A Critical Review of Financial

Measures as Reported in the Ontario

Hospital Balanced Scorecard
John Parkinson, Peter Tsasis, and Marcela Porporato

For Ontario hospitals in Canada, the Financial Performance and Condition measures in the Ontario
hospital balanced scorecard are especially of interest since in the foreseeable future, they may be linked
to provincial government funding decisions. However, we find that these measures lack valuable infor-
mation on key attributes that affect organizational performance. We suggest changes that focus on key
drivers of performance and reflect the operational realities of Ontario hospitals. Key words: hospital
balanced scorecard, financial health, drivers of performance.

O
VER the years, Canadian hospi-
tals have been under pressure to
reduce costs and improve the qual-
ity of patient care. In response, in 1995,
the Canadian Institute for Health Informa-
tion along with the Ontario Hospital Asso-
ciation developed a hospital scorecard to be
used in evaluating performance of Ontario
hospitals. Four performance perspectives
have been identified on the latest scorecard,
namely:
1. Patient satisfaction;
2. Financial performance and condition;
3. Clinical utilization and outcomes; and
4. System integration and change.1
Since its inception in 1995, the Ontario
Hospital Balanced Scorecard has been pre-
dominantly used by hospitals as an external
accountability report, rather than as a strate-
gic management tool as advocated in the
literature.2 This may be due to the fact that in
Ontario, the provincial government provides
approximately 85 percent of hospital fund-
ing and is responsible for capital expansion,
bed allocation, and adoption of new tech-
nology decisions. Furthermore, government
funding decisions are made at the end of each
fiscal year, making it difficult for hospital
administrators to conduct long-term plan-
ning in the absence of an informed under-
standing of strategic priorities for the years
ahead.
Nevertheless, the Ontario Hospital Bal-
anced Scorecard is a positive move towards
enhancing the value of relevant information
reporting on key attributes that affect hospi-
tal performance and condition. The financial
performance and condition measures on the
hospital balanced scorecard are especially of
interest, since it is highly likely that in the
foreseeable future, they may become more
pervasive and more closely linked with hos-
pital funding decisions.3
In this article, we discuss and critique the
financial performance and condition mea-
sures used in the Ontario hospital score-
card, which leads us to suggest several
changes.
John Parkinson, PhD, is a Professor and Director of
the School of Administrative Studies at York University,
Toronto, Ontario, Canada.
Peter Tsasis, PhD, is an Assistant Professor at the
School of Administrative Studies & the School of
Health Policy and Management at York University,
Toronto, Ontario, Canada.
Marcela Porporato, PhD, is an Assistant Professor at
the School of Administrative Studies at York University,
Toronto, Ontario, Canada.
J Health Care Finance 2007;34(2):48–56
c 2007 Aspen Publishers, Inc.


