checks and balances were analysed and evaluated for process risk management.

Preparation of

Reporting formats

•The Income was broken down into revenue verticals based upon source of income

•Costs were allocated to the revenue verticals on the basis of certain cost drivers so as to obtain a Revenue Vertical – wise P&L which reconciled with the overall P&L

•The Revenue verticals were created for a 3 year historic time horizon.

Setting up of

Accounting system

•Revamped the system of billing and cash collection at most revenue verticals

•Plugged gaps in the process flow which led to income leakages

•Created a monthly management information system to enable the promoters to understand the key pain points and address them

•Identified and immediately implemented cost saving opportunities

Observations

• There had been a steady decline in income which included domestic and tourist patients

• Direct expenses showed an increase in spite of a decrease in revenue. As a result, the gross margins of the company showed a declining trend and were in the danger of being wiped off

• The staff and in house doctor expenses had almost tripled over a period of 2 years affecting margins

• Administrative expenses had shown a steady rise

• Revenue verticals were added which contributed to income but looked to be apparent loss makers

• An increasing amount of sundry debtors year on year showed poor recovery

From Financial Statements

Observations

•Cash collection points did not have appropriate checks and balances leading to leakages

•Manual systems and computerised systems were interchangeably used causing compatibility issues

• There was a complete process failure with the pharmacy which led to double accounting and significant loss of stock

• The COO of the hospital was an external consultant which many times led to a conflict of interest

• Expired products sent for replacement were not followed up

From the Process Evaluation

Observations

• Pharmacy stock received was not accounted for on the day of receipt and were found lying on the floor for days

• There was no specific time fixed to accept purchased stock resulting in pilferage

•A formal process of stock audit was not conducted to reconcile the actual stock with the system stock.

• There were no segregation of duties amongst the staff

From the Process Evaluation

Observations

•Cases of siphoning of cash was observed where the person issuing the medical report and collecting the cash was one and the same

•The cash collection system for the OPD patients did not have any checks and balances

•There was disgruntlement amongst the staff due to the lack of a formal increment system

From the Process Evaluation

Our Analyses

•We submitted a report on our profitability analyses which classified the income streams (constituting 95% of the income) into 3 categories. These were: Poor - which requires urgent steps and is not a profitable line of business. Reasonable - which requires better pricing and restructuring to turn more remunerative. Excellent -which gives high margins and can be considered for expansion.

•Certain incomes which were the biggest contributor to the total revenue had overall gross margins of only 15%, the margins were insufficient to take care of overheads.

From the Revenue Verticals

Our Analyses

•While the laboratory income had gone up by 13%, drop in margins were on account of increase in laboratory expenses by 51%.

•The margins from the income from doctors were negative 44%, on account of the salaries paid to these resident doctors being far higher than the revenue they generated.

•Though it contributed only 1% of income, the margins from the CT-Scan income were extremely good, prompting focus on this stream of revenue.

From the Revenue Verticals

Our Analyses

• X-Ray margins were negative 4% mainly due to a 20% lesser charge than market rates for X rays

•More focus on ultrasonography income having margins of around 33% consistently over 3 years.

• Room rent revenue had a declining trend. No room wise occupancy data was maintained to allow further analysis. Though it was apparent that the non AC rooms offered had an average occupancy exceeding 80%, the hospital was not flexible on offering VIP and AC rooms as non AC which often allowed the rooms to go empty.

From the Revenue Verticals

Our Analyses

•Margins from the nursing income was negative. This was on account of the total nurses been employed assuming a full capacity. Over last 3 years the occupancy levels had never crossed 30%. In spite of the high number of nurses, overtime was found to be paid to the nurses due to the lack of a proper roster planning.

• In spite of being promising, margins from medical packages were showing a declining trend.

•Revenue from operation theatre was charged at a fixed rate per hour with a number of additional charges for many support services. This was irking the patient and the surgeon resulting in drop of this income stream.

From the Revenue Verticals

Changes Suggested

• The number of nursing staff was reduced from 83 to 51. A structured shift timing and roster was introduced. This entailed a saving of INR 21,39,200.

• Resident doctor charges to be increased from INR 200 to INR 300 per inpatient per day to provide an increase income of INR 21,46,421.

Profitability Changes

Increase in profits by 43

lakh per annum

Changes Suggested

• A 20% increase in the charge per X-Ray case based on market charges to enable an additional income of INR 2,85,277.

• Precise costing for medical packages were developed wherein the pricing was increased by 7-10% to get more acceptable margins of 25-30%. For an additional earnings of INR 3,46,300.

• Operation charges were worked as a package which was agreed with the surgeons at the beginning of a quarter. Further, the patients to be given an estimate.

Profitability Changes

Increase in profits by 15 lakh per

annum

Changes Suggested

•AN in house COO having experience of administration of a hospital was appointed

•An automated system was installed at cash collection points where there were previous instances of cash balance differences

•Wherever possible there was a segregation of duties of people handling cash and those recording the entries.

• Standard operating procedure was developed for the pharmacy including a thorough checklist for each process. Duties were defined for each pharmacy staff, with sufficient checks and balances.

Process Changes

Possible savings of INR

4 lakh annually.

Changes Suggested

•Monthly physical stock verification to be conducted, with surprise random checks of a few high value items every fortnight.

•Certain high margin income streams to be given more focus and independent market strategies to be devolved to increase the income.

Process Changes

Possible increase by INR 15 Lakhs per annum

Changes Suggested

• The accounting system was modified to follow the best accounting policies and practices

• The presentation of the financial statements were modified to enable more conclusive reading by the user of the statement

• Decision making tools like debtors ageing, creditors ageing and cash flow statements were introduced

Accounting system changes

Impact of Our Exercise

• Within 12 months of our revamping the system and implementing the findings, the Hospital staged a remarkable turnaround with a positive PBT

• We were able to source a JV with an international brand of Hospitals

• The Hospital has regained trust amongst the local population as evidenced by the increased revenue

• The profitability analysis and resultant MIS enabled the company to take quick decisions which improved the income and margins

Results

Summary

Actual profitability increase by changes

suggested – INR 70 Lakh per annum

Estimated cost saving opportunity – INR 25

lakh per annum