Economic outcomes analysis from an ambulatory surgical center

Economic Outcomes Analysis from an Ambulatory Surgical Center In the competitive healthcare marketplace, foot surgeons are being placed under pressure to demonstrate the economic value of surgical care. The management methodology of "fiscal outcomes review" is one tool being used to evaluate such care. Initially developed for internal corporate management as an executive decision support system, the process is being used as an external cost control technique to "economically credential" providers of surgical care. Consequently, the economic outcomes analysis of a single surgical procedure represents a first attempt to gather, allocate, analyze, and interpret meaningful charge information relative to the podiatric Ambulatory Surgery Center setting. When compared with the traditional outpatient hospital setting, charge reductions are documented without compromising quality. The long-held belief that Ambulatory Surgery Center surgery is more efficient than traditional outpatient surgery, can then be corroborated. (The Journal of Foot and Ankle Surgery 35(6):544-549, 1996) Key words: SWOT analysis, critical path method, managerial accounting, fixed costs, variable costs, economic credentialing

David E. Marcinko, DPM, CPHQ, MBA1 Hope Rachel Hetico, RN, CPHQ, MHA2 The current healthcare imbroglio has induced a paradigm shift from the traditional retrospective fee-forservice (FIS) method of physician reimbursement to the more contemporary and prospective capitated healthcare system. As insurance payers such as preferred provider organizations (PPOs) and healthcare maintenance organizations (HMOs) attempt to control healthcare costs, physicians find themselves at increasing levels of economic and financial risk for services rendered, as well as needing to demonstrate cost-effective and quality care. This is especially important for Doctors of Podiatric Medicine (DPMs) who perform highly sophisticated, but nevertheless, elective foot surgery. With financial and accounting cost data as the ultimate proprietary information, such examinations are becoming increasingly important as the vehicle used to identify and perform SWOT (strengths, weaknesses, opportunities, and threats) marketing analysis in today's business-like medical care environment. Therefore, the purpose of this investigation was to perform a retrospective economic outcomes study focusing on the Ambulatory Surgical Center (ASC) milieu of the foot care market. Using a Harvard Business School case study model, we performed a charge accounting 1 President and Chief Executive Officer, MBA, Inc. Address correspondence to: Marcinko Business Associates, Inc., 5901 Wilbanks Drive, Norcross, GA 30092 2 Director, Clinical Outcomes Research Department, MBA, Inc. The Journal of Foot and Ankle Surgery 1067-2516/96/3506-0544$3.00/0 Copyright © 1996 by the American College of Foot and Ankle Surgeons

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analysis that can provide a baseline for similar ASCs facing the treble financial pressures of decreasing revenues, increasing costs, and dwindling volume due to managed care. This was then compared with the outpatient surgical department of a typical local community hospital as economic conclusions were recorded, both comparatively and individually. Inferential conclusions were then reported. Managerial Accounting Methodology

Accepting the assumption that financial instability is the ultimate business liability, ASC survival can be equated to the basic economic equation of Net Income = Revenue - Expenses. In the usual retail marketplace, income can be augmented by increasing price and/or volume, since pre-existing cost reductions are a given in the business community. In the FIS generation, an increase in service charges is possible and limited only by individual provider competition and not aggregate payer competition. In the competitive environment, this strategy is unacceptable, since price increase is of limited value in that most reimbursement schedules have switched to a fixed-dollar payment methodology, and cost shifting is no longer an acceptable strategy. Increasing patient unit volume has potential, but this depends on rates negotiated, as well as the nature, acuity, and quality of the care provided and by what type caregiver and in what venue. As hospitals are looked on as cost drivers (centers), rather than revenue

