NEW Custom Benchmark Report for Subscribing Members: Percent Administration
Hospitals are often criticized for high administrative costs. Yet these expenses are necessary to support effective and efficient care delivery. Understanding how administrative costs are allocated relative to peers provides both justification for such expenses and insight into potential opportunities.
Hospitals with a substantially higher proportion of administrative expenses relative to peers may benefit from adjusting their operating models; for example, through outsourcing services, participating in a shared service models, adjusting management spans of control, or investing in technology. Those with substantially lower expenses may consider the sustainability of effective administrative functions or if investments in productivity are adequate.
Indicator Definition and Comparison
The Percent of Administration Costs report begins with an overall measure of Administrative costs as a proportion of Direct Care Costs; this measure is then broken down into individual Administrative services.
Administrative services include General Administration (Executive Offices, Utilization Management, Risk Management, Quality Assurance, etc.), Finance, Human Resources, Information Systems Support, Communications, and Emergency Preparedness.
BIG’s definition for Percent of Administrative Costs is the net expenses of Administrative services represented as a proportion of an organization’s Direct Care Costs. The notion is that hospitals with similar Direct Care Costs will generally require a similar level of Administrative services to support care delivery.
We often see Administrative Costs expressed as a proportion of Total Operating Costs. This approach, however, distorts the measure by including Administrative costs in both the numerator and denominator. BIG calculates Administrative costs as a proportion of Direct Care Costs instead so that Administrative costs are solely in the numerator.
BIG also performs the following adjustments to improve comparability of true expenses:
- Exclusion of Internal Recoveries: Organizations can use internal recovery accounts to allocate administrative expenses to clinical areas. This can be beneficial to improve internal accountability for Administrative support and also in case costing. However, allocations are not performed in a consistent manner across hospitals; some hospitals do not use internal recovery accounts at all. These differences lead to inaccurate benchmarking results. Therefore, internal recovery accounts are netted to zero across all hospitals so that Administrative expenses are complete and differences in allocation approaches are removed.
- Exclusion of Depreciation: Similar to recoveries, the allocation of depreciation is not performed in a consistent manner across hospitals and is therefore excluded from the denominator of the indicator calculation.
Functional Centre Reporting
The Percent of Administration Cost report provides a breakdown of performance by lower-level Functional Centres as reported by the organization. This allows organizations to understand the drivers of performance and how specific areas (General Administration, Finance, Human Resources, Information Systems Support, Communications, and Emergency Preparedness), compare to peers.
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 Payroll within the overall Finance framework allows a finer breakdown of expenses and improves the potential management information gained from benchmarking.
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 might 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 or in-house 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 Support, might be reflective of a strategic investment intended to improve performance in other functional areas. A staff scheduling system may have been implemented to improve clerical efficiency in patient care areas, improve the efficiency of payroll operations, better understanding of available personnel, and more consistent worked hours across clinical. 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 spike in legal expenses may be buried in the Administrative Functional Centre. The BIG Query Tool allows you 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 indicator.
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.