Key Performance Indicators in Behavioral Health Organizations 1 James E. Sorensen, Ph. D., CPA, CGMA James.Sorensen@du.edu Tom Lucking, Ed. S. tom@luckingconsulting.com
Introduction 2 This course is adapted from the Unit Cost Determination Trainer s Manual that was developed for the National Leadership Institute (NLI) U.S. Department of Health and Human Services Substance Abuse and Mental Health Services Administration Center for Substance Abuse Treatment www.samhsa.gov
3 Short Description This course provides training in unit of service cost determination for use by nonprofit community-based organizations (CBOs) that provide substance abuse treatment. The course offers the opportunity for participants to learn and use unit costing techniques to expand and enhance their organization s work in the community. It is worth 1 continuing education units (CEUs.)
4 An Overview This module will address six basic questions: What is unit of service costing? What two key questions does unit of service costing answer? How do key performance indicators like unit of service cost help you respond to important management questions? What else can unit of service costing do for you? What variables have an impact on unit of service costs? What did I learn from this course? Most users will complete this course in 2 hours
Scope 5 Upon completion of this course learners will be able to: Analyze how unit costs serve as key performance indicators for your organization Comprehend the uses of unit costing in managing your organization Figure out why correct unit costs are important to your organization in an environment that demands increasing accountability Relate accurate unit costs as a basis for pricing your services, comparing your unit costs to the State s reimbursement rates, negotiating your rates with payers, spotting your cost and productivity problems, maintaining financial control of your organization, benchmarking your organization against high performing organizations and performing cost-outcome and cost-effectiveness reviews of your services.
Accreditation 6 This course was designed by JBS International, Inc., an approved continuing education provider through NAADAC, The Association for Addiction Professionals. This course is worth one Continuing Education Unit (CEU).
Audience 7 This course is designed for: Executive directors of behavioral health treatment organizations Administrators, and financial officers of nonprofit community based organizations. Clinical treatment staff
Instructions 8 You will step through the sections of the course at your own pace. Some sections offer reinforcement exercises to help you learn the material. At the end of the course, there is a short assessment. You will need to score 80% or higher to complete the course successfully. If you are unsuccessful, you may try again.
9 Section 1 What is unit of service costing?
10 What is the distinction between a cost and a rate? Cost: resources (like staff s salaries, travel, buildings) used to produce a good or a service Rate: a price (or charge) received or paid for a good or service An example: your electric bill Costs: from coal-burning plant, wind-power Rates: residential or commercial users
11 From Costs to Rates for Electricity Source of costs: Coal or Wind Generation Rates for customers: Commercial or Residential Accounting System; Organizational Practices
12 Calculating Unit of Service Cost Unit Cost of a service is the cost of resources consumed in a service divided by the level of activity in the service Resources include the staff you pay, facilities (beds) you rent or own, buildings you lease or own, and your operating expenses like travel and copying. Services may be defined as residential bed days, intensive outpatient hours, client consultation hours, or medication visits.
13 Example: Unit of Service Cost in a Behavioral Health Outpatient Program Resources: Staff costs $ 810,000 Building & equipment rental 50,000 Utilities 25,000 Supplies 10,000 Other costs 5,000 Total Costs $900,000 (line 1) Total hours of service: 15,000 (line 2) Cost per hour or unit cost $60 (line 1/ line 2)
14 What are the ingredients of unit of service costs? What are common costs associated with behavioral health treatment? Actual costs: Costs incurred by the organization in delivering services to clients Projected (or budgeted) costs: Costs expected to happen sometime in the future based on expected levels of activity Benchmark costs: Costs of comparable high-performing organization used as a guide to evaluate one s own performance
15 Section 2 What two key questions does unit of service costing answer?
16 Unit Costing Helps You Answer Two Fundamental Questions What do you plan to do with your substance abuse treatment resources? How many units of service did you plan to produce with your resources and at what planned cost? What did you actually do with your substance treatment resources? How many actual units of service did you produce with your given resources and at what actual cost?
