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    This blog is intended to encourage open dialogue and learning amongst members and interested parties of the perioperative and periprocedural communities for the purpose of envisioning and encouraging higher performing systems.

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The Apparently Dismal Economics of Reducing Hospital-Acquired Infections

Posted at 1:47 pm on May 09, 2012 by

Several months ago I wrote about the cost of an OR minute.

Hospital-aquired infectionsThis time I’m taking on the cost of a hospital-acquired infection (HAI). More specifically, I’ll be discussing the financial impact of eliminating an HAI on a hospital’s profitability. “What’s the cost of an OR minute got to do with the financial impact of eliminating an HAI?” you might ask. Plenty! It’s all about understanding the real financial consequences of improvement projects.

Let’s say your hospital’s accountants have determined the full cost of a particular HAI to be $20,000 over and above the cost of a normal stay for that condition or surgery. In arriving at the figure, they’ve taken into account the (average) cost of medications and supplies, the time of the nurses and their supervisors, the time of support staff, the utilities, the depreciation on the buildings and equipment, an allowance for the hospital administration, etc. So, if the HAI rate is reduced through the hard work of a group of clinicians, how much will the hospital save per HAI eliminated?

Sadly, the answer is not $20,000. It’s only about 10% to 15% of that figure. Why? Because that’s an estimate of the variable portion of the cost – primarily for the medications and supplies. So let’s assume that the hospital saves 15% or $3,000.

Now let’s look at what the hospital had to give up to reduce the HAI rate. Well, there were all those clinicians I mentioned. Their time is expensive. And they probably purchased some equipment for their project, and created a protocol that increases the hospital’s expenses.

The good news is that the correct way to analyze the situation is to ignore the clinicians’ time unless they were hired specifically to work on the project. However, we do have to take into account any additional expenses resulting from the new protocol. But we don’t expect them to be too big. Let’s say they average out to $200 per HAI averted.

At this point, then, the net savings appears to be $2,800 ($3,000 – $200) per HAI. This is far less than the $20,000 that would result from an incorrect analysis.

But wait! There’s more!

The Impact on Revenue

Suppose the hospital was receiving reimbursement for the excess length of stay associated with the HAI. Let’s assume that it was $5,000 or only 25% of the $20,000 cost. In that case, the hospital would lose $2,200 ($2,800 – $5,000) for each HAI it succeeds in eliminating. And so, the hospital could lose money by doing the right thing. It all depends on the magnitude of the average reimbursement associated with the HAI. In this example, if it’s greater than $2,800 the hospital loses money. Or, more correctly expressed, in the example, the hospital’s cash flow is negative if the average reimbursement associated with the excess length of stay exceeds $2,800.

The example is not a fantasy. It is based on a situation that Dr. Warren Sandberg and I recently addressed in a letter to the editor (PDF) of the American Journal of Medical Quality entitled “The Correct Business Case for the Michigan Keystone Patient Safety Program in ICUs.” In our letter, we consider an analysis that erred in using the full cost of an infection and the full expense associated with the clinicians’ time. However, as we state at the conclusion of our letter:

“[o]ur purpose is to help hospital leaders understand that, in the short term, the benefits of programs such as the one reported in the article, should be measured in terms of lives saved and improved rather than dollars.”

I’ll have more to say about the hospitals’ apparent dilemma associated with projects to improve clinical quality in a future post. Hint: It’s not as grim as it sounds, but it does require thinking out of the box.

IF you need help eliminating your HAIs, please contact us.

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Getting to Know Your (Time-Driven) ABCs

Posted at 9:10 am on Nov 09, 2011 by

In my previous posting I praised Robert Kaplan and Michael Porter for applying Time-Driven Activity-Based Costing (TDABC) to uncover differences in the costs for total-knee procedures in U.S. hospitals and two hospitals in Germany and Sweden.

Their sample was admittedly very small, but the findings suggest that the leading culprit is lower productivity in the U.S.

However, the major point of their article in the September issues of the Harvard Business Review was to advance the benefits of TDABC to health care.

Activity-Based Costing

So, does their prescription to use TDABC make sense? Read more about this article »

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How to Solve the Cost Crisis in Health Care

Posted at 10:44 am on Nov 04, 2011 by

When two of the best-known thinkers from the Harvard Business School offer their prescription on how to solve the cost crisis in health care, it’s time to listen.

In the September 2011 issue of the Harvard Business Review, Robert Kaplan and Michael Porter put it bluntly: “there is an almost complete lack of understanding of how much it costs to deliver patient care, much less how those costs compare with outcomes achieved.” Read more about this article »

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Let’s Start Investing in Measuring Value for Patients

Posted at 5:04 pm on Dec 15, 2010 by

As consultants, we rely on metrics to assess the impact of our work.  Thus, when our clients don’t already measure what we might improve, we face an uphill battle.  And the battle becomes particularly frustrating when institutions don’t measure what we consider to be most important: value to the patient.   But what do we mean by “value”?  Very recently, Michael Porter defined it as health outcomes achieved per dollar spent.

We applaud his definition because it’s consistent with our position that perioperative systems should be judged by a double bottom line: quality of outcomes and financials.

Porter is very careful to stress that outcomes must be measured in terms of results achieved for the patient; process measures are not outcomes.  Moreover, he points out that the principal reason for collecting the outcome measures is to enable “innovations in care.” Read more about this article »

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