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Financial Strategies for the OR
AORN JOURNAL
SEPTEMBER 1990. VOL. 52, NO 3
Financial Strategies for the OR IMPLEMENTING A DEPARTMENTAL PRODUCTIVITY INCENTIVE PROGRAM
Jeannie Botsford, RN; Leann Strasen, RN
M
any financial trends influence the daily functioning of the OR. Those with the greatest impact include the implementation of Medicare’s Prospective Payment System (PPS) in 1983, the escalation of per-diem contracting, discounted rates and capitated plans by third party payors, phasing in of Medicare’s PPS system for hospital-based outpatient surgery programs in 1989, escalating hospital salaries and cost of goods, and downsizing and resizing.
These trends require the surgery manager to be both an innovator and financial wizard. Financial trends mandate that management personnel at hospitals drastically change the way they do business, develop and implement systems that redesign all the roles and responsibilities of staff, set quality and service standards, measure productivity in terms of cost, and
Jeannie Botsford
Leann Strasen
Jeannie Botsford, RN,MS, CNOR, is the director of surgery, postanesthesia care units, and gastrointestinal laboratory, Henry Mayo Ne whall Memorial Hospital, Valencia, Calif: She earned her diploma in nursing from Hollywood (Calif) Presbyterian Hospital School of Nursing, her bachelor of science degree in health care administration from Chapman College, Orange, CaliJ; and her master of science degree in health care administration from the University of La Verne, CaliJ:
Leunn Strasen, RN,DPA, is the senior vice president, National Medical Enterprises, Santa Monica, Calif: She was the vice president and chief operating officer, Henry Mayo Newhall Memorial Hospital, Valencia, CaliJ; when this article was written. She earned her associate degree in nursing from Prairie State College, Chicago, her BS degree in health administration and MBA degree from the University of Phoenix, and her doctor ofpublic administration from the University of Southern California, Los Angeles.
524
When resource allocation decisions must be made, the most effective decisions are made by those who deliver the service. reward employees differently than in the past. These changes are exciting and challenging for many leaders, but are very threatening for others. Leland Kaiser, PhD, predicts that the 1990s will be even more chaotic and disturbing for the healthcare industry than the 19XOs.I Dr Kaiser predicts that after surviving this decade, the industry will function more efficiently, and the quality and level of healthcare services will be superior. Management will be charged with maintaining quality and service while providing professional and financial incentives for the nursing staff to align their efforts with those of the organization. This article describes one organizational strategy and two productivity incentive programs to meet those goals.
A n Organizational Strategy
M
anagers must learn how to respond to downsizing and resizing. One way is to empower the surgery department manager and reward employees for their contributions to cost-cutting measures. Empowerment. In an environment of declining resources, trade-offs are made. When resource allocation decisions must be made, the most effective decisions are made by those who deliver the service. Bccause the professional staff and manager deal with the consequences of these decisions on a daily basis, it is important to delegate both the power and authority to make resource allocation decisions to the surgery manager. The chief executive officer and nurse executive must develop trust in the surgery manager's judgment and decision-making abilities. Administrators of an organization in financial crisis typically become more controlling and insist on increasing the amount of the red tape and levels
of management signatures required for expenditures. Decisions are made from a centralized perspective. This usually results in a short-term focus and poorer quality decisions. These decisions often are n o t in touch with the needs of department managers, patients, physicians. or employees. In turn, this causes additional problems and challenges for the organization. When empowering the surgery manager, administrators can maintain financial control by changing measures of productivity from a fulltime equivalent per occupied bed or hours per patient day to a measurement such as cost per surgical procedure. By shifting management's focus to a monetary measurement per surgical case, the organization can control costs and allow the surgery department manager and his or her staff to make appropriate trade-off decisions to maintain the desired quality and level of service. Quality and level of service standards for the surgery department need to be quantified. All staff and managerncnt should agree on acceptable parameters for quality indicators, and management must be held accountable for providing the predetermined quality and level of service at the budgeted cost per surgery. By implementing this strategy, the organization pIo\ ides service at a predetermined level of quality and cost. The surgery manager and staff assume ownership of the challenge. The staff is spared the I'rustration of being told how to accomplish their jobs by individuals who are not involved in the clinical setting. The staff controls how goals actually are attained. Rewards. All effective management systems must include rewards for individuals o r groups of individuals who help achieve specific goals. After empowering surgery managers and implemenling department-based standards for quality, service, and produclivity based on the cost per procedure, the next strategy is to develop a system that recognizes and rewards individuals and groups 525
AORN JOURNAL
SEPTEMBER 1990. VOL 52. NO 3
Productivity incentive bonuses are divided among all employees in the department based on their actual hours worked in the project period. for providing a high quality product at lower than budgeted cost per procedure.