17 Unit of Service Costs are Required Both questions require the calculation of cost per unit of service or unit of service costs Planned resource costs / planned levels of activity = Planned unit of service cost Actual resource costs / actual levels of activity = Actual unit of service cost
18 Section 3 How do key performance indicators like unit of service costs help you respond to important management questions?
19 Managing Behavioral Health Organizations Managing behavioral health organizations is a complex process requiring periodic assessments of performance. One important tool used to reflect a measure of performance is identified as a Key Performance Indicator (KPI) Key Performance Indicators (KPI) are comprehensive measurements, generally expressed in ratios or percentages, with upper and lower boundary targets
20 Key Performance Indicators The dashboard of your automobile, for example, has several Key Performance Indicators including the gas gauge, oil pressure warning light, the water temperature gauge and the speedometer. With these four key indicators, you can manage driving your automobile from point A to point B. Most key performance indicators are simply diagnostic they tell you something needs attention. However, some are prescriptive also they tell you something needs attention and what needs to be done.
21 Key Performance Indicators Is the oil pressure warning light diagnostic and prescriptive, or only diagnostic? It s only diagnostic, because it doesn t tell you what you need to do to remedy your problem (repair an oil leak or simply add a quart of oil ). How about the fuel gauge? The fuel gauge, on the other hand, is both diagnostic and prescriptive. It tells you that you better go to a fuel station and fill up your tank before you run out of fuel.
22 Key Performance Indicators How about the speedometer? Is it both prescriptive and diagnostic? It is prescriptive by telling you must accelerate in order to reach your destination. It is diagnostic by revealing how quickly you are moving toward your destination (namely, miles per hour). Let s now relate Key Performance Indicators to substance abuse treatment.
KPI in Behavioral Health Treatment 23 Key Performance Indicators can reveal answers to two important questions in delivering substance abuse treatment services: How much of the service treatment capacity is planned to be used? How much of the actual service treatment capacity was used to produce services? Let s review these two questions in light of behavioral health treatment services.
KPI in Behavioral Health Treatment 24 Let s focus the first question of How much of a residential treatment program capacity is planned to be used by Green Hills, Inc.? The planned use of bed days for a residential program is calculated by dividing the planned days of use by the total capacity in bed days. Example of Capacity: 365 operating days x 10 beds = 3,650 total days of capacity Example of Planned Utilization of Capacity: 365 operating days x 9 beds to be filled daily = 3285 day of planned utilization Example of Planning Utilization Percentage: 3285/ 3650 = 90% Example of Planned Annual Bed Day Usage:.9 x 3650 = 3285 (same as the above planned utilization of capacity)
KPI in Behavioral Health Treatment 25 Generally, a residential program would like to use 100% of its capacity, but often it is hard to achieve. It may be difficult to keep 100% occupancy of beds, for example, because of cleaning, repairs, delays in admission or unanticipated discharges. The planned level percentage is a Key Performance Indicator A larger single gender therapeutic community might try to keep this key performance indicator in the high 90% while a smaller program might try for 70%; in both cases values lower than the suggested target are diagnostic of potential planning or operating problems.
KPI in Behavioral Health Treatment 26 Again, let s focus the first question How much of an outpatient program treatment capacity is planned to be used by Green Hills, Inc.? The planned use of staff hours in an outpatient program is calculated by dividing the planned hours of service by the total capacity in staff hours on a yearly basis (to accommodate holidays, vacations and illness). Example of capacity: 10 professional staff x 40 hours per week x 48 weeks per year = 19,200 hours in direct service Example of planned utilization: 10 professional staff x 5 hours per day x 5 days a week x 48 weeks = 12,000 hour of rendered service Example of planned utilization: 12,000 hours / 19,200 hours = 62.5% utilization.
KPI in Behavioral Health Treatment 27 Similarly in an outpatient program, time for completing clinical records, staff meetings and training as well as client no-shows or staff personal emergencies may prevent 100% use of the staff hours planned for service. While a target of 100% is not possible, a good program may shoot for 70% or higher. The planned level percentage is a Key Performance Indicator. Values lower than the target are diagnostic of potential planning or operational problems to be investigated (such as no feedback on productivity or no performance standards).