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producers, many managed care organizations (MCO) payment categories may make outpatient or same-day surgical admission unprofitable (1). On the expense side of the accounting equation, there are two components. First, are the traditional cost reduction methods of corporate downswing, restructuring, re-engineering, and other cost containment strategies designed to reduce both fixed and variable operational overhead. Fixed costs remain constant regardless of changes in level of medical activity, and variable costs are those that vary in direct proportion to changes in the level of activity. Unfortunately, addressing only this side of the equation without increasing revenues usually results in only a one-time charge reduction, since some baseline cost of business always remains (2). The second component of the accounting equation focuses on the efficiency in the way surgical care is delivered. For example, Table 1 illustrates the economic implications of hospital outpatient surgical resources consumed in a typical hallux valgus (bunion) repair procedure, based on the payment category. For those insured patients covered under a FIS or discounted FIS arrangement, the incentive is to acquire, maintain, and consume every patient resource possible. Under a per surgical case, fixed-dollar reimbursement based on the patient's diagnosis, the outpatient admission is still desirable, if medically justified, but with a fixed-dollar reimbursement based on diagnosis. Therefore, it is economically advantageous to reduce length of stay to outpatient status, if possible, but still consume as many resources as possible (3). Under the per treatment diem payment model, an outpatient admission is desirable, along with a longer length of stay, because it is during the later stage of hospitalization that the per diem rate begins to cover its costs. However, hospital denial is possible if the patient remains hospitalized longer than clinically necessary. The commonality of these categories, using our basic accounting equation, is the fact that no additional revenue is gained from additional resources (inputs) provided. In other words, when marginal costs (Me) (cost of producing one additional unit of service or product) exceed marginal benefits (MB) (revenue gained by producing one additional unit of service or product) additional revenues should not be pursued (MC > MB). However, decreasing costs will indirectly increase profits TABLE 1

Outpatient hospital incentives by payor class

Payor Category

Outpatient Admission

Resource Consumpt ion

F/S Discounted F/S Per surgical case Per treatment day

Increased Increased Increased Decreased

Increased Increased Decreased Decreased

through a greater contribution margin , which is defined as the amount remaining from service revenue after variable costs have been deducted. In other words, this approach first contributes to fixed expenses, and then toward profits for the relevant range (4).

Continuous Quality Improvement

Accounting numerics and raw data, regardless of etiology, are not informative until they are gathered, collated, interpreted, and disseminated. It is not enough to simply share data and highlight variances in care. Once this is done, information must be used to develop positive alternative structures for care. This is accomplished by empowering physician leaders, who , in tum, educate those staff members who will take responsibility for driving the process to improve outcomes of care. Others may be abandoned through a Darwinian derivation of business competition (5). The continuous quality improvement (CQI) areas, used for refinement, are listed in Table 2, and are not mutually exclusive, although each ASC must decide which tools will be most effective in meeting corporate objectives. As part of the CQI process, information sharing and comparing performance outcomes, both internally and externally, presents each physician and ASC the opportunity to evaluate their activities compared to those of their peers. Internal benchmarking and process improvement implies identification of the optimal performers for the selected procedure and uses them as models for the best demonstrated practice patterns. External benchmarking implies comparing selected outcomes to other ASCs in an effort to identify optimal treatment goals for the selected procedure. Once identified, techniques can be learned, taught, and adopted by other ASCs using the step-by-step process traditionally performed as part of a CQI program (6). Obviously, the comparison of a homogenous group of patients is needed to accurately interpret this type of comparative analysis, and one may need to apply some type of case-mix, severity index, or risk adjustment modifiers to validate conclusions. However, the solitary Current ProTABLE 2

• • • .• • •

Areas for continuous quality improvement (CQI)

Physician education and information sharing Benchmarking and process improvement Utilization review and case management Guidelines, criteria, and policies and procedures Critical pathway methods and algorithms Outcomes management and financial incentives