Initiating an Incentive Program
S
urgery managers must take the initiative to identify specific areas where costs can be reduced, revenues increased, and incentive programs implemented. They must identify resources and be equipped to move beyond basic budgeting to mastering concepts that will be beneficial to their departments. Implementing a successful departmental productivity incentive program is one means of accomplishing this goal. If an incentive program or gain sharing structure does not exist, innovative action must be initiated. Policies should be developed that will gain administrative approval. Careful analysis of program feasibility must be considered, and documented evidence of the benefits presented to administrators. This demonstrates managerial leadership and the surgery manager’s ability to develop programs that help ensure the hospital’s financial survival. Consulting with the surgery staff to identify areas where waste occurs or where saving can be realized will give direction to potential incentive programs. Successful managers know that employees will support programs when they have a chance to participate in their development. It is wise, therefore, to involve staff from the early stages. When the employees know that they will benefit financially from participation in a productivity incentive program, they will contribute to the program’s success. A productivity incentive program shares department productivity gains with department employees when quality standards for the product are maintained and the product is provided below a targeted cost per procedure. 526
The steps involved in implementing a productivity incentive program in a nonprofit health care organization follow. Step 1. Develop departmental quality indicators that are valued by staff, patients, physicians, administration, the Joint Commission on Accreditation of Healthcare Organizations, and licensing bodies. This ensures that quality will be maintained from all perspectives. Agree on predetermined quantitative levels for satisfactory performance for each of the quality indicators. Step 2. Convert the existing surgery productivity program to a cost per surgical procedure standard based on the existing budget (ie, total departmental budget divided by budgeted surgical cases equals cost per case standard). By developing a productivity standard based on the cost of an average surgery case, the organization can easily monitor productivity. A more sophisticated method can be developed by dividing surgeries into major and minor cases, defining terms, and allocating a different portion of total expenditures to each class of surgeries. Step 3. Develop policies and procedures for the productivity incentive program that outline the goals of the program. The program should encourage department managers and employees to implement innovative ways of operating that provide surgical services at lower costs than those budgeted. The department then shares the savings with the hospital over the course of either sixmonth or 12-month projects. Employees usually get 40% of the savings while the hospital retains 60%because the hospital does not actually convert all the savings to cash. This represents a typical gain-sharing split formula used by the private sector. Departmental productivity incentive bonuses are usually divided among all employees in the department based on their actual hours worked in the project period. According to our plan, employees must be employed at the payout time to receive payment and must have worked in the
4 0 R N J O l l ~RNAL
~~ ~~
department for at least SO% of the project period. Step 4. The final step is to publicize and celebrate the accomplishments of the employees and departments that have completed successful projects. This organizational recognition helps educate fellow employees about the program and the potential for them to participate. It is important to consider other closely related departments that might be interested in a joint venture activity that would be mutually beneficial to both departments. The combined energy and staff involvement of the two departments can result in enthusiastic contribution, thus ensuring a successful outcome of the program. Spin-offs of staff participation are increased motivation, job satisfaction, and financial remuneration.