28 Reviewing KPI: Planned vs. Actual Use of Capacity In the following graph, we see Green Hills, Inc. is planning to use 90% of its partial hospitalization capacity and 62.5% of its outpatient program capacity. The actual utilization for each program is 80% and 50%, respectively. The programs missed the targets by 10% and 12.5%, respectively. Good managers will now begin to ask questions about what happened? What is behind our shortfall? (Or, if the variances where the other way around, what is behind the overutilization?)
KPI: Planned vs. Actual Use of 29 Capacity 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% -20.0% 90.0% 80.0% -10.0% Partial Hospital 62.5% 50.0% -12.5% Outpatient Planned Actual Variance
30 KPI in Behavioral Health Treatment After the resources are planned and the level of activity is envisioned for partial hospitalization, the planned unit of service cost can be computed or the planned cost per unit per partial hospitalization day. The planned unit of service cost now becomes a Key Performance Indicator operating as a target to be achieved in actual operations. Sample computation: Total planned program costs divided by total planned partial hospitalization days or $492,750 / 3285 = $150
31 KPI in Substance Abuse Treatment After the resources are planned and the level of activity is envisioned for the outpatient program, the planned unit of service cost can be computed or planned cost per unit for an outpatient hour of service. The planned unit cost now becomes a key performance indicator operating as a target to achieve in actual operations. Sample computation: Total planned program costs divided by total planned outpatient days or $600,000 / 12,000 = $50
KPI in Behavioral Health Treatment 32 The second question was How much of the actual service treatment capacity was used? The use of the service treatment capacity can be assessed by dividing the actual resources consumed in a service by the actual number of units of service produced to calculate the cost per unit of service or, more briefly, a unit cost.
KPI in Behavioral Health Treatment 33 Example: Partial Hospitalization Partial Hospitalization Program actual total costs divided by the actual total partial hospitalization days Sample computation: $600,000 / 3,000 = $200 cost per day or a unit cost of $200 Example: Outpatient Program Outpatient Program actual total costs divided by the actual total outpatient hours of service Sample computation: $660,000 / 11,000 = $60 cost per hour or a unit cost of $60.
34 KPI: Comparison of Planned vs. Actual Unit Costs Now planned and actual unit costs can be compared in the following graph. Planned and actual unit costs for partial hospitalization are $150 and $200, respectively, with a $50 cost overrun. Planned and actual unit costs for outpatient services are $50 and $60, respectively, with a $10 cost overrun. In both cases the costs were higher than expected and the productivity of services was lower than expected. Good managers will now share this information and begin to probe for the operating reasons behind the cost overruns and lower than expected productivity. (On the other hand, if costs were lower than expected or service production was higher than expected, managers would still seek explanations.)
KPI: Planned vs. Actual Unit Costs 35 $200 $200 $150 $150 $100 $50 $50 $60 Planned Actual Variance $0 ($10) ($50) ($50) Partial Hospital Outpatient
36 KPI Summary Table Program Variable: Planned Actual Variance Partial Hospitalization: Capacity Partial Hospitalization: Unit Cost 90% 80% -10% $150 $200 -$50 Outpatient: Capacity 62.5% 50% -12.5% Outpatient: Unit Cost $50 $60 -$10
KPI in Behavioral Health Treatment 37 High or low unit of service costs may be diagnostic and reveal problems with either costs or levels of service or both. Since unit cost is a important diagnostic Key Performance Indicator let s now focus on some of the other benefits of unit of service costing.
38 Section 4 What else can unit of service costing do for you?
39 The Clout of Unit Costs The cost per unit-of-service is a powerful summary of resource consumption and level of activity for a period of time (for example, annual cost per hour of individual outpatient service). Unit of service costs can be used to Set rates for purchasers of services Estimate costs in contract negotiations Highlight inappropriate costs or service productivity problems (as shown in the key performance indicators) Maintain financial control over the organization Benchmark against the unit costs of high performing organizations Perform cost-outcome and cost-effectiveness reviews.