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cedural Terminology (CPT) No. 282963 procedure leaves only a marginal need for change adjustments in the benchmarking process. On the other hand, utilization review or case management provides a real-time opportunity to effect change through the three-step process of presurgical, concurrent, and retrospective review. Guidelines, criteria, policies, and procedures can then be adopted in an effort to reduce unnecessary variations in care for providing a reference standard for each procedure or "event" or "encounter" (6). Using a two-step process, guideline suggestions can then be: 1) developed internally, and 2) supported by so-called national care standards. Until now, texts such as the Comprehensive Textbook of Hallux Abducto Valgus Reconstruction provided some structure for a single surgical event. Increasingly, care trails, algorithms, or critical path methods (CPM) developed by physician consensus may be used as a framework for reducing variation in patients moving through an ASC system in an uncomplicated fashion (7). It is important to keep in mind however, that the more paths, subsets, or decision points that exist, fewer patients will complete the ASC course on the actual pathway. Moreover, while there is no one set standard definition of a successful HAV surgical outcome, we usually refer to some combination of patient satisfaction, cost, and quality (i.e., function, alignment, pain amelioration, radiographs, toe purchase, or infection control). While several of these parameters are predisposed to patient (pain, function) and physician (alignment, scarification) subjectivity, others are more objectively quantified (infection, radiographs, range of motion, toe purchase); all are overlapping. Regardless of definition, there is a growing demand for aggregate economic bunion surgical outcome analysis holding surgeons more accountable for the fiscal result of surgical care. Finally, one of the most effective ways to change adverse behavior is to align financial incentives to physician and ASC behavior. While it may be considered illegal to directly reimburse physicians for efficient behavior, much of this is changing as medicine moves into a more integrated healthcare delivery system. Independent Physician Associations (IPAs), Medical Service Organizations (MSOs), Integrated Physician Networks (IPNs), Physicians Without Walls (PWWs), and various foundation models are being formed by physicians, combining them into a variety of legal structures enabling competition for managed care contracts. Fixeddollar payments go directly to the ASC, rather than to individual physician members. Further distributions after withholding pools or differential rate bonuses,' are 3 American Medical Assn., Physicians' Current Procedure Terminology, Chicago, Illinois, 1996.

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then distributed on a consistent measurement of physician "pro-rata" performance. Critical Path Method

Using the following model for data recapture, we performed a coordinated economic outcomes review analysis of a dedicated podiatric ASC, in Atlanta, Georgia. The first step involved the development of critical pathways for the selected surgical procedure using standard methodologies. In this case, the engineering concept of CPM was used to determine the cost, quality, and time aspects of the project, in particular, cost/time/quality, trade-offs. Using the CPM, activities can be crashed (expedited or performed) at extra cost to speed up completion time (i.e., stat laboratory values, fixation, no second surgical opinion, or precertification needed). It can identify a project's criticalpath, whose activities cannot be delayed (i.e., surgeon, anesthesia and radiographs, central supply), as well as the slack time that can be somewhat delayed without lengthening the project's completion time (i.e., antibiotics). Realistically, it is noted that critical activities in the relevant range foot surgery constitutes a small minority of total activities (8). Terminology

Project- HAV surgical reconstruction by means of CPT code No. 28296. Activity- Task required by the project that consumes economic resources, such as radiographs, laboratory tests, fixation devices, or central supply items. Event- Identifiable activity end state occurring at a particular point, such as anesthesia or OR time. Network- Combined activity (arcs) and events (nodes) that define the surgical procedure. Path- Series of connected activities between any two events in a network; or the entire process of examining, testing, scheduling, performing, and following the surgery. Critical- Activity, event, or path that, if adverse or absent, will hinder completion of the surgical project (i.e., aberrant laboratory value). For example, after having defined the project (CPT No. 28296), the next step was to make a standard template or network from which all critical pathways would be developed. A crucial component of the system was the ability to track pathway activities that could then be attributed to either physician, patient, or systemspecific variations (9). Finally, all project events con-

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eluded when the patient was discharged from immediate surgical service. An example of a modified HAV (No. 28296) CPM appears in Figure 1. ASC Charge Recapture Techniques

The second step in our study was to allow the CPM to select those cost drivers most suitable for financial process improvement. Economic priorities may be based on volume, cost, risk, specialty, procedure or any pertinent feature or institution, within its relevant range. In our case, the greatest opportunity for improvement rested in the most used surgical procedure with a potentially significant variation in care; hallux abducto valgus reconstruction. Next, a specific diagnostic procedure and all charge drivers were gathered from individual physicians, from the same ASe. We used CPT code No. 28296 (virgin distal first metatarsal osteotomy) as the unilateral solitary procedure. Table 3 lists this eight-tiered allocation process, in seven dollar amounts, and one time allotment, as applied to either an Austin or Reverdin first metatarsal osteotomy for HAV repair. Hospital Outpatient Surgery Data

Comparative hospital surgical department charges allocated exactly according to the above cost drivers were not available for this study. However, aggregate charge data per CPT (No. 28296) procedure from a local community hospital was reported to span the relevant range of $4,000 to $5,000 per outpatient procedure. Patterns and Trends

Although the above data may not be statistically significant, the following aggregate pattern and trend PatieotCodeName:

_

_ _ASA I

_ _ASA2

Activity

Pre-Surgiul

_ _ASA3

Intra-Operative

Referral

PbyBiclanI Palienl/ PIaDIetc.

