Hidden costs make planning critical for trauma centers

Healthcare Financial Management, April, 1989 by Mark A. Woodward, Judith L. Horowitz

Hidden costs make planning critical for trauma centers

In the summer of 1988, four hospitals in Los Angeles, Calif., closed their emergency rooms to certain ambulances. In 1987, seven of the eight trauma centers in Dade County, Fla., announced plans to relinquish their trauma center designations.

These actions were surprising because designation as a trauma center had been considered desirable by many hospitals. There were 166 designated trauma centers in 26 states as of July of 1986.(a)

The experience of the Miami area hospitals, however, indicates that designation is not always advantageous. Hospitals must objectively evaluate if they should apply for, or maintain, designation as a trauma center.

The trauma center concept became popular when study compared the experiences in San Francisco, Calif., where all trauma patients were taken to a single hospital with special resources dedicated to their treatment, to the experiences in Orange County, Calif., where trauma patients were taken to the closest hospital.(b)

The results were dramatic and clear. Almost all trauma patients who died after being taken to the single hospital could not have been saved. In contrast, large percentages of trauma deaths in Orange County were judged preventable. As a result of this and other corroborative work, policy decisions were made around the country to develop systems in which severely injured patients would be transported to a "trauma center."

Trauma center designation quickly became more than just a symbol of quality in emergency services. Many hospital administrators believed that if their hospitals were selected as the single hospital (or one of a limited number of hospitals) to treat trauma patients, their prestige would be enhanced.

Teaching hospitals sought trauma center designation to ensure that their surgical residents would learn to manage these types of patients.

Other facilities saw participation in a trauma network as a means to increase revenues. For these and other reasons, many hospitals wanted to be designated as trauma centers.

OPERATING EXPENSES

For almost all hospitals, however, designation as a trauma center creates significant increases in capital and operating costs. One hospital projected that operating expenses would rise by $1.5 million annually after designation. The number of true trauma patients--patients with injuries to multiple body systems-is small. One study found the incidence rate to be slightly less than one case per 1,000 people annually.(c)

The increased costs of designation must either be covered by small numbers of trauma patients, which implies greater net revenue from these patients, or enhanced by revenue from some other group of patients.

There are five major types of potential benefits of trauma center designation:

Financial return;

Emergency room (ER) market

share;

TOTAL HOSPITAL MARKET SHARE;

Teaching function enhancement;

and

Support of hospital mission.

Most hospitals seek several or all of these objectives. Whether it is reasonable to expect these benefits depends on each hospital's environment.

Following is a review of the costs that are likely to be incurred by a hospital seeking designation and the desired benefits. The same costs and benefits apply to hospitals evaluating the divestiture of trauma center designation, though the costs of an existing program can be more easily estimated.

The nonfinancial benefits of trauma centers are typically overstated. Whether the benefits likely to accrue to a trauma center are worth the cost ultimately is management's decision. Regardless of the benefits sought, a thorough assessment must be undertaken to ensure that the financial consequences are fully understood prior to application for trauma center designation. Many of the costs of trauma center designation are hidden, and many hospitals significantly underestimate the start-up and operating costs.(d)

The best way to determine the direct financial effect of trauma center designation is to focus on incremental costs and revenue, that is, additional patients who will be treated at the hospital and the associated costs and revenue.

These incremental costs and revenue must reflect the changes in costs and revenue in all of the hospital's departments. Overall institutional performance, therefore, is the expected performance without trauma center designation plus the incremental effect of the program.

DESIGNATION COSTS

Costs of designation fall into two categories: the initial capital requirements and ongoing operating expenses. The medical equipment required for trauma center designation is within most hospitals' capital capabilities.

In contrast, most facilities were not constructed to manage the special needs of trauma patients. For most hospitals, therefore, the largest capital expense is for renovation of the ER, operating room (OR), or other specialty facilities within the hospital. Renovation expenses vary greatly, though it is not unusual for hospitals to spend from $500,000 to $1 million for renovations in support of trauma center designation.