Can Laparoscopic Cholecystectomy Be Performed with a Positive Margin at Medicaid Reimbursement Rates? Richard C Frazee, MD, FACS, Victoria G Elliott, MBA, Wilma Larsen, MD, FACOG, Seth Lerner, MD, FACS, Keith W Minnis, MBA, Court Huber, PhD, James Nolan, PhD, Harry Papaconstantinou, MD, FACS, W Roy Smythe, MD, FACS The Affordable Care Act provides health care coverage to an increasing segment of the population at Medicaid reimbursement rates. Health care systems currently offset lower Medicaid reimbursement through higher payers. The ability to “cost shift” will be diminished as the Medicaid population increases. STUDY DESIGN: A financial cost and revenue analysis of outpatient laparoscopic cholecystectomy at our institution was performed. Cost was defined as actual expense to the health care institution. Fixed and variable costs were identified to calculate a break-even point. Time spent from check in to dismissal was based on historic averages. When actual costs could not be pinpointed, estimates from industry experts were used. Reimbursement included surgeon and anesthesia professional fees and facility fees. RESULTS: A total of 501 laparoscopic cholecystectomies were performed at the main operating room facility in 2012. Annual fixed costs were $252,637. Variable costs were $1,860/case. Personnel and single-use equipment made the largest contribution to variable costs. Reimbursement for professional and facility fees totaled $2,444/case. The break-even point occurred at 454 cases. Based on historic volume, the break-even point for the calendar year would occur on November 27. CONCLUSIONS: Our analysis demonstrates that laparoscopic cholecystectomy can be performed with a positive margin at Medicaid reimbursement rates with sufficient volume. The minimal margin, however, could substantially limit the ability of lower-volume hospitals to provide these services and negatively impact access to care in this patient population. (J Am Coll Surg 2014;218:546e553. 2014 by the American College of Surgeons)
BACKGROUND:
forward with Medicaid expansion and enrolled greater numbers of patients in Medicaid coverage. Medicaid reimbursement to health care providers is considerably lower than other insurers. Hahn estimated that Medicaid reimbursement rates are about 65% of Medicare reimbursement and suggested the lower fee payments to physicians reduce their willingness to see Medicaid patients.3 In 20112012, about 33% of primary care physicians nationally did not accept new Medicaid patients.4 As the Medicaid population increases, this could potentially lead to greater difficulties in health care access. As a result of this change in health care policy, we questioned whether surgical procedures could be performed profitably at Medicaid reimbursement. If not, the increasing financial burden of providing care at a negative margin could affect the viability of health care institutions. To help answer this question, we opted to analyze a single
In 2010, the US Congress passed 2 separate pieces of legislationdthe Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act.1 These Acts have the potential to convey farreaching reform of health care delivery in the United States. The expansion of Medicaid has been described as a cornerstone of the Affordable Care Act.2 Although the Supreme Court ruled in 2012 that states could opt out of expanding Medicaid programs, many have moved
Disclosure Information: Nothing to disclose. Presented at the Southern Surgical Association 125th Annual Meeting, Hot Springs, VA, December 2013. Received December 9, 2013; Accepted December 10, 2013. From Scott & White Healthcare System, Temple TX. Correspondence address: Richard C Frazee, MD, FACS, Scott & White Healthcare System, 2401 South 31st Street, Temple, TX 76508. email: [email protected]
ª 2014 by the American College of Surgeons Published by Elsevier Inc.
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ISSN 1072-7515/14/$36.00 http://dx.doi.org/10.1016/j.jamcollsurg.2013.12.031
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common outpatient surgical procedure, laparoscopic cholecystectomy, to determine if it could be performed at Medicaid reimbursement with a positive margin.
METHODS A financial analysis of the cost to provide, and the revenue generated from, outpatient laparoscopic cholecystectomy at our institution was performed. Revenue included both surgeon and anesthesia 2012 professional fees and hospital 2012 facility fees. Any contribution from Medicaid-related disproportionate share funding was excluded. Costs were based on actual expense of items to the hospital rather than charges conveyed on the patient’s billing statement. When actual costs could not be determined, estimates from industry experts were substituted. Costs were separated into 7 categories: personnel, “brick and mortar,” reusable equipment, single-use equipment, utilities, medications, and administrative. Historic times were used to allocate time for patient preparation, operation, and recovery. The historic times were taken from an institutional computerized tracking program. Personnel costs were calculated on a cost per unit time used in actual patient care. Salaries were taken from actual median employee salaries at our institution or from Medical Group Management Association data5 for median physician reimbursement. Surgeons were estimated to perform a 60-hour work week6 and a per-hour expense was calculated for surgeon services. All employee expenses included salary and benefits. Personnel costs calculated 15 minutes of preoperative patient contact, 2 hours of operating room time, 2 hours in post-anesthesia recovery, and 15 minutes of postoperative patient contact. A single nurse was allocated for preoperative and postoperative care, 1 scrub nurse and 1 circulator in the operating room, and 1 nurse assigned to 2 patients in postanesthesia recovery. The surgical team consisted of a surgeon and third-year resident with corresponding salary allocation. Anesthesia costs were calculated based on 1 anesthesiologist supervising 3 operating rooms and 1 anesthetist providing anesthesia care. Brick and mortar costs were based on a budgeted operating room expansion project that will begin this year. Table 1.