Productivity Incentive Program Examples
T
he following examples demonstrate how incentive programs were implemented at Henry Mayo Newhall Memorial Hospital, Valencia, Calif. Example 1. The pharmacy. surgery, postanesthesia care unit, and gastrointestinal laboratory departments participated in a joint venture incentive program to reduce pharmacy lost drug charges and increase revenue. Directors of these departments were concerned about the high percentage of lost charges related t o drugs distributed and dispensed in these specialty areas. Previous attempts to reduce the high volume of lost charges were not successful. Revenue capture was being compromised, and the financial impact adversely influenced the pharmacy department’s budget. Department directors submitted an incentive program proposal for administrative approval and then presented it to the staffs of each department. They targeted a six-month time frame and a realistic expectation to reduce lost drug charges to 57, and increase captured revenue to a designated dollar figure per case for each area. It was essential that the validity of the current system used to track lost charges be established, thereby preventing an incorrect comparison at the conclusion of the program. The staffs met to 528
SFPTEMHER 1990 VOL i? NO1
identify mechanisms that could be successfully executed to achieve these desired results. The following steps were initiated. The goal was to gain participation from all involved employees including part-time, per-diem, and casual employees. 1. Establish the validity of current charging system. 2. Verify quantity of drugs dispensed to specialty areas. 3. Initiate mechanism for daily inventory. 4. Review patient charges for documentation and capture of uncharged drugs. 5. Ensure same charge entry. 6. Analyze computer printout of drugs usage. 7. Post weekly summary of lost charges, identifying trends and specific drugs frequently missed. 8. Share monthly progress with staffs. The successful incentive program reduced lost charges and increased revenue. At the end of six months, the hospital’s net revenue increased by $79,986. The departments’ efforts resulted in a total pharmacy savings of $29,187 (ie, $1.78 per patient per case) and an increase in hospital revenue of $24,299 from the gastrointestinal laboratory and $55,687 from the surgery and postanesthesia care units. The hospital retained 605%of the benefit, and the departments participating in the program retained 40%. That 40% was distributed to participating and eligible employees. Payment was based on actual productive hours worked during the six months the program was in effect. Example 2. A second productivity incentive program was initiated between the management teams of the surgery department and purchasing department to reduce suture inventory by 2570. Department directors and two employees from each department participated in the program and shared in the savings that resulted from the inventory reduction. The departments eliminated sutures that were not used and gained valuable storage space in the supply and equipment room. The following steps were established for the joint incentive suture reduction program. 1. Complete current inventory of all suture material.
A O R N JOURNAL
SEPTEMBER 1990. VOL.. 52. NO 3
2. Identify sutures that were not used or used infrequently 50 they could be removed from inventory. 3. Meet with key physicians and the chairman of the surgery department to review the proposed plan and gain approval. 4. Take list of sutures identified for removal from inventory to surgery department personnel for consensus. 5. Establish an in-depth weekly inventory system to set par levels based on computer data of actual usage. Within the six-month time frame, the two departments were able to reduce the suture inventory by $26,982, exceeding the original projected estimate by 5%. Forty percent of the gain share was divided among the participating
employees who were directly committed to achieving the goal.
Conclusion
T
he challenge for the surgery manager today is to take the initiative and identify areas where incentive programs could be implemented and then take the lead in making the program work. Departments and individual employees profit from participating in the programs. 0 kote 1 L Kaiser, lecture at the IleulthcurcJ Foritnr/_?M Visionary Healthcare Leadership Conference i n Santa Crur, Calif, September, 1989
Childhood Seizures Not Caused by Vaccine Children with no history of seizures are unlikely to develop them after receiving the diphtheriapertussis-tetanus (DPT) vaccine, according to an article in the March 23, 1990, issue of the Journal of the Americun Mrdicul Associution. Although children's temperatures often rise in the first week following DPT immunization, there appears to be no significant increase in encephalopathy, epilepsy, or other serious neurological disease, the authors conclude. They say that public fear of infantile epilepsy after administration of the DPT vaccine appears to be unfounded. Researchers evaluated the risk of seizure and other neurological conditions following DPT immunization in 38,171 children in Tennessee. The children received more than 107,000 DPT immunizations during their first three years of life. Researchers compared the rate of neurological conditions immediately following the DPT vaccination with the rate 30 or more days after vaccination. None of the children developed encephalopathy, epilepsy, or other serious neurological disease in the first week following DPT immunization. There also was no significant
increase in sei7ures. Of the children studied, 356 (0.9'2) received medical attention for seizures. Of those, 277 ~ e I fever-related e seizures, 42 were not related to fever, and 37 occurred in conjunction with other neurologic,
529
SEPTEMBER 1990. VOL. 52, NO 3
Financial Strategies for the OR IMPLEMENTING A DEPARTMENTAL PRODUCTIVITY INCENTIVE PROGRAM
Jeannie Botsford, RN; Leann Strasen, RN
M
any financial trends influence the daily functioning of the OR. Those with the greatest impact include the implementation of Medicare’s Prospective Payment System (PPS) in 1983, the escalation of per-diem contracting, discounted rates and capitated plans by third party payors, phasing in of Medicare’s PPS system for hospital-based outpatient surgery programs in 1989, escalating hospital salaries and cost of goods, and downsizing and resizing.
