Cost Reduction in the OR

Analyze supply cost data, map it to reimbursement data, and develop a cost-per-case roadmap

Photo by Natanael Melchor on Unsplash

This Research Report was conducted in September 2019. We have altered the formatting to be accessible through Medium. If you’d like the PDF download of this report, you can download it by clicking here.

In June 2019, an Executive Order issued by the White House directed the Department of Health and Human Services (HHS) to issue new proposed regulations.

This regulation requires hospitals:

“to publicly post standard charge information, including charges and information based on negotiated rates and for common or shoppable items and services, in an easy-to- understand, consumer-friendly, and machine-readable format using consensus-based data standards that will meaningfully inform patients’ decision making and allow patients to compare prices across hospitals services.”[1]

This ruling is intended to transform the way in which hospitals interact with their patients. Doing so creates a new level of transparency, mandating public disclosure of proprietary rates found in negotiated contracts between payers and health systems.

This mandate, if enacted, has the potential to transform the face of the healthcare market.

While legal challenges are expected, hospitals must be prepared for these possible changes. In a letter to the Office of the National Coordinator dated June 3, 2019, the AHA (American Hospital Association) recommended that “the agency focus its efforts on patient’s out-of-pocket costs to address the goal of price transparency”.

Furthermore, the AHA recommends: “In addition to developing the technology necessary to scale price transparency solutions, we urge the agency to consider how to educate patients to interpret and use the data.”[2]

Drawing on our frontline expertise at VIE Healthcare® Consulting, this report explores the impact of pricing transparency for hospitals, and the urgent need to implement our proven approach to cost reduction, specifically in the OR.

Our approach is multi-faceted: to analyze supply cost data, map it to reimbursement data, and develop a cost-per-case roadmap. We work with clinicians and hospital leadership to design a customized plan for cost savings.

Our strategy includes the vital education, collaboration, and alignment between finance and surgeons. If providers understand the true costs of procedures, and the resulting reimbursement, they can assist both the hospital and their patients in decision making.

Why Is the OR So Important

High performing hospitals have high performing Operating Rooms (ORs)[3].

It is that simple, yet complex matter in hospitals where purchasing decisions, reimbursement, and clinical preference are not always aligned, and true cost per case is often difficult to assess.

The OR is one of the most costly and labor intensive areas in your organization. Overall, it accounts for 40% of total hospital expenses and generates 70% of revenue, making it a critical area for margin improvement [4].

In December 2017, The Agency For Healthcare Research and Quality (AHRQ) reported that inpatient stays with OR procedures accounted for more than a quarter of all hospitalizations and almost half of all the aggregate hospital costs in 2014 [5]. On average, hospital costs for stays with OR procedures are more than double the costs for inpatient stays without OR procedures.

As hospitals face rising costs, the pressure for transparency in pricing will bring more focus on areas for cost efficiencies. This is intensified by the requirement for patients to have access to useful price comparisons for “shoppable” services and thereby the ability to consider alternative care providers.

We recommend that the OR is your starting point.

Research shows that a high performing OR is also an indicator of a health system which offers:

• Operational excellence
• High fiscal performance
• Quality care with best clinical outcomes
• Greater patient satisfaction
• It has also been linked directly to a growth in market share and both research and teaching excellence in academic hospitals.

Challenges To Cost Reduction

In the majority of cases, the biggest challenge to achieving cost reduction in the OR is the lack of insight or awareness of potential cost saving opportunities. We have outlined some of those issues below:

Challenge 1: Supply chain management

By 2020, supply chain costs are predicted to overtake labor expenses as the number one cost in US healthcare. Furthermore:

• Cost incurred on materials represents a third of hospitals' total recurring expenditure [6].
• Poor management of the supply chain can result in non-availability of the right equipment in hospitals, particularly in the OR.
• Without cost-containment, financial sustainability becomes a problem for many hospitals.
• However, each health system could save around $11 million every year if it transformed its supply chain[7].
• An HFMA survey found that healthcare leaders are generally in agreement about the value of the supply chain and believe it is possible to improve hospital margins by between 1 to 3%. A hospital with a 1% profit margin of $900 million in revenues could increase supply chain margins by between $9 million and $27 million.[8]
• CFOs and supply chain leaders reportedly enjoy the most influence on the implementation of specific strategies and solutions, but this cannot be achieved in isolation. As we emphasize again later in this report, collaboration is vital.
• This means that everyone involved — from your purchasing team to your frontline staff — must understand their role in the supply chain.