Margin at Medicaid Reimbursement
547
This capital project will build 11 new operating rooms to add to 17 existing operating rooms. There will be a new post-anesthesia care unit and a preoperative and postoperative day surgery area that will serve the entire operative suite. The project is budgeted for $100,000,000.00. The operating rooms represent 40%, post-anesthesia care unit 40%, and pre-/postoperative day surgery unit 20% of the building cost. A ratio of 40.7% of the cost of the pre-/postoperative day surgery and post-anesthesia care unit was allocated to the 11 new operating rooms as the 17 existing rooms will share this portion of the facility. A 12% financing charge was added to the overall cost in this category. The facility was depreciated over a 30-year functional use. Expenses for reusable equipment were calculated for reasonable useful lifespan of the equipment and included costs for scheduled refurbishing of the equipment. Surgical equipment was calculated for a lifespan of 1,000 operations. Equipment was refurbished every 100 cases. Sterilization of equipment was calculated on a per case basis. Anesthesia delivery and monitoring machines were calculated to have a 20-year functional use. Utility expenses were calculated on a per square foot basis and the cost per square foot was considered equivalent throughout the facility. Square foot measurements were taken from architectural plans. Twenty-five percent additional measurements were added to represent common areas, such as nurses’ stations, waiting rooms, storage, and lounges. Annual utility expense per operating room was provided by the lead architect based on historic use. A panel of 5 anesthesiologists and 5 surgeons was used to agree on common practice use of drugs and disposable equipment for laparoscopic cholecystectomy. This consensus list of items was used for calculation of single-use items and drugs with the knowledge that variability occurs between practitioners, as well as variation to meet specific patient needs. Single-use items and drugs were calculated at the purchase expense to the hospital, not patient charges. There remained a broad category of expenses that were difficult to assign a per patient cost. This included areas such as billings and collections, advertising, risk management, administrative oversight, patient relations, scheduling,
Calculated for Brick and Mortar Costs
Room type
Operating rooms Preoperative, postoperative, and PACU Total annual building brick and mortar *$60,000,000 .407 ¼ $24,420,000. PACU, post-anesthesia care unit.
Building costs, $/no. of rooms
Total cost per room, $
Cost per room during 30 years, $
Added financial costs of 12%/per room/per year, $
40,000,000/11 24,420,000/11*
3,363,364 2,200,000
121,212/room/y 74,000/room/y
135,757/room/y 82,880/room/y 218,637/room/y
548
Table 2.
Frazee et al
Calculations for Reusable Equipment Costs
Reusable equipment
Surgical equipment Anesthesia machines and monitors Total annual reusable equipment cost
Cost, $/years of use
Mean cost, $
23,350/5 120,000/20
4,870 6,000 10,870
electronic medical record documentation, valet parking, etc. This category of expenses was grouped under the heading of “administrative costs.” Our institutional leadership has adopted an accounting practice of an additional 25% of costs to cover these areas. This figure was used in the calculations. Costs were then categorized as fixed (brick and mortar, reusable equipment, and utilities) or variable (personnel, single-use equipment, medications, and administrative) and plotted against volume of cases. Similarly, revenue was plotted on the same graph against volume to determine a break-even point to assess profitability. Volume of cases was taken from 2012 data to determine if profitability could be achieved for our institution. Additional payer mix data are provided from actual figures for comparison purposes.
RESULTS Fixed costs included brick and mortar, reusable equipment, and utilities. The calculations for annual fixed costs are shown in Tables 1, 2, and 3. The total annual fixed costs $218,637 þ 10,870 þ $36,000 ¼ $265,507. This number is reflected in the blue line of Figure 1. Variable costs included personnel, equipment maintenance and sterilization, one-time use equipment, drugs, and administrative costs. These costs are reflected in Tables 4, 5, and 6. Total variable costs are $808.00 þ $635.50 þ $44.00 þ an additional 25% for administrative costs ¼ $1,860/case. This figure is represented in the red line of Figure 1. Anesthesia revenue was calculated for 7 base units and eight 15-minute time units for total anesthesia payment of $276.30. Surgeon Medicaid professional fee for a laparoscopic cholecystectomy is $622.54. Facility fees total $1,546.07. Total Medicaid reimbursement equals $2,444.67/case. This is represented in the green line in Table 3.
J Am Coll Surg
Margin at Medicaid Reimbursement
Figure 1. The break-even point, which represents the number of cases required to meet annual fixed and variable costs, is the point of intersection of the red and green lines. This number correlates with 454 cases. Our institution performed 501 laparoscopic cholecystectomies in the main operating facility in 2012. Based on our historic volumes, our institution could perform laparoscopic cholecystectomy at a positive margin at Medicaid reimbursement, but assuming an even daily distribution of cases, that profitability would not occur until November 27 in the calendar year. Our institution’s current payer mix is reflected in Figure 2. Medicaid has represented roughly 10% of our market. If a break-even point was estimated based on our current payer mix, it would occur at 102 cases.
DISCUSSION With the passage of the Patient Protection and Affordable Care Act and the subsequent ruling by the US Supreme Court upholding the new law, participating states will expand Medicaid eligibility to 138% of the poverty level. It has been projected that, if fully implemented, this legislation would add 21.3 million individuals to the Medicaid population, representing a 43% increase. It has been estimated that Medicaid reimburses health care providers 56% of the amount private insurers pay.7 The result of this higher proportion of patients being reimbursed at Medicaid levels could produce a negative financial impact on the health care industry. Concern has also been expressed that lower Medicaid reimbursements can cause difficulty in obtaining health care and limit access.8 Therefore, we sought to determine if surgery could be provided at a positive margin at Medicaid reimbursement rates. To test this hypothesis, a single common outpatient procedure was chosen as a model for evaluation. The authors want to caution against the extrapolation of this analysis to all procedures, or the application of the specific numbers from this analysis to other health
Calculations for Utilities Cost
Annual room utilities projection
Operating room Preoperative area, PACU, postoperative area, and common areas Total annual utility cost PACU, post-anesthesia care unit.
Square feet
Amount, $
800
24,000
400
12,000 36,000 Figure 1. Break-even point.
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Table 4.
