Capio's financial model is based on the interaction between quality, productivity and financial results, and creates an understanding of the basis for good healthcare and high quality.
In line with its operating model – the Capio Model – the Group’s organization is decentralized and built around patients and the clinical teams that take care of them. To mirror activities and responsibility in a simple and clear way, Capio’s operational and financial reporting is built hand in hand with the Group’s organization and takes its starting point as close to the patients as possible.
In order to support the Group’s strategies and managers at all levels, Capio has developed a financial model that links relevant KPIs with their corresponding financial impact. As the model is based on the relation between quality, productivity and financial statements, the financial model supports the Group’s understanding of what creates good healthcare and increased quality. This allows Capio to continuously refine its healthcare processes, enabling improved quality in healthcare provided to patients.
Quality drives productivity and growth
Focused quality work is part of Capio’s corporate culture and is integrated into its normal working processes. In order to measure and evaluate how quality evolves over time, Capio has introduced a common language and measurement methods that provide the underlying structure and enable a systematic quality approach. QPIs are used to measure quality performance and quality reporting is an important tool used in assessing the quality of healthcare provided to patients. The regular use of QPIs enables continuous improvements, which in turn positively impact production and productivity in healthcare delivery.
Production, productivity and resources
Capio’s financial model is based on two operational metrics: production and productivity. Production is the Group’s measure of how much healthcare is provided in a given period of time. Productivity is the Group’s measure of how well healthcare is provided, quality wise, as good healthcare can be provided to more patients. For example, by providing patients with good information and practicing Modern Medicine with quicker recovery after surgery, average length of stay (“AVLOS”) can be reduced. Reduced AVLOS leads to increased productivity, as more patients can be treated with the same amount of resources.
Combined, production and productivity relate to the resources used in the production of healthcare. Thus, productivity is also a measure of how efficiently both human and physical resources are used in the production of healthcare. Capio’s financial model, accordingly, measures financial results, as well as serving as a way of understanding the underlying operating factors impacting financial results.
The Group uses KPIs to measure production, productivity and resources generated and used in healthcare activities, and these non-financial key figures provide important information to Capio’s local managers in their daily operations. The income statement together with the key figures (KPIs) and quality indicators (QPIs) helps managers at all levels to analyze and influence the business development in the right direction medically as well as financially.
Production generates net sales
Capio divides production into different types of treatments and patient flows, and on an aggregate level, inpatient and outpatient activities are separately tracked. Examples of production KPIs include number of inpatients and number of outpatients. Production is Capio’s key operational measure linked to net sales, as net sales represent remuneration received as compensation for healthcare services provided to Capio’s patients. The change in net sales between periods is driven partly by organic sales growth, which is split between price and volume growth, and partly by structural changes, such as acquisitions, divestments and exchange rate fluctuations.
Resources used impact direct costs and administrative expenses
Resources used in the production of healthcare are divided into the same categories as production, and include number of staff hours (expressed as number of full-time equivalents on average during the year, and divided into, for example, doctors and other clinical staff), number of theater rooms and number of available beds. Capio’s income statement is functional, and the use of resources linked to the Group’s provision of healthcare services is reflected in direct costs in the income statement.
Direct costs reflect salaries for doctors and other clinical staff, material and services costs, including, for example, costs for radiology and laboratory, as well as other direct costs, such as rent of facilities and support services.
Other direct costs also include costs for infrastructure in the form of number of beds, wards and theatres and medical equipment (maintenance cost and depreciation). As the majority of direct costs are directly linked to the level of production, the ratio of direct costs to net sales, measured as a percentage, is a key internal reporting metric used to measure the productivity of Capio’s operations.
Administrative expenses (overhead costs) reflect the infrastructure that the Group needs to run its operations but that is not linked directly to the provision of healthcare. Salaries for care unit managers, IT infrastructure and human resources costs are examples of such costs. As the Group’s administrative expenses are largely fixed, an increase in the volume of healthcare provided generally has a direct, positive impact on the Group’s results of operations and operating margins.
Productivity drives profitability
Productivity is the key operational measure linked to the Group’s gross result (and gross margin which reflects gross result expressed as a percentage of net sales) and reflects the efficiency of the Group’s healthcare delivery both in terms of quality and in terms of resources used. KPIs for productivity include AVLOS, ward and theater utilization and patient visits per day.
Capio has, for example, improved its quality in performing hip and knee surgeries in recent years, which has reduced AVLOS and the rates of revision surgery, which freed up existing resources to serve additional patients. For example, in France, the share of uncomplicated hip and knee prosthesis surgeries where the patient is discharged within four days has increased from 2 percent in 2010 to 44 percent in 2015. In 2015 Capio performed 450 hip and knee replacements in day surgery.
Productivity improvements the last couple of years have made it possible for the Group to treat more patients with its existing resources. Given its relatively fixed cost base, the Group’s margins (gross margins and operating margins) have benefitted from operational leverage driven through increased quality and productivity. To further improve productivity, the Group has also continued to undertake and initiate various restructuring and operational initiatives. These initiatives have been organized around providing healthcare at the most efficient care level (the LEON principle), through better management.
In France, restructuring measures included relocating certain businesses from their current locations (both owned and externally leased) to new locations in order to create purpose-built facilities that allowed for separate patient flows between inpatients and outpatients. Operations were also merged in certain sites in France in order to create centers of excellence, which have enabled the Group to improve quality and drive more efficient use of resources.
The Group’s income statement is presented in a functional format in order to measure the productivity from the use of resources in relation to the production of healthcare. To financially measure productivity, direct costs are subtracted from net sales in order to obtain the Group’s gross result (gross margin), thereafter administrative expenses (overhead costs) are subtracted from gross result in order to obtain the Group’s operating result (operating margin). Gross result is the Group’s key measure for productivity, indicating whether the Group performs healthcare operations efficiently. Operating result provides information as to whether the Group’s operating structure is efficient.
Non-operational parts of the income statement include amortization on surplus values, restructuring and other non-recurring items and acquisition related costs, interest income, interest expense, other financial items and income taxes.
The Group’s balance sheet is also presented in an operational format, tracking capital employed, net debt and equity, in order to track and manage capital needs and resources throughout the Group. The Group’s overall goal for operating capital management is to strike a balance between optimizing operating capital in order to generate cash flows, while making appropriate investments in order to grow the business. The Group’s active operating capital management integrates all parts of the organization and requires clear and efficient processes, such as the sales process (registration and coding of visits, invoicing and collection of receivables) and salary process (from time registration to salary payment).
Related to the Group’s operational balance sheet, the Group also presents cash flow in an operational format, which provides a reconciliation of movements in net debt. The Group seeks to optimize cash flows in order to enable Capio to pursue opportunities to expand its business or strengthen its financial position.