Using downstream revenue in a performance measurement system

Abstract

Using data from a health-care setting that employs outreach clinics to generate revenue at the system hospital, I analyze the properties of downstream revenue (defined as revenue that arises from further servicing and supplying the customer after the initial sale) for use as a performance measure. I find the measure to be congruent because the magnitude of the downstream revenue is substantial. The measure also is sensitive to managerial actions because choices such as location and specialty affect the magnitude and timing of subsequent revenue. However, the measure has low precision. The measure is noisy because there is a nontrivial lag in realizing the downstream revenue, and the downstream revenue is obtained in many departments at the parent hospital. Moreover, both the lag and the spread of revenue among departments vary by specialty. Thus, while potentially useful, firms must overcome significant measurement issues when attempting to use a measure of downstream revenue as a performance indicator. © CAAA.