PriorOJTe HandP

Physlcianl PalientJDPMlSurgeonletc.

Loboratory

_ _ASA4

_ _~

Post-Surgieal

PCPISurgeon/etc. CBC! SMAC! Dilf letc.

Antibimis Surgery

IVIPO and Agent Procedure (#28296)

FlXtItion

[Wire(s)or SCrew(s»)

API LatIObI Ycs or No

SaIisIU_ YcsorNo

FIGURE 1 Distal first metatarsal osteotomy critical pathway. H and P, history and physical examination; PCP, primary care physician; CSC, complete blood count; Diff, differential; IV, intravenous; PO, by mouth; Obi, oblique; Satis, satisfactory; Unsatis, Unsatisfactory.

information should be considered when evaluating the eight charge drivers represented in this case model. Of course, the use of other drivers is encouraged as individual circumstances dictate: 1. The average laboratory charge was $71. Pre-operative laboratory costs may be decreased in healthy patients and increased in non-ASA class I patients. In those cases of true medical necessity, MC = MB or MB > Me. 2. Pre-operative antibiosis was a component of the $126 pharmacy charge, which may be safely omitted since i.v. prophylaxis is not medically indicated under the model. Oral agents after surgery are also not recommended, as the potential for antibiotic resistance is likewise reduced. In this instance, the MC > MB. 3. Average anesthesia charges of $286 dollars may be reduced in the psychologically prepared patient, who can benefit from effective, but less expensive, anxiolytic methods of analgesia, such as nitrous oxide sedation and monitored anesthesia care. Relative to patient educational expenses, MB > MC in almost all cases. 4. Fixation (screws or K-wires) is a $9 average charge, which may be obviated, but marginal benefits likely supersede marginal costs if complications attributed to non-use result in excessive osteotomy motion (i.e., MB > MC). Fixation may, therefore, be considered cost effective relative to the charge expense incurred through use. 5. A slow surgeon (89-minute time driver) may not necessarily increase charges if equipment such as a tourniquet or electrocautery is not used to decrease operating room time. In other words, anatomical dissection and hand ligatures are less costly than these specific equipment expense drivers (i.e., MC > MB). 6. Average radiology charge of $77 may be reduced by taking two radiographic views (anteroposterior and lateral) after surgery, rather than three. Of course, in questionable cases, x-rays are an extraordinary value when comparable to potential dislocation complications (MB > MC). 7. The total central supply charges of $990 include such items as: sutures, suction tips, saw blades, blankets, drape sheets, catheters, irrigation fluids, and scrub materials among others, which may be carefully evaluated to further reduce expenses. Many of these supplies can be considered incidental and may be omitted, reduced or substituted without compromise (MC > MB). Of course, further charge allocations can be continued with increasing smaller drivers, as required. 8. The aggregate charges for an ASC osteotomy was about $1559. This compared to a $4000- to $5000VOLUME 35, NUMBER 6, 1996

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TABLE 3

Average charges per case by ASC: distal osteotomy

DR

A8

CD EF GH IJ Totals AVG.

Case #

Labs

Pharm

Anest

Fix

Time

Rad

2 4 5 5 14 30 6 1

150 358 231 540 856 2135 427 71

197 430 592 748 1810 3770 755 126

545 1029 1293 1925 3802 8594 1719 286

33 66 83 83 0 265 53 9

155 480 430 555 1045 2665 533 88

142 328 340 340 1148 2298 460 77

relevant range from a typical community hospital. Thus, hospital outpatient charges exceeded ASC charges in the examined economic model (MC »MB), all things being equal (ceterisparibus). Assessment

As the current healthcare business and industrial complex evolves, increasingly emphasis will be placed on data analysis and "economic outcomes" as a method to identify ways to improve both the inputs (costs) and outputs (quality) of care. Third-party payers will use this information in an effort to identify and selectively contract with efficient ASCs and purge the miscreants. Later, MCOs will use such data to evaluate physician performance profiles as a form of second-tier "economic credentialing" screen prior to ASC entry and continually monitoring performance as a barometer for continued participation in the plan. Although often counterintuitive, this credentialing will not be intuitive, but may take the form of the business model presented in this review. It is even conceivable that the DRG concept will be extended to ASCs and providers, alike, with fixed reimbursement distributed in whatever fashion deemed most cost effective. Conclusion