Challenge 2: Provider price awareness

A review of current available literature reveals the lack of knowledge among surgeons relating to OR supply costs. To comprehensively illustrate the depth of this challenge, we have highlighted four quotes from recently published studies below.

Operating Room Supply Cost Awareness: A Cross-Sectional Analysis; Bogdana Schmidt; Maxwell Meng;Lindsay Hampson;Urology Practice. 6(2):73–78, MAR 2019 [9].

“Trainees and faculty generally have poor knowledge of operating room supply costs. In our academic setting, we noted an interest among faculty and residents to make cost data more accessible. These data would provide an opportunity for surgeons to act as cost arbiters in the operating room.”

Interventions to Reduce Intraoperative Costs: A Systematic Review; Christopher Childers; Amy Showen;Teryl Nuckols; Melinda Maggard-Gibbons; Annals of Surgery. 268(1):48–57, JUL 2018 [10].

”….hospitals seeking to reduce costs may be able to do so safely by standardizing operative instruments or providing cost feedback to surgeons’’.

Surgical Cost Disclosure May Reduce Operating Room Expenditures, Austin LS, Tjoumakaris FP, Ong AC, Lombardi NJ, Wowkanech CD, Mehnert MJ.Orthopedics;2017 Mar 1;40(2):e269-e274. doi: 10.3928/01477447–20161116–03. Epub 2016 Nov 23.[11]

“The findings suggest that providing physicians with knowledge about their surgical charges can alter per-case expenditures”.

Surgeon Awareness of Operating Room Supply Costs; Christopher Jackson; Roland Eavey; David Francis; Annals of Otology, Rhinology & Laryngology. 125(5):369–377, MAY 2016 [12].

“A majority of surgeons were unable to correctly estimate the costs of items/implants used in their OR. An opportunity exists to improve the mechanisms by which cost data are fed back to physicians to help promote value-based decision making.’’

It is clear that a significant opportunity exists in this area to identify dramatic cost reduction opportunities, help to raise price awareness, and drive better value based choices. For health systems to maximize their cost saving opportunities in the OR, future policies must take account of this fact.

These peer-reviewed studies support the idea of physician and hospital alignment in order to manage costs, which in turns drives margin improvements. Making cost data more accessible also enables surgeons to make more informed decisions around the OR.

At VIE Healthcare®, we collaborate with our clients to achieve that outcome by creating a customized Cost Playbook for your surgical staff. This unique Cost Playbook provides a means to prospectively understand costs associated with each individual procedure.

This enables surgeons to make informed decisions, with options, on the selection of surgical supplies and PPIs.

Challenge 3: The surgeon/vendor relationship

Surgeons may often develop strong relationships with sales representatives from their vendors. Frequently, the representative accompanies the surgeon in the OR, offering advice on new products or educating them on new methodologies. In these cases, it is understandable that a bond develops that may make surgeons reluctant to move to a new vendor.

Furthermore, the surgical residence may influence the choice of vendor. If surgeons are trained to carry out a procedure using a specific component, they may opt to continue using that brand once their residence has finished.

These factors need to be considered by hospitals in evaluating potential cost reduction opportunities.

Research carried out in 2018 noted the following:

Burns LR, Housman MG, Booth RE, Koenig AM. Physician preference items: what factors matter to surgeons? Does the vendor matter?
Med Devices (Auckl). 2018 Jan11;11:39–49. doi: 10.2147/MDER.S151647. eCollection 2018 [13].

‘‘Physician’s preference is heavily influenced by technology/implant factors and sales/ service factors. Other considerations such as vendor reputation, financial relationships with the vendor, and implant cost seem less important. These findings hold regardless of implant type (hip vs knee) and specific vendor….. PPIs are products that surgeons rate favorably on the twin dimensions of technology and sales/service.’’

