Topics
More on Analytics

Why days cash on hand is so important for hospitals

But experts warn this key liquidity metric is no magic number.

Changes in payment trends brought about by the Affordable Care Act, technology expenditures related to electronic health records, and fluctuations in cash flow from higher deductibles and patient copays have all impacted the need for readily available cash. Changes in payment trends brought about by the Affordable Care Act, technology expenditures related to electronic health records, and fluctuations in cash flow from higher deductibles and patient copays have all impacted the need for readily available cash.

Days cash on hand is an important measure of hospital liquidity. An organization needs a certain amount to meet the requirement of lenders, rating agencies and others. But if DCOH is too high, the impact on hospital finances could be detrimental, as cash is not deployed to areas of the business generating higher returns.

"DCOH is just one of the things lenders and others look at," said Richard L. Gundling, vice president of healthcare financial management practices at the Healthcare Financial Management Association. "The metrics should be seen as guidelines and are not the same for each hospital. There are no magic numbers and your cash levels depend largely on your strategies, your market, and your opportunities."

[Also: Daughters of Charity only has 20 days cash on hand]

Organizations usually balance DCOH needs by tying their strategic plans to their capital plan and budgets, and projecting how much cash is needed. Given the current uncertainties in the industry, there is now a need for more cash on hand than in the past.

HIMSS20 Digital

Learn on-demand, earn credit, find products and solutions. Get Started >>

Changes in payment trends brought about by the Affordable Care Act, technology expenditures related to electronic health records, and fluctuations in cash flow from higher deductibles and patient copays have all impacted the need for readily available cash. These transformations continue as healthcare gears up for possible payment delays in October 2015, when ICD-10 is implemented.

However, it is generally not a good management practice to focus on only one financial metric.

[Also: Cash on hand: You'll need it for ICD-10]

"While DCOH is important, we don't view any one metric as a goal within itself, but manage it along with other important operational, liquidity and balance sheet metrics to meet our institutional commitments," said Dina Richard, senior vice president-treasury and chief investment officer at Trinity Health in Livonia, Michigan. "The metrics underlying the AA category are aligned with our organizational goals of becoming a people-centered health system. Achieving them will ensure we're successful in providing charity care, serving our communities and demonstrating consistent financial performance."

Like Healthcare Finance on Facebook

According to Richard, Trinity Health examines their operational performance, debt portfolio and investment portfolio as a first cut. Then cash requirements are formulated to best serve those needs, while leaving the health system well positioned to take advantage of other opportunities as they arise.

Cash levels are not just a matter of how much money is available to an organization, but also how the world is moving around the facility. In other words, what are the hospital's strategies relative to what is going on in the marketplace in real time? Both Richard and Gundling agree that this is not as simple as tossing a figure into a formula and calling it a day.

Every hospital or healthcare enterprise will have a different balance of these factors. And there is one other consideration often overlooked, but still important when assessing cash needs.

"All organizations have different levels of risk tolerance," Gundling said. "DCOH is a function of what the financial leadership is comfortable with. The ideal level is what makes it possible for them sleep soundly at night."

Twitter: @HFNewsTweet