40 Set Rates to Bill Clients and Third-Party Payers Most substance abuse providers are required to develop a rate schedule for the varied services it offers. These schedules identify what the provider charges for a specific service (for example, a partial hospitalization day or an hour of outpatient service) Rates for services should be based on the cost of services that require the development of unit of service (or unit costs).
41 Estimate Costs in Contract Negotiations Rates for services covered by contracts should be based on the cost of services. If contracting for services exists, the contract rate should be a function of the unit-of-service cost times the estimated utilization of services anticipated for a targeted population. Unit-of-service costs (especially budgeted or projected ones) are fundamental financial tools as a provider assumes any risk in meeting the needs of a covered population.
42 Highlight Inappropriate Costs or Service Productivity Problems When dividing the costs by the units of service there may be, for example, excessive costs (in the numerator) or poor productivity (in the denominator) that could produce unacceptable unit costs. Show how a reduction in the numerator (costs) can illustrate the effects of excessive resource consumption Show how an increase in the denominator (units of service) the effects of increased production.]
43 Highlight Inappropriate Costs or Service Productivity Problems In the Green Hills Substance Abuse Program the total outpatient program costs were $1,000,000 and the total delivered hours were 12,500 What is the baseline cost per delivered hour? ($1,000,000 / 12,500 = $80) The unit cost is $80 per hour. What is the cost per delivered hour if the total costs are reduced by $100,000? ($900,000 / 12,500 = $72) The unit cost is reduced from $80 to $72. A 10% reduction in costs reduces the cost per unit by 10%. What is the cost per delivered hour if the hours of service are increased to 15,000 (using the baseline costs of $1,000,000)? ($1,000,000 / 15,000 = $66.67) The unit cost is reduced from $80 to $67.67. A 20% increase in the units of production [(15,000 12,500)/12,500 =.20 or 20%)] results in a 16.7% reduction in the unit cost [($80 - $67.67)/ $80 =.167 or 16.7%)].
44 Maintain Financial Control By comparing budgeted unit costs to actual unit costs managers possess a straightforward, yet potent and understandable, internal key performance indicator. Comparison of actual results to the budget is the underpinning of financial control.
45 Maintain Financial Control The ideal ratio would be 1.0 (actual cost divided by budgeted cost = 1.0). Variations from 1.0 can be red flags requiring managerial attention: If the actual cost exceeds the budget, the ratio is greater than 1.0. If the actual costs is below the budget, the ratio is less than 1.0
46 Maintain Financial Control If the actual unit cost is $150 and the budgeted unit cost is $100, then the ratio is $150/$100 or 1.5 or 150% of the budget probably a red flag! If the actual unit cost is $90 and the budgeted unit cost is $100 the ratio is.9 or 90% of budget ($90/$100 =.9 = 90%) probably a red flag! Both favorable and unfavorable variances should be investigated. While over-spending may be problematic, under-spending may reveal a failure to make needed expenditures (for example, routine maintenance).
47 Benchmark Against High Performing Organizations A provider organization can move to superior performance by measuring its performance against the best-in-class providers, determining how the best-in-class achieves its cost level and then using the information to set targets, strategies, and implementation.
48 Perform Cost-Outcome and Cost-Effectiveness Reviews The resources consumed for a particular target group may be estimated with the unit-of-service costs along with levels of service (unit-of-service cost x number of units received = resources consumed).
49 Perform Cost-Outcome and Cost-Effectiveness Reviews Estimated costs can be linked to the target group outcomes to produce a cost-outcome analysis. Comparisons of cost outcomes enable program managers (and funders) to select the most cost-effective services or programs.
50 Section 5 What variables relate to unit of service cost?
51 Relationships between Variables The notion of relationships extends to each of substance abuse programs, especially in a multiservice organization where the programs are part of a continuum of care. Costs Quality Volume Rates
52 Relationships between Variables The costs incurred for a service delivery unit (SDU) The quality of care provided by a service delivery unit (SDU) The volume of service needed to deliver at the established reimbursement rate to achieve a breakeven of costs and revenues or an over-recovery of costs (namely, profit) The rate (revenues) received from the purchaser for providing that service The role of staff and staff education.