The medical (internal benchmarking) and business (external benchmarking) communities must work together to analyze patient response to treatment outcomes in an effort to more effectively manage the care process to optimize outcomes and reduce costs (10). Having access to the tools needed to derive this necessary information is vital to ASC and practice survival. One of these management tools, ''fiscal outcomes review," has been presented in this investigation model. Further economic research and implementation of related business information systems will only add value to surgical services rendered; to the advantage of patient, physician and payer, alike. In the future, additional research will be performed by our firm to further differentiate those procedures that are financially efficient, from those that are not. In like 548

C. Sup = Total ($)

2724 4260 5190 5190 12,340 29,704 5941 990

= 3790 = 6471 = 7729 = 8826 = 19,956 = 46,772 = 9354 = 1559

fashion, ASCs can be economically compared in an attempt to continually improve quality and reduce costs. The resulting information should prove invaluable when negotiating external pricing contracts with third-party payers or refining the cost accounting practices of officebased physicians. It will also serve as a business model for further research. Thus, a formerly restricted business tool may become incorporated into the healthcare industrial complex as the two fields of endeavor become increasingly blurred. Proprietary Information

The information contained in this report was encrypted to restrict unauthorized distribution. Unencrypted proprietary data, specific expense drivers, and individual charges with geographic variance may be obtained by contacting the firm. Other MBA services are protected by Copyright and other applicable laws. Acknowledgments

The authors acknowledge the assistance of Rhonda Thomson, RN, and Christine Evans, SC, in the production of this paper. Statistical Software

Statistical analysis may be performed using the ASP computer software package for business, economics and the social sciences." Disclaimer

The above CPM information is not to be construed as a standard of medical care in any instance. References

THE JOURNAL OF FOOT AND ANKLE SURGERY

1. Marcinko, D. E. Business negotiation skills in medicine. GPMA

News Magazine, February, 1996. 2. Garrison, R. R., Noreen, E. W. Managerial Accounting. R. Irwin, Inc., New York, 1994. 3. Rosenstein, A. R., Moore, K. Using data to improve clinical

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Published by DMC Software, Inc., New York, NY, 1994.

4. 5. 6.

7. 8. 9. 10.

effectiveness (An orthopedic case study). Healthcare Resource, 14:15-22, 1996. Marcinko, D. E. Fundamentals of healthcare economics. Podiatry Management. February, 1996. Marcinko, D. E. Podiatric outcomes management and performance improvement. Podiatric Products. May, 1996. Hetico, H. R. Quality improvement and medical utilization review. In Textbook and Atlas ofFoot Infections, edited by D. E. Marcinko, Mosby-Yearbook, Chicago, Fall, 1996. Marcinko, D. E. Comprehensive Textbook ofHallux Abducto Valgus Reconstruction. Mosby-Yearbook, Chicago, 1992. Bockrath, J. T. Contracts and the Legal Environment for Engineers and Architects, McGraw-Hill, Inc., New York, NY, 1995. Meredith, J. R., Mantel, S. J. Project Management. John Wiley and Sons, New York, 1996. Weiner, J. P., Steinwachs, D. M., Frank, R. G., Schwartz, K. J.

Elective foot surgery: relative roles of doctors of podiatric medicine and orthopedic surgeons. Am. J. Public Health 77:987-992, 1987.

Additional References Harris, W. H., Alpert, W., Marcinko, D. E. Nitrous oxide and valium use in podiatric surgery. J. Am. Podiatr. Assoc. 72:505, 1982. Marcinko, D. E., Carlson, R. Psychological considerations of the podiatric patient. J. Am. Podiatr. Med. Assoc., 74:441, 1984. Steinwachs, D. M., Weiner, J. P., Frank, R. G. Healthcare for foot problems in the USA: patterns of professional practice, patient utilization and cost of care. Johns Hopkins University, School of Hygiene and Public Health, Health Services Research and Developmental Center, Baltimore, MD, 1986.

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