Are you challenged by how many new investment opportunities exist for perioperative services? In an increasingly complex and poor reimbursement environment, where do you invest? The OR has historically been the revenue engine for most hospitals but unfortunately, the cost engine as well. With many practitioners evaluating new technology and supplies that may improve surgical outcomes, such as minimally invasive procedures touted with shortened lengths of stay or improved pain control, it's little wonder the OR manager may feel overwhelmed.
A step-by-step approach
The first step in evaluating an investment opportunity is to determine the type and amount of information that's available to complete an accurate and useful analysis. The finance manager traditionally works with the OR manager to collect and analyze available information to estimate incremental revenue and expenses related to an initiative.
The first step is to identify incremental revenue, which normally starts with examining the volume of incremental procedures, such as surgeries. Volume is then translated into allowable or appropriate charges. Charges then need to be reviewed to determine the amount of net payment the hospital would expect to receive for these services. The result is the value of incremental net revenue.
The next step includes identifying expenses associated with the investment. These expenses are typically divided into direct-variable and direct-fixed costs. Direct-variable cost examples include direct patient-care providers and the cost of supplies and drugs. Direct-fixed costs include management staff, utilities, and other fixed expenses that don't vary with volume changes. Calculation of direct margin for the investment equals incremental net revenue less incremental variable and fixed costs.
Once you've calculated the direct margin, you can compare it to what your organization requires as its hurdle rate or targeted percentage of direct margin. This helps define the margin necessary to cover an organization's indirect costs.
Sample initiative
Take a look at the following scenario: A request has been made by the neurosurgery department to add a new surgical procedure that will help in the treatment for patients who suffer from Parkinson disease. This new procedure will use an implantable stimulator that reduces the impact of symptoms. The surgeon champion describes the procedure as primarily outpatient; however, the implant costs approximately $15,000 per procedure. The surgeon provides the OR manager with the types of patients making up the current surgical patient population.
As the OR manager, what should your first step be? With the assistance of the surgeon champion, a list of patients who qualify for this new procedure is developed. The list should include: the patient's complete name, medical record number, procedure description, and date of surgery or service. The finance manager will help collect the following: (1) coding information, including codes assigned; (2) diagnosis and procedure description; (3) surgeon of record; and (4) financials that include total charge, costs (direct, indirect, fixed, and variable), total reimbursement, and profit.
Review the information with the surgeon asking for validation that procedure descriptions and current procedural terminology codes match expectations of the new procedure. Next, estimate volume of new procedures to be performed annually. Clarity between new versus current business is critical. What number of existing cases may be converted to the new procedure? The combination will represent the total number of procedures performed.
With assistance from a physician champion, determine what portion of patients are inpatient hospitalizations and which are outpatient procedures. Include identification of any shift from the inpatient to outpatient setting, shortening of length of stay, and lastly, resulting changes in utilization of support services (for example, radiology, lab, physical therapy, and occupational therapy).
Financial evaluation represents using the information collected; however, the information must reflect the new program as accurately as possible. Will the implant be reimbursable or add cost? What's the current profit and loss statement? Were there write-off accounts incorporated into the data? Are your primary insurance carriers reimbursing for the new implant and if not, what's the impact of this new cost? Write-off accounts should be excluded for the purposes of this review. Will this procedure reduce length of stay? If so, calculate the cost per day within the current patient population data using that figure as your proxy for final cost comparisons.
The following are additional areas of concern:
- If the patient moves from the inpatient to outpatient setting you must know whether the procedure is approved in both settings. What potential reimbursement changes from this change may occur? The move of existing procedures from one setting to another can mean reduced indirect cost coverage if new procedures don't exist.
- Fewer resources used by support departments may also create less volume, which negatively affects reimbursement as well as indirect cost.
- If insurance carriers won't support the proposed change and recognize the procedure, then your analysis must show the cost of new supplies as additional cost.
Calculation
Combining direct-variable and direct-fixed costs minus estimated reimbursement will provide you with your existing product line's profitability. Profitability is then current profitability minus new costs, such as the implant, plus any gains from improved length of stay. A reasonable rule of thumb for measurement of value of a new program is whether it can cover all direct-variable costs and at least 25% or more of direct-fixed costs. This can vary with each organization.
Making informed decisions
Resource constraints aren't a new phenomenon in healthcare. Changes in reimbursement and Medicare and Medicaid adjustments have meant close and continuous scrutiny of how resources are allocated. New programs, such as pay for performance, and transparency in hospital quality reporting are pressuring healthcare facilities to provide the highest quality of care while remaining cost competitive. The ability to make the most informed decisions regarding your limited resources will help ensure that your organization continues to provide services that create value for patients, providers, and organizations.
