Refining Finances to Improve Healthcare Margins

Since Cabrini Health implement our clinical costing application it has taken many years to refine the cost allocation rules, derive a definition of direct and indirect costs and ensure our data collection was robust and complete. We have recently commenced a review of each of our service lines to understand what factors could improve our margin.

There are four key dimensions when considering financial performance— revenue, theatre costs, accommodation costs and prosthesis costs.Other factors that are not considered here include critical care costs, emergency department costs and outpatient or hospital in the home costs.

Revenue for private hospitals is primarily derived from payments by private health insurance funds. Each health fund varies significantly in their payment for any particular procedure. As an example, the price paid to the hospital for a Tonsil & Adenoids procedure varied by over 50 percent between the best fund and the lowest paying insurer. The two largest funds payon a basis of the Australian National Diagnosis Related Grouping (DRG)framework, however one fund uses private hospital cost weights, but an older DRG version, while the other large fund uses a more modern DRG version but is selective in how they are applied and only for surgical admission. Other funds use an industry developed payment schedule based on theatre and accommodation bands. The banding process under recognises the costs of more complex theatre procedures. The mix of health funds to which patient are members can result in significant variation in margin.

Most health funds preclude the hospital from charging the patient any out-of-pocket costs that are not agreed by the insurer. Agreed costs are usually limited to the health fund excess, although several funds also have a per-day co-payment capped at a certain limit.

The three major contributors to cost are theatre, accommodation and prosthesis.

Theatre costs are derived from staff costs and consumables. Theatre time is divided into sessions, with most hospitals operating two sessions per theatre per day – morning and afternoon. Theatre sessions are usually dedicated to a particular surgeon who will operate on a mix of cases, often one or two complex cases followed by smaller or less taxing procedures. While the staff costs are relatively fixed – nurses are allocated to the theatre session based on the complexity of the most challenging procedure.

Billable (or utilised) theatre time is dependent on the surgeon’s productivity and efficiency. With relatively fixed nursing costs per session, the costs per billed minute rise when the surgeon is late starting, does not have a full list or if they are particularly slow. Reviewing the theatre times across Cabrini’s hospitals shows that high volume surgeons average theatre time for Tonsils and Adenoids varies from 16 minutes to 53 minutes for what appear to be identical patients. As hospitals are paid on a per patient basis, the 16 minute surgeon is able to operate on 10 or more patients in a morning, while the 53 minute surgeon will only operate on three to four patients.

It can be a challenge to forecast the complexity of cases, and staffing requirements, when surgeons are late in booking additional cases into their list. While most private hospitals set time limits by when a surgeon must book their theatre cases, it is counterproductive to deny a patient an available time slot in a fully staff session because the surgeon did not book the patient on a timely basis.

-“Helping the clinician understand their comparative performance in terms of both efficiency, patient experience and financial margin creates the platform for awareness and change.”

Supplies, consumables or disposables are the second major cost in operating theatres. Each surgeon has their unique preference as to which sutures they use, what instruments they require and what dressings they use to cover the wound at the end of the procedure. Tracking the supplies that are used can be a major challenge with options including bar coding all items (including minor items such as syringes and luer plugs where the cost of the bar code may exceed the product cost), using the surgeons preference cards to establish a usual supply usage, through to creating estimated average consumables used for a particular procedure or group of procedures.

Certain surgical procedures use extra-ordinary consumables which are often not recognised by the health funds in their reimbursements. These include items such as robotic consumables, which may run to several thousand dollars. In being precluded from raising an additional charge against the patient, the hospital is forced to make a trade-off between margin and competitive advantage. High tech robots also come with warranty and service costs that can add hundreds of dollars to each procedure.

Accommodation costs are divided into day case and overnight bed days. A patient is an overnight patient if they were occupying a hospital bed at mid-night. Day-case costs are usually calculate in hours of hospital care while overnight bed costs are calculated in bed days. 

The percentage of patients treated on a day case basis varies significantly between surgeons. For the treatment of varicose veins, the overall percentage of patients treated on a day case at Cabrini is 75 percent, however this varies by surgeon from 58 percent to 97 percent. Some of this variation is dependent on the patient’s condition, anaesthetic risk, social support or frailty. It also depends of the time the operation is performedwith late afternoon cases more likely to stay overnight. In other cases it is driven by surgeon preference, particularly if they want to review the patient before discharge the morning after surgery. For those patients who stay overnight after varicose vein surgery, the length of stay varies between surgeons from one night to three. This partly depends on the technique the surgeon adopts, but may also be dependent on historical practice.

Prostheses are the third major cost driver in private hospitals, particularly in joint replacements and interventional cardiology. Health funds are required to reimburse the private hospital the price listed in the publicly available prosthesis list that is maintained by the Australian Government Department of Health. The chosen prosthesis is dependent on the specialist who makes their choice based on the patient’s condition, age, risk factors and their preference and experience with a particular device. Average prosthesis costs by specialist in interventional cardiologist can vary from US$3,000 to 6,400.

So, what can a private hospital do to manage these costs?

In reviewing our service line contribution here at Cabrini, we explore six core issues:

● Are we being efficient in our theatre staffing and utilisation?

● Are we maximising our use of available beds

● Are we able to optimise the use and pricing of our prosthesis

● Are we minimising our complications

● Are there opportunities in our health fund revenue negotiations

●How can we partner with our specialists to improve margin

Efficient use of theatre focuses on factors such as on-time starts, time between cases, session utilisation and average time per case. Unfortunately there is no standard way to record theatre time across the industry, making it a challenge to collect benchmarks for efficient theatre utilisation. Comparison between specialists forms the basis for our internal discussion.

Length of stay is critical to the efficient use of beds. Having patients discharged efficiently, particularly before 10:00 AM not only minimises the nursing hours per occupied bed day, it also frees the bed for revenue generation from the next patient. There are robust national benchmarks for private hospital average length of stay by Diagnostic Related Group (DRG).

Hospitals are able to negotiate supplier discounts on many prosthesis. Where the price is below the Prosthesis List price, the hospital is able to retain the difference.

Hospital Acquired Complications (HAC) are a set of complications defined by the Australian Commission on Safety and Quality in Healthcare.  Each HAC increases a patient length of stay and many result in additional theatre time. At Cabrini we have calculated the average incremental cost of each hospital acquired complication at US$4,970. Under health fund contracts at least one health insurer imposes an additional discount on their payment in line with the funding rules developed for public hospitals by the Independent Hospital Pricing Authority.

Unfortunately the majority of private hospital groups lack market power to negotiate successfully with health insurance companies.  There is a major opportunity to ensure all funds adopt a similar payment structure. This should be based on independent, nationally developed contemporary cost weights for the private sector.

Working with specialists is perhaps the greatest challenge faced by private hospital operators. Specialists are predominantly Visiting Medical Officers, so are independent practitioners. They seek and are granted accreditation to admit patients to the hospital and then book their patients into their allocated theatre sessions.  Specialists have traditionally not been involved in discussions around productivity, revenue, costs or margin.

Specialists may have a special relationship with the hospital— serving on committees, being available to see urgent cases, mentoring their colleagues, aligning the hospital with academic research, assisting with fund raising, supporting the hospital in change management, be nearing retirement or being a strong public advocate of the hospital. These specialist pose a real challenge to the hospital management when they are outliners in terms of theatre utilisation, length of stay or use of consumables and prosthesis.

A key foundation to enable challenging conversations with specialists is the appropriate sharing of validated clinical data. Helping the clinician understand their comparative performance in terms of both efficiency, patient experience and financial margin creates the platform for awareness and change.