Margin at Medicaid Reimbursement
549
Calculations for Personnel Costs
Personnel
Preoperative/postoperative nurse Recovery nurse OR circulator and scrub Anesthesia team Surgery team Total personnel
Cost per hour, $
No. of hours
Total cost per case, $
28 29 (.5 patient) 29 149 161.25
.5 2 2.5 2 2 2
14 29 145 298 322 808
OR, operating room.
care institutions. Rather, our goal was to demonstrate a real-life model to assess this question and determine if there are health care savings that can be implemented as a result of the analysis. In our analysis, there were a number of direct cost items for which exact numbers could be obtained to determine expense. There were, however, several indirect cost items that required allocation of expense based on input from industry experts. For these indirect costs, our analysis incorporated “usual and customary” practices and incorporated the accounting principle of conservatism to reflect the expenses. Costs were divided into the 3 following fixed-cost categories: brick and mortar, utilities, and reusable equipment; and into the 4 following variable-cost items: personnel, single-use items, drugs, and administrative. Historic times were used to calculate expenses for personnel costs. The annual fixed costs totaled $265,507. Variable costs totaled $1,860/case. Medicaid reimbursement for professional and facility fees totaled $2,444.67. From this, a break-even point of 454 cases was calculated. Any case performed after 454 cases would produce profit for that fiscal year. Based on volume of laparoscopic cholecystectomy at our institution in 2012, a positive margin could be achieved with this procedure at Medicaid reimbursement. The margin would have been small, however, as demonstrated by the break-even point of 454 cases. Table 5.
The high volume of laparoscopic cholecystectomy performed each year at our institution was needed to cover the fixed costs. Had our annual volume been 225 laparoscopic cholecystectomies per year.9 For lower-volume hospitals, a negative margin for surgery could create fiscal shortfalls and lead to the loss of that service. This could potentially affect patient access to health care. One of the ways to positively affect margin is to control costs. This will be an important strategy as our health care system moves to a strategy of lower reimbursement. The highest variable cost expenses in our study were personnel and single-use items. An ongoing effort to contain costs in these 2 areas has been adopted. Personnel costs were determined by time and level of expertise. Not wanting to replace experienced personnel with less expensive, less experienced, or less trained personnel, our focus has been on improved time management. More efficient time management leads to additional operations being performed in the same amount of time and maximizes our personnel-related production. Weinbroum and colleagues reported a 35% decrease in time waste and spillover time with implementation of new operating room
Calculations for One-Time-Use Equipment Costs
Equipment and description
Surgical Trocars, clip applier, suction/irrigator, scissors, skin preparation, cautery, grounding pad, cautery extension, bandages and Steri-Strips, gowns, and mask Anesthesia Endotracheal tube, 5-mL syringe (n ¼ 3), 20-mL syringe, 10-mL syringe (n ¼ 4), Yankauer suction, tubing and canister, 18-g angiocatheter, Tegaderm, roll of tape, upper-body warmer, blood pressure cuff, pulse oximetry, EKG pads, nasogastric tube, humivent, pharyngeal temperature probe, 1 L normal saline, tongue depressor, oral airway, gas tubing, mask, oxygen mask, stylet Equipment sterilization and refurbishment Sterilization/per case Equipment refurbish ($650/100 cases) Total cost
Cost, $
481.00
143.00 5.00 6.50 635.50
550
Table 6.
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Margin at Medicaid Reimbursement
Drugs
Drugs used
Cost, $
Cefazolin, heparin, propofol, rocuronium, fentanyl, midazolam, ondansetron, ketorolac, glycopyrrolate, neostigmine, hydromorphone, desflurane
44.00
efficiency guidelines.10 Our efforts have encompassed changes including operating room scheduling, the “time-out” procedure, and tracking of turnover time. The scheduling changes have incorporated the principles outlined by Smith and colleagues.11 Dedicated emergency and urgent case rooms are available so as to not interfere with elective scheduling. The elective surgery schedule has strict guidelines to target 85% or higher block use. These changes maximize operating room use during our best staffed and most efficient times of the day. The timeout procedure now incorporates a preoperative discussion of equipment needs between the surgeon and the operating room team so that additional equipment does not have to be obtained during the surgery.12 Additional time points are monitored in our turnover analysis so that the root cause of delays can be ascertained. Variability in operative time by procedure is a second area of analysis. Dexter and colleagues reported up to a 50% difference among hospitals in operating time for laparoscopic cholecystectomy.13 We have noted considerable differences in operating time among surgeons without a difference in outcomes. Strategies for efficient surgery are being shared between colleagues. This has become a new emphasis in the education of our surgical residents. In addition to teaching the principles of operative decision making and safety, operative efficiency has been added as an educational goal.
The second area of variable costs being addressed is single-use equipment. Several authors have demonstrated that disposable items can be replaced at a lesser cost by reusable equipment.14-16 A critical analysis of all singleuse equipment is being performed to determine if all items are essential for performance of the operation, or could be replaced with less expensive reusable options, or eliminated. Cost comparisons are being studied between surgeons doing the same operations to determine if more expensive equipment translates into better outcomes. Best practice guidelines will be developed that incorporate both high quality and cost effectiveness.
CONCLUSIONS Our financial analysis determined that at a high-volume hospital, laparoscopic cholecystectomy can be performed with a positive margin at Medicaid reimbursement rates. Personnel and single-use equipment were our most expensive variable expense items, and offer the greatest opportunities for cost containment. A break-even point occurred after 454 cases. The minimal margin achieved, however, raises concerns for the profitability of lowervolume hospitals and could potentially affect access to services. Author Contributions Study conception and design: Frazee, Elliott, Larsen, Lerner, Minnis, Huber, Nolan, Papaconstantinou, Smythe Acquisition of data: Frazee, Elliott, Larsen, Minnis, Lerner, Huber, Nolan Analysis and interpretation of data: Frazee, Elliott, Larsen, Lerner, Minnis, Huber, Nolan, Papaconstantinou, Smythe Drafting of manuscript: Frazee, Elliott, Larsen, Lerner, Minnis, Huber, Nolan, Papaconstantinou, Smythe Critical revision: Frazee, Elliott, Larsen, Lerner, Minnis, Huber, Nolan, Papaconstantinou, Smythe Acknowledgment: The authors recognize Gina Du Par for manuscript editing and formatting. REFERENCES
Figure 2. Historic payer mix.
