An Introduction To Understanding, Articulating, and Managing Your Wound Clinic’s Finances

Having a good grasp of your wound clinic’s finances can improve both patient care and enhance revenue. This author discusses what drives revenue and expenses, how to manage your clinic’s financial performance, and what metrics can improve your balance sheet.

Financial metrics to wound clinic and hospital staff are like vital signs to patients and providers: Whether or not you track and manage these metrics, they exist and impact your program’s viability. In fact, it has been this author’s experience that in general, clinical and financial wound clinic performance go hand in hand (see a related Today’s Wound Clinic video at https://tinyurl.com/qka9ggl ). Even when a clinic’s finances are healthy—as they often are—if management is unable to articulate the impact to those who control the resources, the program is not likely to reach its full potential.

There are a variety of potential reasons that administrators, clinicians, and other wound care stakeholders might hesitate, or even underperform, in this regard. Yet ideally, a lack of understanding or inability to articulate them should not be one of them.

Getting a Grasp on Your Financials and Frequency
of Reporting

One of the most important financial tools for assessing and managing a wound care program is the income statement, also referred to as a profit and loss statement (P&L). If you manage one clinic, then you would have one P&L. If you manage multiple clinics, then ideally you would have one P&L for each, as well as an “umbrella” or “roll-up” P&L, which combines the performance of all programs into a single document. Likewise, wound care-related service lines such as home health care may have separate breakdowns of wound care versus other service types provided. Regardless, the goal is to have granular (specific) reports, in addition to the high level summaries. While the high level versions can save time to get a snapshot of performance, the detailed breakdowns are crucial for identifying specific problems or opportunities for improvement.

If your wound program is part of a hospital or healthcare system, your chief financial officer (CFO), director/manager of finance, or financial analyst can likely help you access those P&L reports. If the reports are commingled with another department’s budget (such as diabetes clinic, physical therapy, surgery, education, ancillary services, etc.), these colleagues may be able to help separate reports or to create a new reporting structure for the following budget year. This may be on a normal calendar year (Jan. 1 through Dec. 31), or may begin and end mid-year, depending on how the accounting and reporting calendar is set up.

For wound care clinics working with an outsourced management company, the company can likely assist with this process as well. The management company also may be able to provide some benchmarking data and best practices from other similar programs (in size, geography, etc.) within their network.

In addition to the P&L, you ideally can get ahold of the collections report for your service line, too. This information can help you identify whether major differences between the amounts billed versus collected, which could be due to factors such as:

• Payer mix

• Documentation, coding, and billing

• Processes such as benefit checks and prior authorizations

• The way electronic medical records (EMR) and billing software are mapped (set up) to handle certain situations

Once you have the P&L (and ideally the collections report) on a regular—ideally monthly—basis, you or your designee should review each line and compare it to prior months’ and prior years’. Typically, there will be a column for the current vs. the prior year, as well as a column comparing “variance,” which focuses on the differences between any given two periods. 

Keep in mind that in accounting and finance, a reduction, subtraction or loss is typically written in parentheses. So for example, if you had revenues from reimbursed products totaling $10,000 in December 2018, and those same revenues were only $3,000 in December 2019, the variance will probably be reported as, “($7,000),” not “-$7,000,” but the meaning is the same (“a reduction or loss of $7,000 compared to the same period one year ago). Such variances are frequently also reported in percentages (also using the parentheses notation to show a reduction). So in the above example, the ($7,000) may also be written as (70.0%), since it represents a 70% reduction compared to December 2018. 

Likewise, had the revenues from reimbursed products increased from $10,000 to $17,500 since last year, then it would likely be noted as a variance of $7,500 (without the parentheses since it is an increase, not a reduction). If a percentage variance is listed, it would be 75.0% (without parentheses, since it is also an increase, not a reduction).

As you compare significant financial variances, note what has changed, why, and what might be done to improve it (more details below). There is little cause for concern if the dollar amounts are small, such as an increase in office supplies from $20 to $100 in a month, even though that represents a 500% increase. Also, try to pay particular attention to trends which continue over longer periods moreso than short-term “blips,” as those are often more likely to have a large impact on the future.

Revenue Drivers

In the U.S., most revenue is going to be driven by services. At the time of this writing, the following general categories are likely to be the most prominent for a typical wound care program:

• Consultations (evaluation and management [E&M], etc.)

• Procedures (debridements, cultures/biopsies, application of compression therapy, etc.)

