STRATEGY | OASC

A Strategic Look at Case Costs

DON’T WASTE TIME TRACKING EVERY PENNY. CONTAIN RELEVANT COSTS TO INCREASE REVENUE.

By Stephen C. Sheppard, CPA, COE

If your ASC is focused on maximizing its profits, then it’s likely you have a manager who calculates case costs. As such, your ownership group supports this effort and is willing to make individual concessions to reduce costs.

If you haven’t calculated case costs or if you’ve done so without any concrete results, such as reducing your costs, then you may benefit from a more strategic approach to number crunching. You already have the data at your fingertips. You just need to spend time tracking key numbers, such as individual doctor’s costs for high-volume procedures, to help increase profitability.

Why Calculate Case Costs?

For an ASC to increase its financial stability, management must spend time tracking and evaluating cost data. If you don’t have a good handle on facility costs, it will be difficult for you to be profitable over the long term. It’s a good idea for an ASC’s owners and management to know their case costs per procedure, so they can benchmark those numbers internally as well as against industry numbers.

You have so much data at your disposal — where do you begin? Give it some thought. There’s little value in knowing the facility’s average case cost, for example. However, if an ASC has 10 doctors performing cataract surgery, finding the case cost for each surgeon enables you to compare that information and use it to encourage best practices and reduce costs within the group.

Case costs also can help identify opportunities to aggregate purchasing. If you’re buying from three different vendors, you’re probably not getting the best price from any of them. If an analysis of individual case costs can help fuel consensus among surgeons about instruments and supplies, that will increase your ability to buy larger volumes from fewer suppliers, which should help you secure better pricing. These numbers can help surgeons see and seize the opportunity to increase profitability.

What Should You Calculate?

ASCs should develop tables that show all the major costs for a procedure and whittle it down to the finest details. You can determine the cost of each minute of a technician’s time or a pair of surgical gloves, but as an accountant, I wonder why you’d want to know that. What would you do with that information? (See What Not to Calculate)

As a starting point for any discussion of case costs, ask yourself, What do we want to accomplish? What information can help us reach our goals?

The answers to these questions should drive what costs you include in the calculation. It’s the difference between a very good, nice-to-know evaluation of your marginal case costs and a relevant evaluation that can support positive action items to improve the financial health of your ASC.

The potential components of your calculations may include facility costs, staff costs, supply costs and all of their subcategories. Most of the facility costs are outside management’s range of control. They are “fixed,” at least over a relevant range of case volumes. For example, going from 1,000 cases to 1,050 cases doesn’t have much of an impact on rent, utilities, cleaning, infection control, taxes and other occupancy and administrative costs.

Staff labor costs typically warrant an examination, particularly if you already suspect some inefficiencies. While many ASCs are operating without any unnecessary staff, an evaluation of labor costs centered on surgical schedules may show that your staff is fully utilized some days but not others. This information can be used to help you devise more profitable schedules. This analysis also may highlight opportunities to substitute lower cost staff members when appropriate so you can improve efficiency, flexibility and coverage.

For most ASCs, the biggest opportunities to save money are in surgical supplies and medications because management has more control in these areas. And the most productive way to examine supply cost differences and savings opportunities is to develop surgeon-specific data (See Utilizing Cost Data for Individual Doctors).

For example, your surgeons may use different drops of varying cost before and after surgery. If they can all agree to use a less expensive drop, then the practice may be able to secure better volume pricing from the less costly supplier.

In some cases, instruments can be changed. If some surgeons use diamond blade knives while others use single-use steel blades, you might look at the cost and number of uses for each knife, as well as the maintenance costs of upkeep on reusable instruments.

It’s often up to the office manager to lay out the data and say, “Here’s what each of you is doing individually. You can see the areas that are costing us money. Who is willing to make a change?”

What Procedures Should Be Assessed?

Management’s time and resources are best spent developing accurate case cost information for those procedures that are performed frequently and, therefore, potentially have the biggest impact if changes can drive down costs. Any practice management system will tell you your case volume by CP code, but in many ASCs, the high-volume procedures are already clear.