1. Cannan J. A legislative history of the Affordable Care Act: how legislative producer shapes legislative history. Law Libr J 2013; 105:131e173. 2. Rosenbaum S, Sommers BD. Using Medicaid to buy private health insurancedthe great new experiment? N Engl J Med 2013;369:7e9. 3. Hahn Y. The effect of Medicaid physician fees on take-up of public health insurance among children in poverty. J Health Econ 2013;32:452e462.
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4. Decker SL. Two-thirds of primary care physicians accepted new Medicaid patients in 2011-12: a baseline to measure future acceptance rates. Health Aff (Millwood) 2013;32: 1183e1187. 5. Medical Group Management Association. MGMA physician compensation and production 2013. Report based on 2012 data. Englewood, CO: MGMA; 2013:78. 6. American College of Surgeons. Career Lifestyle Issues. Available at: FACS.org/medicalstudents/lifestyle.html. Accessed August 20, 2013. 7. Moffit RE. Obamacare: impact on doctors. Heritage Foundation WebMemo 2895, May 11, 2010. Available at: http:// www.heritage.org/research/reports/2010/05/obamacare-impacton-doctors. Accessed August 20, 2013. 8. Cook NL, Hicks LS, O’Malley AJ, et al. Access to specialty care and medical services in community health centers. Health Aff (Millwood) 2007;26:1459e1468. 9. Murphy MM, Ng SC, Simons JP, et al. Predictors of major complications after laparoscopic cholecystectomy: surgeon, hospital, or patient? J Am Coll Surg 2010;211:73e80. 10. Weinbroum AA, Ekstein P, Ezri T. Efficiency of the operating room suite. Am J Surg 2003;185:244e250. 11. Smith CD, Spackman T, Brommer K, et al. Re-engineering the operating room using variability methodology to improve health care value. J Am Coll Surg 2013;216:559e568. 12. Papaconstantinou HT, Jo CH, Reznk SI, et al. Implementation of a surgical safety checklist: impact on surgical team perspectives. Oschner J 2013;13:299e309. 13. Dexter F, Davis M, Egger Halbeis CB, et al. Mean operating room times differ by 50% among hospitals in different countries for laparoscopic cholecystectomy and lung lobectomy. J Anesth 2006;20:319e322. 14. DiGiacomo JC, Odom JW, Ritota PC, Swan KG. Cost containment in the operating room: use of reusable versus disposable clothing. Am Surg 1992;58:654e656. 15. Penn E, Yasso SF, Wei JL. Reducing disposable equipment waste for tonsillectomy and adenotonsillectomy cases. Otolaryngol Head Neck Surg 2012;147:615e618. 16. Conrardy J, Hillanbrand M, Myers S, Nussbaum GF. Reducing medical waste. AORN J 2010;91:711e721.
Discussion DR LD BRITT (Norfolk, VA): As health care expenditures continue on an upward trajectory that is unsustainable, and reimbursement rates fall precipitously, the provision of essential services will be adversely affected and will challenge attempts to achieve optimal access. With the expansion of Medicaid being underscored as the cornerstone of the Affordable Care Act, the authors appropriately frame the discussion around the question, “Can a relatively common and essential operation be performed with a positive margin at Medicaid reimbursement rates?” I sincerely applaud Dr Frazee and his coauthors for addressing this issue and also the Program Committee of the Southern Surgical for having the wisdom to select this unique and timely paper for presentation at our annual meeting. I fully understand that the
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Discussion
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emotions are quite high when the Affordable Care Act is being discussed. However, our interpretations and analyses need to be both objective and accurate. Unfortunately, the authors presented some inaccuracies that could invalidate their findings and conclusions. As presented (and in the first paragraph of their methodology section), the authors stated that, “Any contribution from Medicaid related disproportionate share funding was excluded.” The disproportionate share funding (ie, “DSH” funds) should be included because they are intended to help support hospitals that have actually a “disproportionate” share of uninsured and underinsured patients. An allocation methodology would need to be developed to accurately reflect the amount of “DSH” attributable to each case. Was this exclusion of the disproportionate share funding a gross oversight by the authors (for it clearly should not have been excluded)? I am also concerned that national survey information is being used to represent actual costs. Unless the actual compensation at the facility exactly matches the national survey data, the resultant break-even analysis is not based on actual data! In addition, the authors stated, “the surgical team consisted of a surgeon and a third year resident with corresponding salary allocation.” Assuming that the resident stipend is included in the hospital cost report, the resident stipend should NOT be included in the personnel cost (if it is included, a legitimate complaint could be made regarding “double dipping”). Utilities were calculated on a per-square-footage basis and costs per square foot were considered equivalent throughout the facility. The expense per operating room (OR) was provided based on historic use. I’m not sure that such assumptions are valid. Also, the areas used in the “brick and mortar” calculation may not be used on a 24/7/365 basis. The assumption was made in the authors’ break-even analysis that the operating room is dedicated to Medicaid cholecystectomies 24/7/365, when in fact, I doubt this is the case. Assuming that a cholecystectomy requires 2.5 hours of pre, post, and postanesthesia care unit (PACU) time, along with 2.5 hours of OR time, then the “brick and mortar” cost should be determined per case based on actual time. There are 8,760 hours in a year, so the OR hourly “brick and mortar” cost is $15.50 and the pre, post, and PACU cost is $9.46 per hour. This translates into an OR cost of $38.75 per case and a pre, post, and PACU cost of $23.65 per case. The same rationale should be applied to the “utilities” cost as well. Note: utility consumption will always vary based on use. The authors emphasized that a 25% institutional overhead cost was applied to the variable cost per procedure. Although this is probably a common practice, the question is, which of these institutional costs would disappear if Medicaid cholecystectomies were not performed? By making these necessary adjustments, the fixed cost per cholecystectomy would be reduced and the number of cases needed to break even would be decreased. Therefore, without more accurate analyses, no definitive determination can be made regarding profitability of lower volume hospitals where laparoscopic cholecystectomies are being performed. I forgot to disclose that I am neither a Democrat nor a Republican. However, I am the past president of the practice plan for the medical school and currently the treasurer of the Finance Committee. I want to thank Mr James Lind, CEO of EVMS Medical
