At the Margins

Taking stock of surgery: Is it time to revisit your assumptions?

by John Johnston, CPA, MHA

Health system leaders have long known the financial importance of strong surgery volume. Through the years, most hospitals not only have streamlined operations within the operating room (OR) to maximize throughput, grow capacity, and attract new business but also have expanded their reach in the market. The question facing hospitals today is: Has our approach to surgery kept up with the new reality? 

With only modest growth forecast in inpatient and outpatient surgery in the next few years, and the likelihood of greater downward pressure on payment, competition for surgery market share is heating up. Recent surgical technology advances add new complexities to a business that is already complex. Now is the time for health systems to take a step back and assess the cost efficiency of their surgical business—from the mix of services across care sites to performance in the hospital OR and across the perioperative continuum—to stay competitive and profitable.

Rationalizing service delivery across the system

For many systems, surgical business line expansion to multiple locations has been an incremental process, and management has not always kept pace with the reach—and complexity—of the footprint.

It's no longer about running a single hospital inpatient OR efficiently; it's about managing numerous facilities and locations that often have different governance structures and that provide a broad range of increasingly specialized services. It is not uncommon today for a large community health system to have built a separate cardiac surgery suite, bought a free-standing ambulatory surgery center, or entered into a joint venture for an orthopedic surgery center—and if the organization has any one of these steps it likely has taken all of them.

The combination of multiple locations and greater specialization creates challenges to managing efficiency, patient satisfaction, and coordination with surgeons and their offices. Health system leaders are faced with creating new management and governance structures to ensure the overall surgical business line meets clinical, operational, and financial goals.

With payment levels declining and patient price sensitivity increasing, leaders also need to assess the full surgical portfolio across the entire system and identify opportunities to deliver care more cost effectively. Are outpatient procedures performed at the best location to align quality and cost? Is there duplication of services that could be eliminated? Would consolidating specific services into fewer locations enable operational efficiencies, and leverage management talent better? How can that be done without inconveniencing physicians and patients?

A medical center in the Midwest that had expanded over 10 years to include seven different ambulatory locations recently decided to bring ophthalmology procedures and many gastrointestinal labs into the hospital's outpatient wing and reduce the number of freestanding locations to five, while still preserving geographic convenience for physicians and patients alike. This consolidation is expected to reduce annual operating costs by $4 million.

Renewing discipline in the OR

As to performance within the hospital OR itself, leaders generally believe they addressed this problem years ago: improving on-time starts, instituting block scheduling, and refining surgeon preference cards. Although those initiatives were successful at the time, an important concern is whether the ORs have continued to operate at the same level of rigor. With the expansion into new services and the addition of new physicians, we've seen again and again how discipline erodes and the OR drifts into inefficiency.

It's not enough to re-instill the same performance metrics; as competition intensifies, we also must revisit our assumptions about what constitutes high OR performance. This effort should address a number of key questions: Does our executive team have a meaningful dashboard containing OR business characteristics that you can use to drive strategy? Does our operational dashboard include nationally benchmarked process measures stratified by service line? How are we currently evaluating service line performance, efficiency, and resource stewardship?

Managing the perioperative continuum

As demographic shifts bring hospitals ever-more complex patient populations, it is essential to have the full picture of performance across the entire surgical encounter to optimize clinical outcomes for the patient and financial performance for the organization. Consider, for example, the case of a 64-year-old female patient coming in for a knee replacement. If pre-admission screening does not adequately uncover comorbidities and other considerations (e.g., obesity and diabetes) and the fact that the patient lives in a home with stairs, the patient may have a difficult recovery within the hospital or have complications after being discharged, even if the procedure itself was successful. Tracking performance metrics only in the OR wouldn't indicate a problem, but a broader examination of length of stay, comorbidities, and 30-day readmissions would reveal that the episode did not result in a successful clinical outcome, and in fact ended up generating excess costs.

Redefining surgical performance to incorporate quality and cost measures across the entire surgical episode provides a more meaningful way to assess the outcome for the patient—and the efficiency of a healthcare organization's model. Such measures are necessary to successfully compete for surgical volumes and deliver high-quality services profitably—under both fee-for-service and value-based care. Future sustainability will come not simply by reinforcing the cost discipline of the tried and true, but by revisiting assumptions about what a cost-efficient surgical model really looks like.

John Johnston, CPA, MHA, is an Advisory Board senior vice president and national partner

This article previously appeared on the hfm Healthcare Finance Blog.

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