48
 Review of Financial Measures as Reported in the Ontario Hospital Balanced Scorecard
Financial Measures in the Ontario
Hospital Balanced Scorecard:
What Can They Tell Us?
The Financial Performance and Condition
perspective of the Ontario hospital balanced
scorecard refers to a hospital’s financial
health, efficiency, management practices,
and human resource allocation. Nine mea-
sures are reported in the section of the bal-
anced scorecard, namely: total margin; unit
cost performance; corporate services; days
in inventory; current ratio; working capital;
equipment expenditure; nursing care hours;
and patient care hours. We will discuss each
one in detail.
Total Margin and Definition of Surplus
The extent to which a hospital’s revenue
and support exceeds its expenses or the ex-
tent to which expenses exceed revenue and
support in a given fiscal year is referred
to as the total margin value on the hospi-
tal balanced scorecard. However, amortiza-
tion of building and depreciation of service
equipment is excluded from the calculations.
By focusing on a total margin value before
amortization and depreciation expense, hos-
pitals short-change themselves.
When the buildings and service equip-
ment are no longer functional, there will be
no resources available to replace them. In
addition, if the cash-based reporting system
results in a failure to accrue for repairs that
have been deferred, the future will be bur-
dened with the misdeeds of the past. This
is a flaw in the total margin calculation and
thus is not a good indicator of good fis-
cal management. As a result, a positive to-
tal margin value does not necessarily reflect
good management of resources. In some in-
49
stances, it may indicate that the hospital has
not provided adequate services or made the
necessary changes needed for day-to-day op-
erations and future replacements.
On the other hand, a hospital may budget
for a deficit because it has no choice than to
do so if it is to continue to provide services
to an increasing number of patients over the
fiscal year. This has occurred in some hos-
pitals in Ontario, and in turn, they have used
their deficits to leverage more dollars out of
the provincial government.
Therefore, the existence of a surplus or
deficit is not necessarily the best measure of
financial performance in the context of On-
tario hospitals. After all, achieving financial
success is not the primary goal of Ontario
hospitals. Perhaps, a better measure would
have been a variance measure between the
actual versus budgeted amounts, whatever
the planned outcome might have been. For
instance, a hospital that reports a deficit when
it had projected a surplus has failed in its fi-
nancial objective, in the same way as a hospi-
tal that reports a surplus when it has projected
a deficit.
Furthermore, a second issue that arises is
the way a surplus is calculated to arrive at
a total margin value. As previously noted,
to arrive at a total margin value, deprecia-
tion and amortization expense is excluded.
In general, such an adjustment is part of
cash-flow calculations reflected in the indi-
rect method of calculating cash flow state-
ments. Under the indirect method, cash flow
from operations is computed by adjusting
net income for all non-cash revenues and ex-
penses; non-operating items included in net
income; and non-cash changes in operating
assets and liabilities. As a result, an attempt
is made to move away from the accrual basis
of accounting and towards a cash basis, while
50 JOURNAL OF HEALTH CARE FINANCE/WINTER 2007
changes in working capital are not taken into
consideration. This creates some confusion
as to whether the balanced scorecard is in-
tended to measure income under the accrual
basis, in which case the exclusion of depre-
ciation and amortization is inappropriate, or
whether the balanced scorecard is intended
to measure cash flow, in which case the label
“total margin” is incorrect and the adjust-
ment is incomplete.
Perhaps the shift towards measuring cash
flow may be prompted by the fact that cash
flow is becoming more popular in financial
reporting, perhaps because of the mistrust
that may have been created in financial cir-
cles in the wake of scandals such as Enron,
WorldCom, Xerox, etc. Cash-flow reporting
may seem to be the option of choice on hospi-
tal scorecards, since cash flows are perceived
to be less vulnerable to management manipu-
lations and thus, more reliable as measures of
financial performance. However, their abil-
ity to predict financial failure in hospitals
has not been well documented. A hospital
that repeatedly reports a deficit in Ontario
runs the risk of having administrative con-
trol imposed on it by the provincial govern-
ment until financial control is restored. It is
therefore a surplus or deficit measure after
deduction of depreciation and amortization
that is of greater significance in predicting fi-
nancial successes or failures in Ontario hos-
pitals, and not necessarily cash flow.
In addition, it should be pointed out that
any surplus or deficit reported on the hospi-
tal balance scorecard, as a percentage of to-
tal revenue, creates some ambiguity when we
are comparing data among different size hos-
pitals. As an illustrative example, three hos-
pitals are considered in Figure 1: Almonte
General Hospital, a small regional hospi-
tal; Halton Healthcare Services Corporation,
a large regional hospital; and St. Joseph’s
Healthcare, a mid-to-large size teaching hos-
pital. Aside from the fact that all three
hospitals being considered classify in the
mid-range of financial performance on
the Ontario hospital balanced scorecard,
there are no further inferences that can
clearly be made from the surplus/deficit data
reported in Figure 1, Panel A.
A better way to represent hospital perfor-
mance may be to report the actual financial
surplus or deficit compared to the surplus
or deficit budgeted for the year. In addition,
the actual cumulative surplus value to date
should also be reported with the expecta-
tion that it should be generally positive but
close to zero. This will ensure that over time,
neither a deficit nor a surplus gets out of
hand, thus giving the organization the flex-
ibility to plan a surplus in one year and/or
a deficit in another year in such a way that
minor year to year perturbations can be man-
aged. As a result, financial success can be
measured by whether or not a hospital has
achieved what it intended to achieve, and
not through some inflexible and arbitrary
norm such as a handed down budget that
has no relevance to the strategic plan of the
hospital.
Unit Cost Performance
The second measure, unit cost perfor-
mance, reported on the financial perfor-
mance and condition section of the hospital
balanced scorecard focuses on the extent to
which a hospital’s actual cost per equivalent
weighted case differs from the expected cost
per equivalent weighted case as calculated
by the Ontario Joint Policy and Planning
Committee. It has been suggested that hospi-
tal average case weighted costs for hospital
Review of Financial Measures as Reported in the Ontario Hospital Balanced Scorecard 51