These trends require the surgery manager to be both an innovator and financial wizard. Financial trends mandate that management personnel at hospitals drastically change the way they do business, develop and implement systems that redesign all the roles and responsibilities of staff, set quality and service standards, measure productivity in terms of cost, and
Jeannie Botsford
Leann Strasen
Jeannie Botsford, RN,MS, CNOR, is the director of surgery, postanesthesia care units, and gastrointestinal laboratory, Henry Mayo Ne whall Memorial Hospital, Valencia, Calif: She earned her diploma in nursing from Hollywood (Calif) Presbyterian Hospital School of Nursing, her bachelor of science degree in health care administration from Chapman College, Orange, CaliJ; and her master of science degree in health care administration from the University of La Verne, CaliJ:
Leunn Strasen, RN,DPA, is the senior vice president, National Medical Enterprises, Santa Monica, Calif: She was the vice president and chief operating officer, Henry Mayo Newhall Memorial Hospital, Valencia, CaliJ; when this article was written. She earned her associate degree in nursing from Prairie State College, Chicago, her BS degree in health administration and MBA degree from the University of Phoenix, and her doctor ofpublic administration from the University of Southern California, Los Angeles.
524
When resource allocation decisions must be made, the most effective decisions are made by those who deliver the service. reward employees differently than in the past. These changes are exciting and challenging for many leaders, but are very threatening for others. Leland Kaiser, PhD, predicts that the 1990s will be even more chaotic and disturbing for the healthcare industry than the 19XOs.I Dr Kaiser predicts that after surviving this decade, the industry will function more efficiently, and the quality and level of healthcare services will be superior. Management will be charged with maintaining quality and service while providing professional and financial incentives for the nursing staff to align their efforts with those of the organization. This article describes one organizational strategy and two productivity incentive programs to meet those goals.
A n Organizational Strategy
M
anagers must learn how to respond to downsizing and resizing. One way is to empower the surgery department manager and reward employees for their contributions to cost-cutting measures. Empowerment. In an environment of declining resources, trade-offs are made. When resource allocation decisions must be made, the most effective decisions are made by those who deliver the service. Bccause the professional staff and manager deal with the consequences of these decisions on a daily basis, it is important to delegate both the power and authority to make resource allocation decisions to the surgery manager. The chief executive officer and nurse executive must develop trust in the surgery manager's judgment and decision-making abilities. Administrators of an organization in financial crisis typically become more controlling and insist on increasing the amount of the red tape and levels
of management signatures required for expenditures. Decisions are made from a centralized perspective. This usually results in a short-term focus and poorer quality decisions. These decisions often are n o t in touch with the needs of department managers, patients, physicians. or employees. In turn, this causes additional problems and challenges for the organization. When empowering the surgery manager, administrators can maintain financial control by changing measures of productivity from a fulltime equivalent per occupied bed or hours per patient day to a measurement such as cost per surgical procedure. By shifting management's focus to a monetary measurement per surgical case, the organization can control costs and allow the surgery department manager and his or her staff to make appropriate trade-off decisions to maintain the desired quality and level of service. Quality and level of service standards for the surgery department need to be quantified. All staff and managerncnt should agree on acceptable parameters for quality indicators, and management must be held accountable for providing the predetermined quality and level of service at the budgeted cost per surgery. By implementing this strategy, the organization pIo\ ides service at a predetermined level of quality and cost. The surgery manager and staff assume ownership of the challenge. The staff is spared the I'rustration of being told how to accomplish their jobs by individuals who are not involved in the clinical setting. The staff controls how goals actually are attained. Rewards. All effective management systems must include rewards for individuals o r groups of individuals who help achieve specific goals. After empowering surgery managers and implemenling department-based standards for quality, service, and produclivity based on the cost per procedure, the next strategy is to develop a system that recognizes and rewards individuals and groups 525
AORN JOURNAL
SEPTEMBER 1990. VOL 52. NO 3
Productivity incentive bonuses are divided among all employees in the department based on their actual hours worked in the project period. for providing a high quality product at lower than budgeted cost per procedure.