• Hyperbaric oxygen therapy (HBOT), vascular testing, and procedures (e.g., vein ablation), though these do not exist in all wound care clinics.

• Product-related revenues, such as cellular- and/or tissue-based products (CTPs), single-use negative pressure wound therapy (NPWT), offloading devices, and in some cases (and for certain payers), dressings. Some or all of these may also be bundled into the above categories, depending on the situation

Some of the key considerations to be looking for when reviewing revenues include:

• Are there major fluctuations in any of those categories, and if so, why?

• Were there changes to your provider staff (panel) during the reporting period?

• Might seasonal fluctuations have had a role (inclement weather, or arrival/departure of “snowbirds” from your area)?

• If you manage multiple programs, are there significant differences between the two?

• Are all of the correct revenues showing up? For example, this author has seen wound clinics whose revenues from CTPs and other products by default go to a materials management, surgical services, or other separate department, causing the expense burden (see below) to be reflected on the wound clinic’s budget, without the associated revenue benefit, thus making the wound care program look less profitable than it should be. (Usually, a simple re-mapping can be done by the finance/accounting team to fix this.)

Expense Drivers

Almost without exception, the key expenses for a U.S. wound care center will be the following (they may be called different names, depending on how the budget is set up):

• Staffing: Salaries plus benefits (may also break down overtime pay separately)

• Supplies: May be broken down into reimbursable versus non-reimbursable

• Management fees/contractors: Particularly if you have a third party management company

• Rent/overhead: Depending on whether you are in a hospital versus free-standing facility, and how your use of the space is accounted for

Of the above, the ones you usually have the most control over are the first two, staffing and supplies. Like with revenues, you especially want to be looking for correlations over time, such as:

• What is the impact of hiring (or losing) staff on expenses, such as onboarding, overtime for other staff, etc.?

• Did switching to new products (or eliminating old ones) have a measurable impact on expenses?

There are likely smaller (in terms of the total amount spent) yet potentially impactful expense items, too, including allocations for training and certifications, attendance at trade shows, capital equipment, and digital health tools such as specialty equipment and electronic medical records (EMR). For example, a relatively small investment in such tools might show significant reductions in larger items such as staffing or supplies expense.

Still, be careful about viewing expense fluctuations in a bubble. Looking for metrics and uncovering correlations among revenues, expenses, and clinical/operational/patient satisfaction outcomes is where the most value can usually be unlocked.

Creating Useful Metrics and Uncovering Correlations

As important as it is to keep a finger on the pulse of and explore the changes in revenues and expenses (and as a result, profits) of a wound care program, perhaps the most important—and interesting—insights come from tracking metrics and correlations.

There are literally hundreds—even thousands—of useful ratios that you can turn into metrics to better understand and explain the performance and needs of your wound program. So which ones should you focus on and track over time? The answer depends on the specific insights and challenges you and your team (and the hospital or health system’s leadership) are looking to solve. Examples include (note how you can mix financial, operational, and clinical metrics together):

• Ratio of revenue increases to staffing expense increases: If you earn $5 for every additional $1 spent on staff over time, it can make a good case for why additional staff might be a worthwhile use of funds.

• Chart average supply cost per new patient (or per patient encounter): Total supply costs divided by new patient admissions (or encounters) can suggest whether changes to formularies have an impact over time, among other things.

• Correlation between healing rates and staffing expense: May imply (or disprove), for example, that greater investment in staff leads to better ability and time to spend case managing patients, leading to improved outcomes.

Conclusion

The ability to comprehend and communicate the financial performance of a wound care program, as well as its impact on both clinical and non-clinical trends, is often underappreciated. However, for those involved in the administration and management of wound care services, this competency is no less important than understanding the science or proper indications for a new medical technology used in the wound clinic. Communicating and visualizing such concepts to clinical and non-wound-focused leadership is crucial to managing performance, expectations, and securing resources for improvement. 

This article provided some very basic approaches to doing so, though many other resources, and even emerging certification programs, exist for building and nurturing that competency, which can ultimately help a wound care program—including administrators, clinicians, and patients—receive and optimize adequate resources.

Rafael Mazuz is Managing Director of Diligence Wound Care Global LLC (https://diligencewcg.com), a leading advisory firm providing executives, investors, and clinicians confidence in their wound care business decisions. He also serves on the board of directors for Tissue Analytics, an integrated digital health platform for wound, skin, and burn stakeholders, and is a Today’s Wound Clinic board member. He can be reached at rafael@diligencewcg.com.