BACKGROUND:
forward with Medicaid expansion and enrolled greater numbers of patients in Medicaid coverage. Medicaid reimbursement to health care providers is considerably lower than other insurers. Hahn estimated that Medicaid reimbursement rates are about 65% of Medicare reimbursement and suggested the lower fee payments to physicians reduce their willingness to see Medicaid patients.3 In 20112012, about 33% of primary care physicians nationally did not accept new Medicaid patients.4 As the Medicaid population increases, this could potentially lead to greater difficulties in health care access. As a result of this change in health care policy, we questioned whether surgical procedures could be performed profitably at Medicaid reimbursement. If not, the increasing financial burden of providing care at a negative margin could affect the viability of health care institutions. To help answer this question, we opted to analyze a single
In 2010, the US Congress passed 2 separate pieces of legislationdthe Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act.1 These Acts have the potential to convey farreaching reform of health care delivery in the United States. The expansion of Medicaid has been described as a cornerstone of the Affordable Care Act.2 Although the Supreme Court ruled in 2012 that states could opt out of expanding Medicaid programs, many have moved
Disclosure Information: Nothing to disclose. Presented at the Southern Surgical Association 125th Annual Meeting, Hot Springs, VA, December 2013. Received December 9, 2013; Accepted December 10, 2013. From Scott & White Healthcare System, Temple TX. Correspondence address: Richard C Frazee, MD, FACS, Scott & White Healthcare System, 2401 South 31st Street, Temple, TX 76508. email: [email protected]
ª 2014 by the American College of Surgeons Published by Elsevier Inc.
546
ISSN 1072-7515/14/$36.00 http://dx.doi.org/10.1016/j.jamcollsurg.2013.12.031
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Vol. 218, No. 4, April 2014
common outpatient surgical procedure, laparoscopic cholecystectomy, to determine if it could be performed at Medicaid reimbursement with a positive margin.
METHODS A financial analysis of the cost to provide, and the revenue generated from, outpatient laparoscopic cholecystectomy at our institution was performed. Revenue included both surgeon and anesthesia 2012 professional fees and hospital 2012 facility fees. Any contribution from Medicaid-related disproportionate share funding was excluded. Costs were based on actual expense of items to the hospital rather than charges conveyed on the patient’s billing statement. When actual costs could not be determined, estimates from industry experts were substituted. Costs were separated into 7 categories: personnel, “brick and mortar,” reusable equipment, single-use equipment, utilities, medications, and administrative. Historic times were used to allocate time for patient preparation, operation, and recovery. The historic times were taken from an institutional computerized tracking program. Personnel costs were calculated on a cost per unit time used in actual patient care. Salaries were taken from actual median employee salaries at our institution or from Medical Group Management Association data5 for median physician reimbursement. Surgeons were estimated to perform a 60-hour work week6 and a per-hour expense was calculated for surgeon services. All employee expenses included salary and benefits. Personnel costs calculated 15 minutes of preoperative patient contact, 2 hours of operating room time, 2 hours in post-anesthesia recovery, and 15 minutes of postoperative patient contact. A single nurse was allocated for preoperative and postoperative care, 1 scrub nurse and 1 circulator in the operating room, and 1 nurse assigned to 2 patients in postanesthesia recovery. The surgical team consisted of a surgeon and third-year resident with corresponding salary allocation. Anesthesia costs were calculated based on 1 anesthesiologist supervising 3 operating rooms and 1 anesthetist providing anesthesia care. Brick and mortar costs were based on a budgeted operating room expansion project that will begin this year. Table 1.
Margin at Medicaid Reimbursement
547
This capital project will build 11 new operating rooms to add to 17 existing operating rooms. There will be a new post-anesthesia care unit and a preoperative and postoperative day surgery area that will serve the entire operative suite. The project is budgeted for $100,000,000.00. The operating rooms represent 40%, post-anesthesia care unit 40%, and pre-/postoperative day surgery unit 20% of the building cost. A ratio of 40.7% of the cost of the pre-/postoperative day surgery and post-anesthesia care unit was allocated to the 11 new operating rooms as the 17 existing rooms will share this portion of the facility. A 12% financing charge was added to the overall cost in this category. The facility was depreciated over a 30-year functional use. Expenses for reusable equipment were calculated for reasonable useful lifespan of the equipment and included costs for scheduled refurbishing of the equipment. Surgical equipment was calculated for a lifespan of 1,000 operations. Equipment was refurbished every 100 cases. Sterilization of equipment was calculated on a per case basis. Anesthesia delivery and monitoring machines were calculated to have a 20-year functional use. Utility expenses were calculated on a per square foot basis and the cost per square foot was considered equivalent throughout the facility. Square foot measurements were taken from architectural plans. Twenty-five percent additional measurements were added to represent common areas, such as nurses’ stations, waiting rooms, storage, and lounges. Annual utility expense per operating room was provided by the lead architect based on historic use. A panel of 5 anesthesiologists and 5 surgeons was used to agree on common practice use of drugs and disposable equipment for laparoscopic cholecystectomy. This consensus list of items was used for calculation of single-use items and drugs with the knowledge that variability occurs between practitioners, as well as variation to meet specific patient needs. Single-use items and drugs were calculated at the purchase expense to the hospital, not patient charges. There remained a broad category of expenses that were difficult to assign a per patient cost. This included areas such as billings and collections, advertising, risk management, administrative oversight, patient relations, scheduling,
Calculated for Brick and Mortar Costs
Room type
Operating rooms Preoperative, postoperative, and PACU Total annual building brick and mortar *$60,000,000 .407 ¼ $24,420,000. PACU, post-anesthesia care unit.