Initiating an Incentive Program
S
urgery managers must take the initiative to identify specific areas where costs can be reduced, revenues increased, and incentive programs implemented. They must identify resources and be equipped to move beyond basic budgeting to mastering concepts that will be beneficial to their departments. Implementing a successful departmental productivity incentive program is one means of accomplishing this goal. If an incentive program or gain sharing structure does not exist, innovative action must be initiated. Policies should be developed that will gain administrative approval. Careful analysis of program feasibility must be considered, and documented evidence of the benefits presented to administrators. This demonstrates managerial leadership and the surgery manager’s ability to develop programs that help ensure the hospital’s financial survival. Consulting with the surgery staff to identify areas where waste occurs or where saving can be realized will give direction to potential incentive programs. Successful managers know that employees will support programs when they have a chance to participate in their development. It is wise, therefore, to involve staff from the early stages. When the employees know that they will benefit financially from participation in a productivity incentive program, they will contribute to the program’s success. A productivity incentive program shares department productivity gains with department employees when quality standards for the product are maintained and the product is provided below a targeted cost per procedure. 526
The steps involved in implementing a productivity incentive program in a nonprofit health care organization follow. Step 1. Develop departmental quality indicators that are valued by staff, patients, physicians, administration, the Joint Commission on Accreditation of Healthcare Organizations, and licensing bodies. This ensures that quality will be maintained from all perspectives. Agree on predetermined quantitative levels for satisfactory performance for each of the quality indicators. Step 2. Convert the existing surgery productivity program to a cost per surgical procedure standard based on the existing budget (ie, total departmental budget divided by budgeted surgical cases equals cost per case standard). By developing a productivity standard based on the cost of an average surgery case, the organization can easily monitor productivity. A more sophisticated method can be developed by dividing surgeries into major and minor cases, defining terms, and allocating a different portion of total expenditures to each class of surgeries. Step 3. Develop policies and procedures for the productivity incentive program that outline the goals of the program. The program should encourage department managers and employees to implement innovative ways of operating that provide surgical services at lower costs than those budgeted. The department then shares the savings with the hospital over the course of either sixmonth or 12-month projects. Employees usually get 40% of the savings while the hospital retains 60%because the hospital does not actually convert all the savings to cash. This represents a typical gain-sharing split formula used by the private sector. Departmental productivity incentive bonuses are usually divided among all employees in the department based on their actual hours worked in the project period. According to our plan, employees must be employed at the payout time to receive payment and must have worked in the
4 0 R N J O l l ~RNAL
~~ ~~
department for at least SO% of the project period. Step 4. The final step is to publicize and celebrate the accomplishments of the employees and departments that have completed successful projects. This organizational recognition helps educate fellow employees about the program and the potential for them to participate. It is important to consider other closely related departments that might be interested in a joint venture activity that would be mutually beneficial to both departments. The combined energy and staff involvement of the two departments can result in enthusiastic contribution, thus ensuring a successful outcome of the program. Spin-offs of staff participation are increased motivation, job satisfaction, and financial remuneration.