Since surgeons maintain close relationships with vendors through their sales staff, they can be instrumental in the collaborative pricing negotiations.

Case Study

A Spine Success story: Collaboration with the C-Suite and Physician

VIE Healthcare® was asked to help to reduce the costs of implants for spinal surgeries in a 300 bed hospital located in the Northeast. We completed an extensive analysis of the implant utilization, and corresponding costs. VIE Healthcare® presented the data to the surgeon, who expressed surprise at the high costs of the components. The surgeon was also instrumental in negotiating with the vendor to reduce costs and save the hospital thousands of dollars per case.

Lesson learned: Surgeon cost awareness and their vendor relationships are essential factors in achieving cost savings in the OR.

Some concern has naturally been expressed regarding the potential impact that cost cutting exercises in the OR may have on patient care and outcomes. Careful analysis of the available data enables cost reduction exercises to be carried out without diminishing patient care in your organization.

A 10 month study into spine surgical procedures at a tertiary care center resulted in a cost decrease for the surgical implants [14].

Further research into strategies to reduce intraoperative costs shows that cost savings are achievable without any increase in adverse effects.

Christopher Childers; Amy Showen; Teryl Nuckols; Melinda Maggard-Gibbons; Annals of Surgery. Intervents to Reduce Intraoperative Costs: A Systematic Review 268(1):48–57, JUL 2018 [15].

“Almost all studies assessing interventions to reduce intraoperative costs have demonstrated cost savings with no apparent increase in adverse effects. Methodologic limitations, especially related to cost data, weaken the reliability of these estimates for most intervention categories. However, hospitals seeking to reduce costs may be able to do so safely by standardizing operative instruments or providing cost feedback
to surgeons.”

Sustainable Cost Reduction Strategies In The OR

As health systems begin to respond to the new HHS directive, hospital costs will come under greater scrutiny with the move towards price transparency.

Although the concept of price transparency has been in place for a while, the Executive Order from the White House incorporates new directives. These include the requirement to create simple, user friendly tools.

It is expected that both insurance companies and hospitals will react negatively towards this concept, but the future of this ruling is unknown.

Hospitals must prepare for whatever change is coming.

Sustainable cost reduction strategies in the OR can be achieved through various methods and approaches, as outlined in this report. It is essential to truly understand where opportunities exist to reduce costs while maintaining or exceeding quality patient outcomes.

Strategy 1: Providing cost feedback to surgeons

Cost data provides surgeons with a significant opportunity to influence cost efficiencies in the OR. Making that data accessible is the key, and surgeons must be informed of pricing variations.

As we highlighted in the previous section of this report, our customized Cost Playbook from VIE Healthcare® achieves this outcome for all surgical staff.

Example 1: Preference cards

While clinicians can’t impact labor or indirect costs, they can directly control the supplies used for a specific operation through their preference cards. Preference cards provide a list of supplies and equipment required for a particular case.

Most systems often have significant variability in surgical supply use by different surgeons. This can result in considerable cost differences for similar procedures across just one hospital, often without a proven benefit or improvement on patient outcomes.

Operative costs involved in purchasing, packing, and transporting unnecessary supplies can be reduced by improving surgeon preference cards and their accuracy. Ongoing surgeon involvement in preference card management can therefore lead to waste reduction in the OR and cost savings[16].

Example 2: Pricing labels

Research shows that surgeons become more price conscious when pricing labels are placed on products in the OR.

For example, implants are often the most significant component of the entire cost of a procedure, yet awareness around pricing can be poor. Implant familiarity was the most common reason for surgeon selection in one study.

The simple strategy of including prices alongside the implant list resulted in the surgeon’s choices taking into account the price variance of implants. Price awareness was shown to significantly influence the final section of a specific model within the same class of implant. This straightforward method to raise price awareness among surgeons represents one of the biggest untapped opportunities for cost reduction in the OR [17].