Building costs, $/no. of rooms
Total cost per room, $
Cost per room during 30 years, $
Added financial costs of 12%/per room/per year, $
40,000,000/11 24,420,000/11*
3,363,364 2,200,000
121,212/room/y 74,000/room/y
135,757/room/y 82,880/room/y 218,637/room/y
548
Table 2.
Frazee et al
Calculations for Reusable Equipment Costs
Reusable equipment
Surgical equipment Anesthesia machines and monitors Total annual reusable equipment cost
Cost, $/years of use
Mean cost, $
23,350/5 120,000/20
4,870 6,000 10,870
electronic medical record documentation, valet parking, etc. This category of expenses was grouped under the heading of “administrative costs.” Our institutional leadership has adopted an accounting practice of an additional 25% of costs to cover these areas. This figure was used in the calculations. Costs were then categorized as fixed (brick and mortar, reusable equipment, and utilities) or variable (personnel, single-use equipment, medications, and administrative) and plotted against volume of cases. Similarly, revenue was plotted on the same graph against volume to determine a break-even point to assess profitability. Volume of cases was taken from 2012 data to determine if profitability could be achieved for our institution. Additional payer mix data are provided from actual figures for comparison purposes.
RESULTS Fixed costs included brick and mortar, reusable equipment, and utilities. The calculations for annual fixed costs are shown in Tables 1, 2, and 3. The total annual fixed costs $218,637 þ 10,870 þ $36,000 ¼ $265,507. This number is reflected in the blue line of Figure 1. Variable costs included personnel, equipment maintenance and sterilization, one-time use equipment, drugs, and administrative costs. These costs are reflected in Tables 4, 5, and 6. Total variable costs are $808.00 þ $635.50 þ $44.00 þ an additional 25% for administrative costs ¼ $1,860/case. This figure is represented in the red line of Figure 1. Anesthesia revenue was calculated for 7 base units and eight 15-minute time units for total anesthesia payment of $276.30. Surgeon Medicaid professional fee for a laparoscopic cholecystectomy is $622.54. Facility fees total $1,546.07. Total Medicaid reimbursement equals $2,444.67/case. This is represented in the green line in Table 3.
J Am Coll Surg
Margin at Medicaid Reimbursement
Figure 1. The break-even point, which represents the number of cases required to meet annual fixed and variable costs, is the point of intersection of the red and green lines. This number correlates with 454 cases. Our institution performed 501 laparoscopic cholecystectomies in the main operating facility in 2012. Based on our historic volumes, our institution could perform laparoscopic cholecystectomy at a positive margin at Medicaid reimbursement, but assuming an even daily distribution of cases, that profitability would not occur until November 27 in the calendar year. Our institution’s current payer mix is reflected in Figure 2. Medicaid has represented roughly 10% of our market. If a break-even point was estimated based on our current payer mix, it would occur at 102 cases.
DISCUSSION With the passage of the Patient Protection and Affordable Care Act and the subsequent ruling by the US Supreme Court upholding the new law, participating states will expand Medicaid eligibility to 138% of the poverty level. It has been projected that, if fully implemented, this legislation would add 21.3 million individuals to the Medicaid population, representing a 43% increase. It has been estimated that Medicaid reimburses health care providers 56% of the amount private insurers pay.7 The result of this higher proportion of patients being reimbursed at Medicaid levels could produce a negative financial impact on the health care industry. Concern has also been expressed that lower Medicaid reimbursements can cause difficulty in obtaining health care and limit access.8 Therefore, we sought to determine if surgery could be provided at a positive margin at Medicaid reimbursement rates. To test this hypothesis, a single common outpatient procedure was chosen as a model for evaluation. The authors want to caution against the extrapolation of this analysis to all procedures, or the application of the specific numbers from this analysis to other health
Calculations for Utilities Cost
Annual room utilities projection
Operating room Preoperative area, PACU, postoperative area, and common areas Total annual utility cost PACU, post-anesthesia care unit.
Square feet
Amount, $
800
24,000
400
12,000 36,000 Figure 1. Break-even point.
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Table 4.
Margin at Medicaid Reimbursement
549
Calculations for Personnel Costs
Personnel
Preoperative/postoperative nurse Recovery nurse OR circulator and scrub Anesthesia team Surgery team Total personnel
Cost per hour, $
No. of hours
Total cost per case, $
28 29 (.5 patient) 29 149 161.25
.5 2 2.5 2 2 2
14 29 145 298 322 808
OR, operating room.
care institutions. Rather, our goal was to demonstrate a real-life model to assess this question and determine if there are health care savings that can be implemented as a result of the analysis. In our analysis, there were a number of direct cost items for which exact numbers could be obtained to determine expense. There were, however, several indirect cost items that required allocation of expense based on input from industry experts. For these indirect costs, our analysis incorporated “usual and customary” practices and incorporated the accounting principle of conservatism to reflect the expenses. Costs were divided into the 3 following fixed-cost categories: brick and mortar, utilities, and reusable equipment; and into the 4 following variable-cost items: personnel, single-use items, drugs, and administrative. Historic times were used to calculate expenses for personnel costs. The annual fixed costs totaled $265,507. Variable costs totaled $1,860/case. Medicaid reimbursement for professional and facility fees totaled $2,444.67. From this, a break-even point of 454 cases was calculated. Any case performed after 454 cases would produce profit for that fiscal year. Based on volume of laparoscopic cholecystectomy at our institution in 2012, a positive margin could be achieved with this procedure at Medicaid reimbursement. The margin would have been small, however, as demonstrated by the break-even point of 454 cases. Table 5.