Figure 1. Financial Performance of Selected Ontario

Hospitals: 2000 to 2003
52 JOURNAL OF HEALTH CARE FINANCE/WINTER 2007
Figure 1. Financial Performance of Selected Ontario
Hospitals: 2000 to 2003 (Continued)
procedures be used as a benchmark in evalu-
ating hospital efficiency. One problem with
this is that some university teaching hospi-
tals house medical/research institutes such as
the Cardiac Institute of the Toronto General
Hospital and thus take on some of the most
challenging cases. This results in them hav-
ing a greater than average cost since their
case loads are not average and as a result
they may exhibit a greater number of patient
complications that may add to the actual cost
per case. We would agree that reporting ac-
tual cost per equivalent weighted case is of
importance, but we would also add that a
deviation from average does not necessarily
mean inefficient use of resources. A higher
than average cost may be justified or a lower
than average cost may be expected depend-
ing on how patient case categories in ques-
tion are classified in calculating unit cost
performance. Publicly available data are not
available to report in this domain.
Corporate Service Measure
The corporate service measure on the hos-
pital balanced scorecard is intended to mea-
sure how much a hospital spends in the area
of administrative services relative to its total
operating expenses. However, even though
hospital financial accounting systems report
expenditures into a number of useful cate-
gories such as salaries; wages and benefits;
medical and surgical supplies; drugs, etc., it
is insufficient in isolating corporate admin-
istrative costs from the total operating costs.
As a result, the corporate service measure
does not truly reflect the administrative over-
head which it is intended to measure.
Days in Inventory
The measure, days in inventory, is im-
portant in the profit sector where the dollar
value of inventory may be a large proportion
of corporate assets and as a result, holding
too much inventory on-hand ties up money
that might otherwise be available for other
purposes.
In a hospital setting, where inventory has
a low absolute dollar value and where the
cost of an “out of stock” situation may result
in a life-threatening event, the measure has a
 Review of Financial Measures as Reported in the Ontario Hospital Balanced Scorecard
different interpretation. If we were to look at
the inventory to revenue ratio, we would see
that any reduction in the ratio over time in a
hospital setting does not necessarily reflect
better inventory control, given the fact that
patient demand on medical supplies fluctu-
ates over time. Thus, the measure, days in in-
ventory, is not useful in measuring efficiency
in this context. Publicly available data are
presented in Figure 1, Panel B.
Current Ratio and Working Capital
Current ratio and working capital are dis-
cussed together since they are conceptually
similar. Current ratio is the ratio of current
assets to current liabilities while working
capital is current assets less current liabil-
ities. Both measures are of importance for
the profit sector where insufficient liquidity
over time is indicative of corporate failure.
However, liquidity is not an issue for On-
tario hospitals. It only becomes an issue in
the extreme case where the hospital is not
able to pay its debts when they come due.
Since Ontario hospitals typically have sub-
stantial assets and a large debt capacity,
their ability to borrow funds is not compro-
mised. Publicly available data are presented
in Figure 1, Panel C.
On the other hand, one should note that
a hospital’s inability to achieve a balanced
budget is of greater importance than its liq-
uidity. It is the surplus or deficit of the
hospital’s operating budget that determines
whether or not a hospital can survive in-
dependently, that is, without government
intervention.
Equipment Expenditure
This measure calculates the total ex-
penses related to the acquisition and use of
53
equipment and thus is an indicator of the ex-
tent to which a hospital is investing in the
renewal of its equipment. It is an appropri-
ate measure for the hospital balanced score-
card since it singles the extent to which the
organization is investing in new equipment
and technology. Publicly available data are
not available to report in this area; however,
proxy measures are reported in Figure 1,
Panel D.
Nursing Care Hours and Patient
Care Hours
Nursing care hours are recorded as the per-
centage of nursing hours spent on patient
care, as opposed to time spent in adminis-
tration activities, holidays, sick leave, ed-
ucation leave, maternity leave, etc. Patient
care hours are recorded as the percentage of
all hospital workers’ hours for staff available
to carry out activities that directly relate to
patient care. Both of these measures focus
on the extent to which health care providers
spend time on direct patient care. There is
no doubt that they are important measures.
However, they are not financial indicators
and may be best placed elsewhere on the
hospital balanced scorecard and not in the
financial performance and condition section.
Discussion
As the Ontario hospital balanced score-
card is becoming more pervasive in its use in
