During a recent discussion on operational improvements I was asked for “my” number for the cost of an OR minute. “What’s your point?” I asked. “It tells us how much we can save by reducing time in the OR,” he responded. Unfortunately, this is a fallacy. It’s even more unfortunate that there are many others who share this misunderstanding.
Before explaining the source of this fallacy, let’s consider why the number is important, how it’s calculated and who should be interested in the number.
The number is essential to assessing a hospital’s profitability by comparing the hospital’s costs to the reimbursements it receives. In addition to the cost of materials and supplies used in a case, the hospital also needs to calculate the cost of everything else that should be allocated to, say, a lap chole procedure.
That includes nurses in the pre-op area, the OR and the PACU; the ancillary staff assigned to these areas; housekeeping; the staff in central sterile; the schedulers; the administration; the equipment in the pre-op area, OR, PACU and central sterile; and depreciation on all the facilities, including the parking lots. You get the picture.
One of the challenges is to determine how to allocate those indirect expenses. For example, on what basis should the CEO’s compensation be allocated to the OR?
When all these expenses have been identified and allocated, the next step is to estimate the total case minutes for the next accounting period. Finally, the allocated expenses are divided by the total number of case minutes to arrive at the cost of an OR minute. This can then be used to calculate the average cost of a lap chole by multiplying the average OR time for a lap chole by the cost of an OR minute and adding in the variable costs for materials and supplies.
It’s the administration that’s interested both in the OR cost per minute and, of course, the difference between what the hospital receives for a lap chole and what it costs; as calculated in the manner just described.
This description of the process of calculating the cost of an OR minute tells us that the financial impact of reducing tardiness of first cases, reducing turnover time or better scheduling cannot be calculated by multiplying OR minutes saved by the cost of an OR minute. As proof of this, consider:
- Did the improvement project reduce the hospital’s payroll?
- Did it make any buildings go away?
This does not mean that reducing turnover time or instituting better scheduling don’t pay off. It does mean that the financial impact of these actions must be estimated differently.
In fact, reducing turnover times and improving the scheduling process may allow a hospital to regularly schedule additional short cases without adding staff. These short cases generate substantial incremental margins: By routinely adding a one-hour case every day, a hospital can increase its margin by $500,000.
And that number has absolutely nothing to do with the cost of an OR minute.