The high volume of laparoscopic cholecystectomy performed each year at our institution was needed to cover the fixed costs. Had our annual volume been 225 laparoscopic cholecystectomies per year.9 For lower-volume hospitals, a negative margin for surgery could create fiscal shortfalls and lead to the loss of that service. This could potentially affect patient access to health care. One of the ways to positively affect margin is to control costs. This will be an important strategy as our health care system moves to a strategy of lower reimbursement. The highest variable cost expenses in our study were personnel and single-use items. An ongoing effort to contain costs in these 2 areas has been adopted. Personnel costs were determined by time and level of expertise. Not wanting to replace experienced personnel with less expensive, less experienced, or less trained personnel, our focus has been on improved time management. More efficient time management leads to additional operations being performed in the same amount of time and maximizes our personnel-related production. Weinbroum and colleagues reported a 35% decrease in time waste and spillover time with implementation of new operating room
Calculations for One-Time-Use Equipment Costs
Equipment and description
Surgical Trocars, clip applier, suction/irrigator, scissors, skin preparation, cautery, grounding pad, cautery extension, bandages and Steri-Strips, gowns, and mask Anesthesia Endotracheal tube, 5-mL syringe (n ¼ 3), 20-mL syringe, 10-mL syringe (n ¼ 4), Yankauer suction, tubing and canister, 18-g angiocatheter, Tegaderm, roll of tape, upper-body warmer, blood pressure cuff, pulse oximetry, EKG pads, nasogastric tube, humivent, pharyngeal temperature probe, 1 L normal saline, tongue depressor, oral airway, gas tubing, mask, oxygen mask, stylet Equipment sterilization and refurbishment Sterilization/per case Equipment refurbish ($650/100 cases) Total cost
Cost, $
481.00
143.00 5.00 6.50 635.50
550
Table 6.
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Drugs
Drugs used
Cost, $
Cefazolin, heparin, propofol, rocuronium, fentanyl, midazolam, ondansetron, ketorolac, glycopyrrolate, neostigmine, hydromorphone, desflurane
44.00
efficiency guidelines.10 Our efforts have encompassed changes including operating room scheduling, the “time-out” procedure, and tracking of turnover time. The scheduling changes have incorporated the principles outlined by Smith and colleagues.11 Dedicated emergency and urgent case rooms are available so as to not interfere with elective scheduling. The elective surgery schedule has strict guidelines to target 85% or higher block use. These changes maximize operating room use during our best staffed and most efficient times of the day. The timeout procedure now incorporates a preoperative discussion of equipment needs between the surgeon and the operating room team so that additional equipment does not have to be obtained during the surgery.12 Additional time points are monitored in our turnover analysis so that the root cause of delays can be ascertained. Variability in operative time by procedure is a second area of analysis. Dexter and colleagues reported up to a 50% difference among hospitals in operating time for laparoscopic cholecystectomy.13 We have noted considerable differences in operating time among surgeons without a difference in outcomes. Strategies for efficient surgery are being shared between colleagues. This has become a new emphasis in the education of our surgical residents. In addition to teaching the principles of operative decision making and safety, operative efficiency has been added as an educational goal.
The second area of variable costs being addressed is single-use equipment. Several authors have demonstrated that disposable items can be replaced at a lesser cost by reusable equipment.14-16 A critical analysis of all singleuse equipment is being performed to determine if all items are essential for performance of the operation, or could be replaced with less expensive reusable options, or eliminated. Cost comparisons are being studied between surgeons doing the same operations to determine if more expensive equipment translates into better outcomes. Best practice guidelines will be developed that incorporate both high quality and cost effectiveness.
CONCLUSIONS Our financial analysis determined that at a high-volume hospital, laparoscopic cholecystectomy can be performed with a positive margin at Medicaid reimbursement rates. Personnel and single-use equipment were our most expensive variable expense items, and offer the greatest opportunities for cost containment. A break-even point occurred after 454 cases. The minimal margin achieved, however, raises concerns for the profitability of lowervolume hospitals and could potentially affect access to services. Author Contributions Study conception and design: Frazee, Elliott, Larsen, Lerner, Minnis, Huber, Nolan, Papaconstantinou, Smythe Acquisition of data: Frazee, Elliott, Larsen, Minnis, Lerner, Huber, Nolan Analysis and interpretation of data: Frazee, Elliott, Larsen, Lerner, Minnis, Huber, Nolan, Papaconstantinou, Smythe Drafting of manuscript: Frazee, Elliott, Larsen, Lerner, Minnis, Huber, Nolan, Papaconstantinou, Smythe Critical revision: Frazee, Elliott, Larsen, Lerner, Minnis, Huber, Nolan, Papaconstantinou, Smythe Acknowledgment: The authors recognize Gina Du Par for manuscript editing and formatting. REFERENCES
Figure 2. Historic payer mix.
1. Cannan J. A legislative history of the Affordable Care Act: how legislative producer shapes legislative history. Law Libr J 2013; 105:131e173. 2. Rosenbaum S, Sommers BD. Using Medicaid to buy private health insurancedthe great new experiment? N Engl J Med 2013;369:7e9. 3. Hahn Y. The effect of Medicaid physician fees on take-up of public health insurance among children in poverty. J Health Econ 2013;32:452e462.