53 Costs Staff Turnover More Expensive Replacement Personnel Costs = Unit Costs Staff Turnover Less Expensive Replacement Personnel Costs = Unit Costs
54 Quality Hiring or Credentialed Staff or Supplies = Unit Costs
55 Volume If client volume, then Unit Costs If reimbursement rate doesn t change Cash Flow Borrowing Unit Costs
56 Rates If reimbursement rate doesn t equal unit costs of service Cash Flow Borrowing Unit Costs If client volume, then Unit Costs and if reimbursement rate doesn t change Cash Flow Borrowing Unit Costs
57 Involving Staff Clinical staff and program managers are critical to creating and documenting your service definitions, a basic step in the cost finding process. They also may offer valuable input into choosing an appropriate unit for measuring units of service.
58 Involving Staff Finance managers and staff should educate program managers and staff and foster the latter to buy into the unit costing process. Finance managers help program managers and staff understand how knowing unit costs for individual services can benefit them and their organization. Result: motivate program staff to take the time to document how much time they spend in providing each of the direct services offered by the organization (the denominator in the unit costing equation).
59 Section 6 Your assessment
60 Next Steps Now you should be familiar with unit of service costs and how to enhance your organization s performance using unit of service costs. Feel free to review any of the previous sections of this course prior to taking the quiz.
61 Question 1 The unit of service cost of a service is the cost of resources consumed in a service divided by A. The number of staff members in the service B. The number of clients seen during a year. C. The level of activity (units as defined in the service) in the service. D. The planned treatment capacity.
62 Question 2 Most Key Performance Indicators (KPIs) are A. Prescriptive B. Diagnostic C. Both equally prescriptive and diagnostic D. Neither prescriptive nor diagnostic
63 Question 3 For which of the following would a behavioral health program manager find unit of service cost determination most useful? A. Setting rates for clients and third-party payers. B. Estimating cost in contract negotiations. C. Highlighting excessive costs or service productivity problems. D. Benchmarking against high performing organizations.
64 Question 4 If the total costs of a behavioral program s outpatient services was $500,000 and the unit of service costs was $50, then the number of units of service must be A. 1,000. B. 10,000. C. 100,000. D. Some other value.
65 Question 5 Maintaining financial control of an organization using unit of service costs requires the A. Comparison of budgeted unit costs to actual unit costs. B. Addition of budgeted unit and actual unit costs. C. Subtraction of budgeted units costs from actual unit costs. D. Multiplication of actual units costs times actual levels of service.
66 Question 6 Which of the following statements is the most accurate regarding key performance indicator analysis? A. Few organizations can benefit from the use of key performance indicator analysis. B. Some organizations, but not behavioral health organizations can benefit from key performance indicator analysis. C. Only manufacturing firms can benefit from key performance indicator analysis. D. Nearly all organizations can benefit from key performance indicator analysis.
67 Question 7 Which of the following statements is FALSE? A. Planned services treatment capacity divided by planned units of service produces the planned utilization of capacity. B. Planned unit of service costs are usually calculated before actual unit of service costs. C. The planned level of utilization is a key performance indicator. D. Total planned program costs divided by total planned units of service produces a planned unit of service cost.
68 Question 8 Actual unit costs are calculated by dividing A. Planned resource costs by planned levels of activity. B. Actual resource costs by planned levels of activity. C. Planned resources by actual levels of activity. D. Actual resources by actual levels of activity.
69 Question 9 If a behavioral health treatment program had 15 professional staff members who were expected to work 48 weeks per year (assuming a 40 hour work week of 5 8-hour days) and were each expected to produce 5 hours of service per day during a normal work week of 5 days each, what is the planned utilization as a percentage of treatment capacity? A. 12.5% B. 62.5% C. 100% D. 160%
70 Question 10 A behavioral health program planned to utilize 90% of its partial hospitalization capacity. If the actual utilization was 95%, what might be the underlying explanation of the difference? A. The demand for services was lower than expected. B. The program managers reduced the caseload for their clinicians. C. The length of stay for existing and newly admitted clients was longer than expected. D. Admissions and discharges were constant (level).
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