An Introduction to Benchmarking Administrative Functional Areas

Administrative areas are fairly consistent across organizations and, with minor exceptions, their functions are typically not dependent on the type of patient population that a hospital serves. Therefore, even hospitals with very acute or specialty populations can benchmark their administrative areas against a broad range of peers.

The most common categories of Administrative and Support Functional Centres include: Executive Offices, Finance and Decision Support, Human Resources, Information Systems Support, Housekeeping, Laundry and Linen, Plant Operations and Maintenance, Health Records, and Food Services.

The following sections outline the steps to identify opportunities for Administrative efficiencies within your organization.

Selecting Your Peers
(also see An Introduction to Peer Selection for Benchmarking)

When benchmarking clinical Functional Centres, comparisons are often to organizations that have similar patient volumes. Other bases of comparison, however, may be more relevant for administrative areas. For example, organizations with a similar level of Direct Care Costs may be more appropriate when looking at areas such as executive functions, finance or IT. The notion is that hospitals with similar Direct Care Costs will generally require a similar level of administrative services to support their functions. For administrative Functional Centres that use a more specific workload measure (FTEs, Net Square Metres, KG of laundry, etc.) a more specific peer group can be established.

For Member Hospitals, the Benchmarking Survey results are presented based on two peer groups: acute and non-acute hospitals. An updated version of the BIG Benchmarking Tool (due out in the fall of 2020) will provide additional peer group options for Member hospitals.

Subscribing Members have access to our Peer Group Management tool. This tool allows Subscribing Members to create any number of custom peer groups for benchmarking analyses. Distinct peer groups can be used for each functional area that you are investigating to ensure you are comparing your hospital to the most relevant set of peers.

Within the BIG tools, under Reference Reports, we have included a report that provides Workload by Functional Centre for all Member hospitals. This report provides the activity (workload) that is used to calculate indicators by each Functional Centre. You can use this report to identify peers that have similar activity to your hospital for the particular Functional Centre you are investigating.

Hospitals are encouraged to collect and report data in the Trial Balance at the level of detail that best provides useful information for internal decisions. For example, reporting at the detailed level of Finance – Payroll within the overall Finance framework allows for better comparison of similar administrative areas with peers where they exist and improves the potential management information gained from benchmarking.

Identifying your Top Opportunities

If there is a specific Functional Centre of interest, the most direct approach is to navigate directly to the graphical summary for that functional area. However, in many instances you may be wondering which administrative areas show the greatest savings opportunity so that you can focus your investigation.

Subscribing Members have access to the Functional Centre Summary Report that provides a quick look at potential opportunities for each Functional Centre. This report can be used as a starting point to understand which administrative areas you should focus on. The final tab in the report identifies the Net Savings Opportunity for each Functional Centre. The downloadable version breaks out the opportunity into FTEs and supplies savings (referred to as Variable Non-Labour Non-Drug Costs).

Once you’ve selected the areas that show material savings opportunity, the next step is to better understand the underlying data that is driving the opportunity in each Functional Centre.

Understanding the Drivers of Savings Opportunities

The Functional Centre Detail Reports provide insight to how savings opportunities are calculated. The report includes trends on staffing and supplies expenses, and the range of peer performance relative to your organization’s performance.

The calculation of savings opportunity is based on what resources could be saved if your organization’s performance was equivalent to either the Median (50th percentile) or Best Quartile (25th percentile) performance of your selected peer group. To use an example, the performance indicator for Finance is calculated as the Net Cost of the Finance Department represented as a proportion of the organization’s Total Direct Care Costs.

Suppose an organization’s expenditure on the Finance Department represents 3.2% of the organization’s Total Direct Care Costs, and the Median of its peers represents 2.3% of Total Direct Care Costs. The organization’s potential Net Costs are calculated as the benchmark of 2.3% of Total Direct Care Costs, and the savings opportunity is the difference between the actual expenditure of 3.2% and the potential expenditure of 2.3% on the Finance Department.

It is important to note that the Median or Best Quartile performance benchmarks are not theoretical “best practice” targets, but rather reflect the actual performance of the hospitals selected in your peer group. The key message is that if there is a savings potential identified, it is based on the actual performance of hospitals in your peer group.

Considerations in Analysis

The BIG calculations of savings potentials are meant to be directional, and to point an organization towards opportunities for further investigation. Considerations when analyzing Administrative functional centres include:

• Contracted-Out Services: Many types of administrative services can be contracted-out to external agencies. Expenses related to contracted-out services are captured within the supplies’ expenses of each Functional Centre and are therefore incorporated into the benchmarking calculations of Net Costs. Areas with substantial contracted-out services will have higher supplies expenses, and areas with substantial in-house services will have higher FTE expenses. When analyzing opportunities, consider the trend of investments in contracted-out services within a Functional Centre and whether the Net Costs have experienced anticipated improvement.
• Strategic Investments: Organizations may have chosen to make strategic investments in specific administrative areas. High expenditure in a particular administrative area, for example Information Systems, might be reflective of a strategic investment. Benchmarking results that identify a higher expenditure than peers may well be acceptable given such a strategic choice. This may be particularly true if there have been IT investments that are intended to result in efficiencies in other functional areas. For example, a staff scheduling system may have been implemented that may result in more consistent worked hours per patient day in clinical areas and may also result in a more efficient payroll function; or an HRIS investment may provide better attendance management. If such outcomes were intended to be measurable results of such IT investments, benchmarking can help identify if such outcomes were actually achieved. Consider examining whether investments in administrative areas have demonstrated the anticipated improvements in other areas.
• One-Time Occurrences: An organization may experience one-time expenses that skew overall benchmarking results. For example, a one-time legal settlement may be buried in the Administrative Services Functional Centre resulting in a savings opportunity that doesn’t truly exist. It is possible to use the Query Tool to investigate the underlying accounts that roll-up to Functional Centres to better understand what is driving the overall summary expenditure. This will help identify the magnitude of unique occurrences within the context of the overall savings opportunity.
• Reporting Choices: Differences in reporting across organizations can impact benchmarking and skew the comparability of results. The BIG Benchmarking approach adjusts for anticipated reporting differences by creating unique functional centres. For example, insurance costs are moved to a unique functional centre to isolate and standardize the reporting of this significant cost item since hospitals report this expense in different functional centres. In practice, not all differences can be anticipated and recognized. To ensure useful analysis it is necessary to understand operating contexts and reporting choices.

There may be many such considerations to take into account when looking at your benchmarking results. The numerical results are only the first step in benchmarking. Understanding the detailed operations of your individual functional areas is essential to interpreting results.

We would encourage your comments on such considerations that you found most helpful or problematic.