acute care hospitals, so is the likelihood that
it will be used by the provincial government
for hospital funding decisions. Although it is
not yet used as the basis for funding of hos-
pital budgets, it is already used for the distri-
bution of marginal funding among hospitals.
Under the existing system of hospital fund-
ing (block funding model) a hospital is given
54 JOURNAL OF HEALTH CARE FINANCE/WINTER 2007
a lump sum of money based on the hospital’s
previous year budget allocation. For these
reasons, we have critically reviewed the fi-
nancial performance and condition sections
of the hospital balanced scorecard, pointing
out any weaknesses and strengths in the con-
text of Ontario hospitals.
What appear to be insufficiently repre-
sented on the Ontario hospital balanced
scorecard are the financial dimensions of de-
velopment. Crude as it may be, growth in
funding would probably be a relatively good
measure, along with the existing measure on
expenditures on new equipment. In addition,
Baker and Pink4 have proposed that growth
in a hospital’s foundation can be used as a
measure of hospital prosperity. We agree that
it is a relevant measure. However, it has a lim-
ited focus and may not illuminate the whole
financial picture.
Overall, the hospital balanced scorecard
proposed by Baker and Pink5 focuses on
three objectives. First it focuses on survival,
which measures surplus or deficit for the
year, compared to the budgeted surplus or
deficit, and cumulative surplus or deficit to
date. It also focuses on success, which mea-
sures actual cost per equivalent weighted
case, compared to peer group average. Fi-
nally, it focuses on prosperity, which mea-
sures total expenses related to the acquisition
and use of equipment, and year to year per-
cent increase in total revenue. In our opinion,
these objectives seem appropriate for mea-
suring financial performance and condition
for Ontario hospitals. In contrast, the On-
tario hospital balanced scorecard provides
only a single measure in the financial di-
mension of development. As a result, we
propose that the Ontario hospital balanced
scorecard be modified to include Baker and
Pink’s6 three objectives as they are relevant
to the financial performance and condition
perspective of Ontario hospitals.
As for the appropriate number of perspec-
tives and measures that should be included
on a hospital balanced scorecard, we can
turn to Debusk, Brown, and Killough’s7 re-
search on the subject. Debusk, Brown and
Killough claim that the number of perspec-
tives in a performance measurement sys-
tem depends on the organizational strategy
as a response to the competitive threat and
economic conditions that the organization
is facing. Although the research was con-
ducted in the profit economic sector, its find-
ings are generalizable to the health care
sector.8 If we assume that hospitals in On-
tario have more complex strategies than or-
ganizations in the private sector, then this
would drive a need for a greater number
of reporting categories in their balanced
scorecards.
Furthermore, the health care environ-
ment is characterized by growth and change
in technology and health care population
needs. The Canadian population is increas-
ing in diversity vis-à-vis its demographic,
cultural, and socio-economic composition.
Approaches to health care are also chang-
ing as attention is shifting from a focus on
treatment to a focus on wellness and disease.
Furthermore, there is an increased emphasis
towards an integrated approach to health
care, involving a range of health service or-
ganizations and health care professionals.
As a result, there is an increased level of
complexity and rapid change in the indus-
try requiring hospitals to constantly adapt.
This constant need to adapt to change re-
quires multiple performance criteria mea-
sures. However, one should be cautious not
to fall into the trap of creating measures
of little value. In general, measures on the
 Review of Financial Measures as Reported in the Ontario Hospital Balanced Scorecard 55

Figure 2. Proposed Changes to the Financial Performance and Condition Perspective

balanced scorecard need to enhance the
value of information on key attributes that
affect organizational performance.9 Consis-
tent with all these concerns, our study allows
us to make a set of concrete recommenda-
tions for the measures included in the Finan-
cial Performance and Condition perspective
of the Ontario Hospital Balanced Scorecard,
which are summarized in Figure 2.
Having to evaluate an extensive num-
ber of measures in a balanced scorecard
is extremely complex, and makes it diffi-
cult for managers to focus on any strategic
priorities.10 Limiting the number of mea-
sures and relating them to key drivers of
performance is key. It is useful to think
about this perspective around three key ar-
eas as suggested by Kaplan and Norton:11
cost incurred (to measure operational effi-
ciency), value created (to measure benefits
created to the patients), and legitimizing sup-
port (to provide measures that assure contin-
ued funding). However, the real challenge
is to recognize that what gets measured can
be managed, and what gets rewarded, gets
done.
56 JOURNAL OF HEALTH CARE FINANCE/WINTER 2007
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