Why Do Hospitals Need Effective Hospital Administrators

Public hospitals are negligent in their finances

Despite the much-described death of clinics, German hospitals, especially public hospitals, have not yet organized their processes efficiently enough to counteract the cost pressure in the industry. This is the result of an analysis of the key figures of over 100 German hospitals by PwC. According to this, expenditure on personnel and materials in public clinics averaged 95 percent of sales in 2015.

Not only the private but also the church hospitals worked much more efficiently here. For them, the cost of personnel and materials was only 88 and 89 percent, respectively. In other words, out of 1,000 euros for treating patients, 50 euros remained in public houses, for example to carry out maintenance work. In the case of non-public houses, this was more than 100 euros on average.

Since state investment finance has long since ceased to cover the actual investment needs, the hospitals have to finance a large proportion of the necessary investments themselves. The company's own funds are nowhere near sufficient for this and there is a high level of dependence on external donors. Against this background, it seems plausible that the public hospitals financed around 43 percent of their business with outside capital (bank or shareholder loans). For comparison: the private clinics managed with 32.6 percent, the church clinics with 31.2 percent.

Given this high level of dependency on financial resources, it is all the more astonishing that hospitals do not put their own cash management at the top of their list of priorities for upcoming management tasks. Key figures that provide information about this deficiency are rarely analyzed or the management does not approach them strategically.

PwC partner Michael Burkhart, Head of Healthcare & Pharma, alludes to the “Days Sales Outstanding” (DSO) - the key figure that describes how long it takes hospital administrations to cash in on their claims against health insurers close. While the average value for German companies is currently around 33 days, the DSO in the hospital sector is significantly higher at around 48 days. In public hospitals, this figure is almost 60 days.

“At first glance it might look undramatic. In fact, this key figure hides an essential explanation why many public hospitals repeatedly run into liquidity problems and are dependent on loans from banks or shareholders. "

Michael Burkhart, Head of Healthcare & Pharma

Extrapolated to the population of approved general hospitals in Germany, the hospitals reported in their balance sheets at the end of 2015 a total of around 5.3 billion euros in outstanding payments from delays in payment. If one looks at the individual hospital, it foregoes an average annual liquidity of approx. 2.7 million euros due to its own deficits in the accounting process. In this way, the hospitals give the health insurers an interest-free loan, whereby they refinance themselves with interest-bearing banks or shareholders.

If the DSO for hospitals is above the national average for all companies, this may be due to a later payment by the health insurance companies. The different periods of time with different carriers show a homemade problem. "In fact, the underlying processes are still so manual and slow that the invoices are regularly created too late," says Burkhart. The problem with this is that the sales made have already been correctly recorded in the accounts, but the invoices have not yet been created due to a lack of various circumstances and are therefore not yet available to the health insurance companies.
The conclusion of the PwC expert is: “Our impression is that the second step is often taken before the first. Construction or renovation is taking place everywhere, and in many places municipal bodies are joining forces to form larger associations. In principle, it makes sense to think about larger units. However, too little attention is paid to optimizing internal processes in administration and implementing a key figure system in administration.

Further results of the study at a glance:

  • Negative equity ratio: while the private hospitals achieved a return on equity of 14.6 percent, the church hospitals achieved 6.4 percent. In contrast, the public posted losses again, which was reflected in a negative return of minus 0.9 percent.
  • Different DSO among the sponsors: For private and church clinics, the DSO is on average between 46 and 48 days. In the case of public hospitals, the bills were paid on average after 53 days and in university hospitals only after 62 days.
  • Maximum occupancy: With an occupancy of around 80 percent, the occupancy rate in public hospitals is highest. The private clinics improved compared to 2014 from around 74 percent to around 77 percent, the occupancy rate of church houses fell from almost 79 percent to around 74 percent.