Productivity Incentive Program Examples
T
he following examples demonstrate how incentive programs were implemented at Henry Mayo Newhall Memorial Hospital, Valencia, Calif. Example 1. The pharmacy. surgery, postanesthesia care unit, and gastrointestinal laboratory departments participated in a joint venture incentive program to reduce pharmacy lost drug charges and increase revenue. Directors of these departments were concerned about the high percentage of lost charges related t o drugs distributed and dispensed in these specialty areas. Previous attempts to reduce the high volume of lost charges were not successful. Revenue capture was being compromised, and the financial impact adversely influenced the pharmacy department’s budget. Department directors submitted an incentive program proposal for administrative approval and then presented it to the staffs of each department. They targeted a six-month time frame and a realistic expectation to reduce lost drug charges to 57, and increase captured revenue to a designated dollar figure per case for each area. It was essential that the validity of the current system used to track lost charges be established, thereby preventing an incorrect comparison at the conclusion of the program. The staffs met to 528
SFPTEMHER 1990 VOL i? NO1
identify mechanisms that could be successfully executed to achieve these desired results. The following steps were initiated. The goal was to gain participation from all involved employees including part-time, per-diem, and casual employees. 1. Establish the validity of current charging system. 2. Verify quantity of drugs dispensed to specialty areas. 3. Initiate mechanism for daily inventory. 4. Review patient charges for documentation and capture of uncharged drugs. 5. Ensure same charge entry. 6. Analyze computer printout of drugs usage. 7. Post weekly summary of lost charges, identifying trends and specific drugs frequently missed. 8. Share monthly progress with staffs. The successful incentive program reduced lost charges and increased revenue. At the end of six months, the hospital’s net revenue increased by $79,986. The departments’ efforts resulted in a total pharmacy savings of $29,187 (ie, $1.78 per patient per case) and an increase in hospital revenue of $24,299 from the gastrointestinal laboratory and $55,687 from the surgery and postanesthesia care units. The hospital retained 605%of the benefit, and the departments participating in the program retained 40%. That 40% was distributed to participating and eligible employees. Payment was based on actual productive hours worked during the six months the program was in effect. Example 2. A second productivity incentive program was initiated between the management teams of the surgery department and purchasing department to reduce suture inventory by 2570. Department directors and two employees from each department participated in the program and shared in the savings that resulted from the inventory reduction. The departments eliminated sutures that were not used and gained valuable storage space in the supply and equipment room. The following steps were established for the joint incentive suture reduction program. 1. Complete current inventory of all suture material.
A O R N JOURNAL
SEPTEMBER 1990. VOL.. 52. NO 3
2. Identify sutures that were not used or used infrequently 50 they could be removed from inventory. 3. Meet with key physicians and the chairman of the surgery department to review the proposed plan and gain approval. 4. Take list of sutures identified for removal from inventory to surgery department personnel for consensus. 5. Establish an in-depth weekly inventory system to set par levels based on computer data of actual usage. Within the six-month time frame, the two departments were able to reduce the suture inventory by $26,982, exceeding the original projected estimate by 5%. Forty percent of the gain share was divided among the participating
employees who were directly committed to achieving the goal.
Conclusion
T
he challenge for the surgery manager today is to take the initiative and identify areas where incentive programs could be implemented and then take the lead in making the program work. Departments and individual employees profit from participating in the programs. 0 kote 1 L Kaiser, lecture at the IleulthcurcJ Foritnr/_?M Visionary Healthcare Leadership Conference i n Santa Crur, Calif, September, 1989
Childhood Seizures Not Caused by Vaccine Children with no history of seizures are unlikely to develop them after receiving the diphtheriapertussis-tetanus (DPT) vaccine, according to an article in the March 23, 1990, issue of the Journal of the Americun Mrdicul Associution. Although children's temperatures often rise in the first week following DPT immunization, there appears to be no significant increase in encephalopathy, epilepsy, or other serious neurological disease, the authors conclude. They say that public fear of infantile epilepsy after administration of the DPT vaccine appears to be unfounded. Researchers evaluated the risk of seizure and other neurological conditions following DPT immunization in 38,171 children in Tennessee. The children received more than 107,000 DPT immunizations during their first three years of life. Researchers compared the rate of neurological conditions immediately following the DPT vaccination with the rate 30 or more days after vaccination. None of the children developed encephalopathy, epilepsy, or other serious neurological disease in the first week following DPT immunization. There also was no significant
increase in sei7ures. Of the children studied, 356 (0.9'2) received medical attention for seizures. Of those, 277 ~ e I fever-related e seizures, 42 were not related to fever, and 37 occurred in conjunction with other neurologic,
529