Written by Brian Gustin- President, Forensic Prosthetic and Orthodontic Consulting
Understanding the meaning of cost is the first step in objectively defining quality. We must first understand what the term “cost” means, which varies according to the opinion of different stakeholders. Cost, to politicians and policy wonks, is tied to reimbursement which has absolutely nothing to do with the cost incurred to provide a given service. Cost, to providers, relates to the internal cost of delivering care.
As providers of care struggle with reimbursements and profitability, the O&P industry will need to develop a system to properly capture and measure their internals costs and compare this cost to the quality of the outcome. This will be the first step in actively practicing comparative effectiveness. Currently (in the absence of this system), we are seeing providers destroy the value of care by focusing on highly reimbursed items to replace their lost margin, often disregarding the clinical effectiveness of the service provided.
If we accept the new concept that value is measured in terms of patient outcomes per dollar spent and more expensive services do not necessarily create better patient functionality, then how does O&P create value by treating patients with a given diagnosis? The answer is by considering the long-term costs of all resources consumed during the patients spectrum of care.
To properly understand these costs, it is assumed the providers have created a defined and measurable process for delivering care. Unfortunately, many facilities do not have processes that are definable and repeatable. This problem is not unique to O&P and most healthcare models are inconsistent in the delivery of patient care throughout their spectrum of services. Management will need to begin documenting the processes used to deliver service and define all aspects of patient care, like identifying who is needed to perform a process, how long the process takes, how much space is required for the process, and what supplies are necessary.
A patient consumes various resources during the process of delivering patient care. There are administrative costs like checking the patient in and completing the documentation, there are clinical costs to assess and deliver care, and technical costs to fabricate the definitive device. From this example, we learn the administrative staff spent 18 minutes (0.3 hrs.), the technician spent 24 minutes (0.4 hrs), and the practitioner spent nine minutes (0.15 hrs.) to provide the service.
From here, we calculate the cost of each resource consumed during patient care using the following formula:
- Resource Cost Rate = Expense of all Resources/Available Capacity of the Resource (time)
The Expense of All Resources needed for care includes the sum of all compensation (including taxes, fringe benefits – i.e. health ins, pension or retirement plan cost, etc.) plus the cost of all other factors that make the resource available (such as a pro rata share of space cost, cost related to employee supervision, and any equipment or technology costs each may use to perform their job).
Thus, the Expense of All Resources for one of the individual involved in care of a patient may be as follows:
Annual Compensation – $65,000
Supervision Cost (10% of their Manager’s full-time cost) – $9,000
Space Cost (100 sq. ft. @ $25/sq. ft./year) – $2,500
Technology & Support – $1,800
Total Annual Cost – $78,300 or $6,535 monthly cost ($78,300/12)
The Available Capacity of a Resource formula is as follows:
Total Annual Days – 365
Less Weekend Days – 104
Less Vacation Days – 20
Less Holidays – 12
Less Sick Days – 5
Total Annual Days Available – 224 or 18.7 days monthly (224/12)
Hours per Work Day – 8.0 hours
Less Breaks – 0.5 hours
Less Lunch – 0.5 hours
Less Meetings, Training, Etc. – 1.0 hours
Total Available Patient Hours – 6.0 hours
Total Days Per Month x Hours Per Work Day = 112 hours per month
This staff member is available for direct patient care 112 hours per month (18.7 days x 6.0 hours). Therefore, the monthly costs of the resource (calculated above) divided by the available time ($6,535/112 hours) gives us a total cost of $58.35 per hour for this one resource. Complete this calculation for all people within the organization whose time is consumed by a patient. Then simply add all the per hour costs and multiply by the total number of hours spent with the patient to arrive at the total cost of a visit.
This analysis is invaluable when identifying the true cost of providing care and is often overlooked when measuring the return on investment per patient. In order to remain profitable, it will be necessary (and a good practice) for providers of care to apply the principle of comparative effectiveness.
About the Author: Brian Gustin is a 35 year, second generation veteran of O&P. He has owned and operated two different practices, selling one to the largest orthopedic surgical group in the country and the other to a private group. He has served as the President of AOPA in 2009 and is the senior member of the AOPA Coding and Reimbursement Committee. Today he serves as an industry consultant to many individual practices, manufacturers, insurance companies, law enforcement agencies, and private equity and venture capital firms.