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4. Decker SL. Two-thirds of primary care physicians accepted new Medicaid patients in 2011-12: a baseline to measure future acceptance rates. Health Aff (Millwood) 2013;32: 1183e1187. 5. Medical Group Management Association. MGMA physician compensation and production 2013. Report based on 2012 data. Englewood, CO: MGMA; 2013:78. 6. American College of Surgeons. Career Lifestyle Issues. Available at: FACS.org/medicalstudents/lifestyle.html. Accessed August 20, 2013. 7. Moffit RE. Obamacare: impact on doctors. Heritage Foundation WebMemo 2895, May 11, 2010. Available at: http:// www.heritage.org/research/reports/2010/05/obamacare-impacton-doctors. Accessed August 20, 2013. 8. Cook NL, Hicks LS, O’Malley AJ, et al. Access to specialty care and medical services in community health centers. Health Aff (Millwood) 2007;26:1459e1468. 9. Murphy MM, Ng SC, Simons JP, et al. Predictors of major complications after laparoscopic cholecystectomy: surgeon, hospital, or patient? J Am Coll Surg 2010;211:73e80. 10. Weinbroum AA, Ekstein P, Ezri T. Efficiency of the operating room suite. Am J Surg 2003;185:244e250. 11. Smith CD, Spackman T, Brommer K, et al. Re-engineering the operating room using variability methodology to improve health care value. J Am Coll Surg 2013;216:559e568. 12. Papaconstantinou HT, Jo CH, Reznk SI, et al. Implementation of a surgical safety checklist: impact on surgical team perspectives. Oschner J 2013;13:299e309. 13. Dexter F, Davis M, Egger Halbeis CB, et al. Mean operating room times differ by 50% among hospitals in different countries for laparoscopic cholecystectomy and lung lobectomy. J Anesth 2006;20:319e322. 14. DiGiacomo JC, Odom JW, Ritota PC, Swan KG. Cost containment in the operating room: use of reusable versus disposable clothing. Am Surg 1992;58:654e656. 15. Penn E, Yasso SF, Wei JL. Reducing disposable equipment waste for tonsillectomy and adenotonsillectomy cases. Otolaryngol Head Neck Surg 2012;147:615e618. 16. Conrardy J, Hillanbrand M, Myers S, Nussbaum GF. Reducing medical waste. AORN J 2010;91:711e721.
Discussion DR LD BRITT (Norfolk, VA): As health care expenditures continue on an upward trajectory that is unsustainable, and reimbursement rates fall precipitously, the provision of essential services will be adversely affected and will challenge attempts to achieve optimal access. With the expansion of Medicaid being underscored as the cornerstone of the Affordable Care Act, the authors appropriately frame the discussion around the question, “Can a relatively common and essential operation be performed with a positive margin at Medicaid reimbursement rates?” I sincerely applaud Dr Frazee and his coauthors for addressing this issue and also the Program Committee of the Southern Surgical for having the wisdom to select this unique and timely paper for presentation at our annual meeting. I fully understand that the
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emotions are quite high when the Affordable Care Act is being discussed. However, our interpretations and analyses need to be both objective and accurate. Unfortunately, the authors presented some inaccuracies that could invalidate their findings and conclusions. As presented (and in the first paragraph of their methodology section), the authors stated that, “Any contribution from Medicaid related disproportionate share funding was excluded.” The disproportionate share funding (ie, “DSH” funds) should be included because they are intended to help support hospitals that have actually a “disproportionate” share of uninsured and underinsured patients. An allocation methodology would need to be developed to accurately reflect the amount of “DSH” attributable to each case. Was this exclusion of the disproportionate share funding a gross oversight by the authors (for it clearly should not have been excluded)? I am also concerned that national survey information is being used to represent actual costs. Unless the actual compensation at the facility exactly matches the national survey data, the resultant break-even analysis is not based on actual data! In addition, the authors stated, “the surgical team consisted of a surgeon and a third year resident with corresponding salary allocation.” Assuming that the resident stipend is included in the hospital cost report, the resident stipend should NOT be included in the personnel cost (if it is included, a legitimate complaint could be made regarding “double dipping”). Utilities were calculated on a per-square-footage basis and costs per square foot were considered equivalent throughout the facility. The expense per operating room (OR) was provided based on historic use. I’m not sure that such assumptions are valid. Also, the areas used in the “brick and mortar” calculation may not be used on a 24/7/365 basis. The assumption was made in the authors’ break-even analysis that the operating room is dedicated to Medicaid cholecystectomies 24/7/365, when in fact, I doubt this is the case. Assuming that a cholecystectomy requires 2.5 hours of pre, post, and postanesthesia care unit (PACU) time, along with 2.5 hours of OR time, then the “brick and mortar” cost should be determined per case based on actual time. There are 8,760 hours in a year, so the OR hourly “brick and mortar” cost is $15.50 and the pre, post, and PACU cost is $9.46 per hour. This translates into an OR cost of $38.75 per case and a pre, post, and PACU cost of $23.65 per case. The same rationale should be applied to the “utilities” cost as well. Note: utility consumption will always vary based on use. The authors emphasized that a 25% institutional overhead cost was applied to the variable cost per procedure. Although this is probably a common practice, the question is, which of these institutional costs would disappear if Medicaid cholecystectomies were not performed? By making these necessary adjustments, the fixed cost per cholecystectomy would be reduced and the number of cases needed to break even would be decreased. Therefore, without more accurate analyses, no definitive determination can be made regarding profitability of lower volume hospitals where laparoscopic cholecystectomies are being performed. I forgot to disclose that I am neither a Democrat nor a Republican. However, I am the past president of the practice plan for the medical school and currently the treasurer of the Finance Committee. I want to thank Mr James Lind, CEO of EVMS Medical