Example 3: Inventory

It is also critical to monitor owned versus consigned inventory. ORs usually have a tremendous inventory, and they’re often mixed between the two. When a hospital loses track of this, it can understandably lead to discrepancies or confusion around costs.

Strategy 2: Collaboration between physicians and hospitals

Collaboration and alignment between physicians and hospitals are critical to identifying and achieving cost savings in the OR while maintaining quality patient care [18]. It empowers hospitals to maintain a balanced and informed decision-making process, encompassing product cost and clinical quality, and outcomes to create a high performing OR and a high performance hospital.

In our experience at VIE Healthcare®, surgeons embrace the evidence-based feedback. Their subsequent involvement helps to reduce waste in the OR and support cost savings.

It is essential for hospitals to utilize their surgical staff's extensive knowledge and advice, both in clinical and financial aspects.

In addition to the challenges to cost reduction already discussed we frequently see the following issues:

• Provider burnout, including resistance to finance participation due to the increased volume of administrative responsibilities and documentation.
• Constant changes in the marketplace related to pricing and contracts for OR supplies and high cost implants.
• Propensity of manual processes which are vulnerable to high levels of human error. A geater opportunity for transformation exists with data analytics implementation.
• Trends in utilization with new technology
• Bill-only product billing accuracy.
• Missing opportunities for charge capture.
• Inability to have reimbursement tie-in, creating a true cost per case analysis.
• Other innovative approaches to expense reduction.

Proven OR cost reduction strategies from VIE Healthcare®

• Physician engagement and feedback to surgeons. This is achieved through cost analytics mapped to reimbursement
• Creation of a customized Cost Playbook.
• Identifying surgeon champions to lead the effort to align finance and clinical teams.
• Development of clinician/finance partnership councils based on surgical specialties, with cost and reimbursement updates provided regularly
• Physician Preference Items: A “deep dive data analysis” integrated with physician input and alignment can realize significant cost savings.

Conclusion

The OR is a dynamic environment with multiple hidden cost saving opportunities which a customized approach to costs and revenue management can realize.

The implications of the President’s Executive Order are yet to be fully understood. As numerous challenges lie ahead for hospitals and healthcare providers, identifying the opportunities for cost reduction and implementing sustainable strategies will help to drive margin improvement while still maintaining or exceeding patient care.

References

[1]https://www.whitehouse.gov/presidential-actions/executive-order-improving-price-quality-transparency-american-healthcare-put-pa- tients-first/
[2] https://www.aha.org/system/files/media/file/2019/06/aha-let-onc-21st-century-cures-act-hit-proposed-rule-6-3-2019.pdf
[3] https://www.usnews.com/info/blogs/press-room/articles/2018-08-14/us-news-announces-2018-19-best-hospitals
[4] https://www.openanesthesia.org/or_costs_labor_vs_materials/
[5] https://hcup-us.ahrq.gov/reports/statbriefs/sb233-Operating-Room-Procedures-United-States-2014.pdf
[6] https://www.ncbi.nlm.nih.gov/pubmed/24010261
[7] https://viehealthcare.com/4-reasons-to-invest-in-your-supply-chain-in-2019/
[8] https://www.hf ma.org/topics/operations management/article/healthcare-leaders-agree-about-the-value-of-supply-chain- managem.noauth.html
[9] https://www.ncbi.nlm.nih.gov/pubmed/31106254
[10] https://insights.ovid.com/pubmed?pmid=29533265
[11] https://www.ncbi.nlm.nih.gov/pubmed/27874914
[12] https://insights.ovid.com/crossref/00000627-201605000-00002?isFromRelatedArticle=Y
[13] https://www.ncbi.nlm.nih.gov/pubmed/29391836
[14] https://www.ncbi.nlm.nih.gov/pubmed/30626523
[15] https://insights.ovid.com/pubmed?pmid=29533265
[16] https://www.ncbi.nlm.nih.gov/pubmed/28669894
[17] https://www.ncbi.nlm.nih.gov/pubmed/28606437
[18] https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3706670/

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Lisa Miller via VIEHealthcare.com