The business of surgery: managing the OR as a profit center requires more than just IT. It requires a profit-making mindset, too - Operating Room Info Systems

Health Management Technology, July, 2002 by Richard L. Jackson

Many hospitals today are losing money. We read about them cutting services and closing their doors. But there is an answer. They must realize what business the hospital is in--the business of surgery.

If your hospital were decertified for surgery, how many admissions would you have? X-rays? OB? No one goes to a hospital for X-rays, because it is less convenient and more costly than an outpatient facility. No responsible obstetrician would admit patients without the ability to do C-sections.

What percentage of a hospital's revenue is driven by the operating room (OR)? Like many executives, you might estimate 20 percent to 40 percent. A recent survey of more than 200 hospital executives found that more than 60 percent of those surveyed would agree.

Perception, however, does not match reality. The actual percentage of revenues related to surgery is 68 percent. Actuarial firm Towers Perrin reports a $114 per member per month (PMPM) rate nationally for medical insurance plans. Of that total, $47 is related to hospital services, of which $32 goes toward surgery. This 68 percent does not include ancillary services such as lab and radiology, which are often driven by surgery.

MBA 101 teaches that if any channel of your sales or service produces 50-plus percent of your revenues, that is the business you are in. Why, then, do hospitals focus on areas that are not the sales/ profit leader?

Perception versos Reality

History has changed the way that hospitals make a profit. Until the 1980s, a large part of hospital profits was derived from inpatient stays. In 1980, five in 10 patients in the hospital didn't need to be there that day.

The "hotel for sick people" reimbursement philosophy of the '60s, '70s and '80s encouraged a "cost-plus" mentality. All expenses were charged as a "pass through" to payers. There was no incentive to create efficiency; profits were almost guaranteed.

Clearly, we are no longer in Kansas. Fading profits from inpatient admissions mean that hospitals must re-evaluate their revenue stream. Profits previously generated from inpatient diagnostic procedures have now been precluded by managed care and sophisticated diagnostic equipment such as MRIs and CT-Scans. Minimally invasive procedures allow patients to heal faster, eliminating the need for lengthy hospital stays. Medical procedures and ancillary services once administered in the hospital are now given in ambulatory settings. HMOs have made it difficult to justify a hospital admission unless absolutely necessary.

Further, financial accounting classifies the OR as a cost center. This has led to a general misperception of the OR's impact on hospital revenue. Because the OR is responsible for 20 percent to 40 percent of the hospital's cost, it has been assumed that it contributed 20 percent to 40 percent of the hospital's revenue--an incorrect assumption.

Operational Impact

Hospital executives must first change their mindset about the OR's economic impact on a hospital's revenue and profit and, secondly, change the way they operate. A department managed as a cost center focuses solely on costs. When managed as a profit center, it focuses on the relationship of revenue and costs.

If the hospital sees the OR as a cost center, it will cut labor and supplies. If it sees the OR as a profit center, it may elect to expand to increase revenues. Let's look at a hospital facing a $5 million loss. What changes would it make to return the bottom line to black? Most executives would manage the OR by the methods in the left column using a cost center mindset. Note the differences in managing the OR as a profit center (Figure 1).

In a cost center, there is only one way to increase profits--cut costs. In a profit center, there are two ways--cut costs and simultaneously increase revenues.

Here's another example. Let's say you ran three reports on arthroscopic knee surgery. The first report, "Lowest Cost per Case," showed Dr. Smith ranked best at $1,800. The second report, "Revenue by Surgeon," showed Dr. Jones highest at $3 million.

The third report, "Profit by Surgeon," showed Dr. Green as the leader at $1 million. Which doctor would you reward with playoff tickets? Typically, hospitals give the most clout to the surgeon with the highest revenue or the lowest cost. In this example, the greatest benefit came from Dr. Green, even though he didn't have the lowest cost or the highest revenue.

Managing for Profits

Here are six areas of change to help you manage your OR as a profit center.

Mentor. Educate OR managers that the OR is the main source of revenue for the hospital.

Measure financial data. Treating the OR as a profit center, you must measure: profit per minute; profit per case; profit by surgeon; and profit by service. These data give you the ultimate information in using the assets of your OR.

Monitor efficiencies. Using utilization reports, monitor turnover times, cancellations and percent utilization to recognize "bottlenecks" that impede throughput.

Market to surgeons. Market to surgeons who can bring the greatest profit to your hospital. Bond with the 20 percent of surgeons that drive 80 percent of your profits.