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Net Operational Income %

Net Operational Income % = Net Patient Revenue - (Total Direct Costs + Total Indirect Costs)

Net Operational Income DOES NOT include Community Support, Development Costs, or the costs of extracurricular programs.

14% is what MVI recommends a Hospice have as Net Operational Income:

Cost Category Average Acceptable Excellent
Net Operational Income 5% 25%

To achieve a Net Operational Income of 14%, a Model is needed. Our recommended model or targets expressed as a percentage of Net Patient Revenue are:

That's the model! Add these percentages up and subtract the sum from 100% and you have 14%. Our best advice is to use the MA/BA monthly and manage the exceptions.

For more information on creating a Model for your Hospice, click here.

Now, a few thoughts on Operational Profitability...

Many people in Hospice think that profitability is wrong. They think that it is "evil" to do this work and make money. This mindset must go. This "Great Dilemma" and internal conflict must be resolved. It is not only right for our Hospices to be profitable; it is the only way to survive! This anti-profit mindset is not compatible with reality. If you know people with this mindset, put them on your "gotta go" list.

Perspective on Hospice Reimbursement

Hospice reimbursement is good when compared to other flavors of healthcare. If a hospital or nursing home gets a 5% return, they consider it a great year. There is "enough" money in Hospice to cover all costs of providing care and still have money left over.

Unfortunately, Hospice has a tradition of losing money from operations. It has taken the introduction of for-profit Hospices to teach us about efficiencies and working smarter. In fact, from my experience, much of the advancement of Hospice has come from the for-profit sector of Hospices. It is here that I see the most radical differences in management...some good, some not so good. But much of the accepted practices in Hospice come from the for-profit world.

Many people equate high cost with high quality. This is flawed thinking. Just because you spend $25 a patient-day on medications does NOT mean that patients are getting better care. It simply means that your Hospice is wasting money. The SAME outcome could be achieved at two-thirds LESS cost. The same lesson applies to Direct Labor as well as to other Patient-Related costs.

"It is incorrect to believe low costs indicate a Hospice is skimping on services." AR

Hospice reimbursement provides more than enough to provide World Class services. If there was a time to be bold about building reserves, the time is NOW!

For more information on the Role of Financial Reserves in a Hospice, click here.

How much "positive residual" or profit should your Hospice have?

The answer to this question will come from your vision of Hospice care and what you think your Hospice will need in the future regarding funds. My rule of thumb is that a Hospice should have a net operating income of approximately 14% regardless of whether you are for-profit or not-for-profit. But what is important is that your Hospice is what your community needs or it is fulfilling your vision of Hospice. Therefore 5%, 14% or even 20% might be what you need to do.

Running a Hospice at "break-even" is very unattractive considering our current great reimbursement levels, unless we hold to the mindset that the community needs to bail us out. Here is the advice from my first Hospice CEO:

"Learn to ignore community support. Pretend that it isn't there." AR

This is a healthy idea that has served me well over the years. It keeps a Hospice sharp and FOCUSED on making it on operations.

The Illusion of Profitability

Growth in ADC can create an illusion of organizational financial health. In the case of rapid growth, a Hospice's staffing-needs outpace its ability to hire clinical staff. Therefore, the Hospice builds census on the backs of overworked clinicians. However, when the ADC slows down, profitability reverses or lessens as the Hospice's normal staffing patterns and habits of clinical practice and management catch up. Be aware that your profitability could only be due to this situation. This situation can also create a false expectation in management and Boards of Directors. They may ask, "Where did our margins go?" The fact is that we were working short and unless we are willing to change our model of care, we will not see those profit margins again.

Factors of Hospice Profitability

When we consider the factors of Hospice profitability, many people think that it is about things like the environment, the economy, being in the right place at the right time, connections/knowing the right people, having inside information, providing low quality care, skimping, etc. However, when looking at profitability, I have learned that most of the time, I need not look any further than the Leader...

The #1 Factor in profitability (or performance for that matter) is the Leader. If any business segment, department or company is not performing, you need not look any further than the Leader. The Leader is the key element. If MVI is not accomplishing its goals, it is because of me. I must face the fact. Let's consider some other examples:

It is about the Law of the Lid. Our departments, business segments, and organizations cannot exceed our level of leadership. I have known situations that have become "accepted" by Hospices over the years. Then, by some chance, a new Leader is introduced and it seems that everything changes...for better or worse. But when that dynamic Leader comes on the scene, it is as though magic dust has been thrown on the situation. As the Clinical Leader, YOU need to be able to identify leadership talents in people.

Once in awhile, we all need to "fire" ourselves. Then rehire yourself, the NEW LEADER with the right attitude, energy, and mindset, the next day.

Multi-Pedia

ADC Average Length of Stay Benefits Percent Caseload Expectations Computed Caseloads Crisis Care Percent Served Days Cash on Hand Days in AP Days in AR Debt to Equity Development to Return Ratio Development Signature Programs Direct Labor % of All Labor Direct Labor NPR Direct Labor PD Direct Patient Related Expenses NPR Direct Patient Related Expenses PD Facility Mix Percentage Facility Related Facility Team Patient Days Percent Indirect Labor Marketing Incentive Median Length of Stay Mileage Rate Net Operational Income Net Revenue PD Operational Costs Organizational Net Income % of Hospice Homecare Net Revenue Revenue to Payroll Dollar Segment Indirect Percent Net Revenue Segment Net Income The Role of Financial Reserves Total Indirect Volunteer Level of Activity What is Net Patient Revenue What is The Model