High-volume procedures: Obviously, when possible, the preferred alternative for increasing profitability is to increase the number of high-volume procedures performed. Alternatively, a thorough case cost analysis can show you how reducing certain variable costs — supplies or labor — can boost profitability when multiplied through high-volume procedures.

Virtually every ASC tries to increase procedure volumes to boost profitability, and everyone wants to increase the same types of high-volume cases they’re already performing. The equipment, trained staff, supplies and supply chain management are already in place, so more volume doesn’t mean more investment, making it very quick and profitable for ASCs to recruit surgeons to fill unused time with additional cataract procedures.

Let’s consider cataract surgery. Variable costs of supplies, including the intraocular lens, viscoelastic, phaco cassette and tubing, a custom tray, the phaco needle and so on may be about $250, depending on the surgeon’s choices.

Marginal labor costs should address the question, “Who will I send home if I don’t perform this extra case?” For a single cataract case, the marginal staff might include a surgical technician, circulating nurse, a pre-op nurse, a recovery nurse and perhaps a front office person. If we assume we’re paying those five people $30 per hour on average, including benefits and taxes, then 1 hour of their time is a combined $150.

The variable costs of surgical supplies will always subtract $250 from your reimbursement, while labor costs reflect your typical case times. Many ASCs target three cataract cases per OR hour as an achievable standard; thus, in our example, marginal labor costs are approximately $50 per cataract.

If CMS reimbursement is about $950 per case, the ASC will make $650 at the margin for that single case. That’s the financial leverage of increasing surgical volume.

Often, ASCs don’t have the flexibility to add certain cases because there are a limited number of physicians in the market available to use the facility. Even if an ASC can add less profitable cases at the margin (e.g., oculoplastics cases), those cases will boost the bottom line. They usually don’t require any substantial capital purchases for an ophthalmic ASC, supply costs are relatively minor, and CMS reimbursement for functional oculoplastics cases is in the $750 to $800 range.

High-cost procedures: Another productive area to evaluate is your list of high-cost procedures. This is particularly true in ASCs where physicians perform a considerable volume of retina procedures, which have significantly higher case costs than anterior segment surgeries.

In an ASC where surgeons perform an appreciable volume of retina cases, it’s worthwhile to look at their case costs. Some complicated retina procedures may actually lose money, but the ASC may be willing to support those cases to benefit from the straightforward vitrectomies, peels, puckers and holes.

Sometimes we find that retina cases can be more profitable with smarter scheduling. These cases often take longer and may have lower profit margins per OR hour than cataract surgery, so if those surgeries are crowding out more profitable cases, there is a scheduling opportunity. The ASC can adjust the hours for those kinds of procedures, reallocate block time or take other steps to enhance profits. ASCs generally have a fair amount of unutilized OR hours (it’s rare for an ASC to operate at 90% utilization or higher), so there’s often room to adjust the schedule.

Does Everyone Do This?

Every partner in an ASC should receive basic quarterly financial statements and key benchmark data that give the 30,000-foot view of the facility’s financial stability, but hands-on involvement varies tremendously, as does the motivation to define and control costs through such measures as case costing.

If an ophthalmic ASC has appropriate surgical volumes, then the center will operate profitably. However, depending on the focus of the ownership group, it may or may not operate efficiently. The most successful groups are aware of costs, the varying case costs of different physicians and negotiations for favorable pricing.

However, in my experience, ASC management structures vary broadly in their sophistication. While some owner physicians are paying attention and getting the resources and expertise they need to operate efficiently, other groups are dysfunctional, remote and disinterested in the “business side of the practice.” That kind of approach doesn’t support highly profitable operations. The ASC can muddle along with an environment that is friendly to physicians and patients, but they cannot maximize their profits.

Size is a factor in determining whether an ownership group is actively involved or not. Large, multispecialty ASCs often give doctors ownership shares of 1% to 3%, so there’s little incentive for any individual doctor to spend time on business operations. A smaller ownership group with larger individual shares tends to be more close knit and more focused on operating efficiently and profitably.

Not everyone calculates case costs. But if you’re interested in maximizing profits in your ASC, it’s what you need to do. ■

STEPHEN C. SHEPPARD, CPA, COE, is managing principal at Medical Consulting Group. He can be reached at ssheppard@medcgroup.com.