The combined performance of a hospital’s service lines contributes to its overall financial health. That’s why effective service line evaluation is key to ensuring long-term hospital viability.
What is service line evaluation?
Service line evaluation involves a comprehensive analysis of each department’s performance, expenses, growth potential, and overall contribution to the hospital’s financial health. This process typically involves hospital leaders, financial experts, and relevant stakeholders.
Unlike a rigid annual practice, service line evaluation should be a dynamic and ongoing process intertwined with budget cycles and strategic planning.
How to complete a service line evaluation
While smaller hospitals may lack a robust cost accounting system used by healthcare systems for real-time service line assessment, it’s still possible to calculate contribution margin of service lines by looking at its costs and revenues while factoring in how the service impacts community health and complements other services within the hospital.
For instance, essential services like the emergency department may run at a loss or break even, but other services like surgery or radiology need to contribute positively for the hospital to remain sustainable.
Benefits of service line evaluation:
A thorough analysis helps executives understand the financial impact of cutting, continuing or expanding a service line. This involves understanding reimbursement implications, potential loss of revenue, capital investments, impact on community health, and downstream consequences to other services. Benefits include:
1. Improved Decision Making: Boards and hospital leadership can make informed strategic decisions based on concrete data rather than assumptions or anecdotes. Whether it’s expanding a service line or reallocating resources, service line analysis ensures these decisions are rooted in a thorough understanding of each service’s financial viability and community need.
2. Optimized Capital Investments: Service line evaluation helps hospitals determine where to allocate capital investments to support services and optimal contributions. Whether adding new capabilities or upgrading existing infrastructure, hospitals can weigh the financial benefits against the costs to make prudent investment decisions.
3. Financial Sustainability: By identifying underperforming service lines and addressing financial warning signs proactively, hospital leadership can ensure long-term financial sustainability. This involves not only cutting non-viable services but also exploring opportunities for revenue growth and cost optimization.
To demonstrate how this works, consider a hospital contemplating a new oncology center. A thorough service line evaluation includes assessing the existing demand, projecting potential revenue streams, determining providers for care, and estimating the capital investment required. Armed with this data, the hospital’s board can confidently approve the initiative, knowing it aligns with the hospital’s strategic goals and financial health.
Considerations for rural hospitals
Service line evaluation is particularly important for rural hospitals with limited resources. The process is helpful when considering a variety of practical considerations. The analysis helps executives prioritize investment in rural hospital service line development by:
1. Identifying the greatest needs by primary care providers
2. Measuring market demand for “local” services
3. Determining the hospital’s capability to deliver and/or coordinate the care
4. Calculating what is financially feasible
In conclusion, service line evaluation is not just a financial exercise; it’s a strategic imperative for hospitals. By adopting best practices and leveraging data-driven insights, hospitals can optimize their service offerings, drive financial sustainability, and ultimately deliver better care to their communities.
Michael Morgan
Michael Morgan is SVP Strategic Analysis of Community Hospital Corporation.
