Published in the January 2008 issue of Today’s Hospitalist
How can you make the case to administrators that your program provides an exceptional return on investment?
The ability to make that case is increasingly important as programs look to CFOs and other senior management to fund staffing or pay raises for physicians already on board. Yet many hospitalist services find it hard to quantify what they bring to the table, not only in terms of savings but in other critical measures such as increased bed capacity.
In a recent presentation on the Web, Ron Greeno, MD, and Russell Holman, MD, two principals with Cogent Healthcare, a national hospitalist management company based in Nashville, Tenn., explained that hospitalists need to develop a methodology to track critical measures in several categories, including cost reduction and revenue generation.
Hospitalists should use these metrics to calculate their return on investment in both “hard” and “soft” dollars. (Hard dollars refer to actual money brought in or saved, while soft dollars are more indirect revenue and savings generated by having hospitalists on staff.) Both types of returns, they said, should figure into the value equation when hospitalists make their case.
According to Dr. Holman, Cogent’s chief operating officer, that’s particularly true in those hospitals that still think that hospitalist programs cost them instead of bringing value. “I would encourage you to focus the discussion on value, rather than on pure cost,” he said. “Small increments of performance applied to large numbers of patients yield big value.”
Cost reduction: direct variable cost per case
As long as hospitals can provide accurate, severity-adjusted data, cost reduction is the easiest metric to calculate, said Dr. Greeno, Cogent’s chief medical officer. It’s also the measure that hospital administrators put the most stock in.
“Reduced costs are the ‘hardest’ dollars,” Dr. Greeno said. “When you talk to hospital CFOs, they place more value on this metric than on any other.”
When discussing direct variable costs per case, you should pick a benchmark against which to compare hospitalist performance. Say, for instance, that a hospitalist program manages 3,000 cases per year. When compared to non-hospitalist physicians practicing at the same hospital, the hospitalist program may have a severity-adjusted direct variable cost that is $700 less per case. That’s a savings of $2.1 million for the year.
If you don’t have costs per case data for practicing non-hospitalists, you can compare hospitalists’ direct variable costs per case to pre-program or historical baselines, or some type of external benchmark, Dr. Greeno said. (You can choose from a variety of external cost-per-case benchmarks, such as actuarial data from a company such as Milliman or large health plan databases like Kaiser Permanente’s or Cigna’s.)
Some hospitalist programs go even further to break down variable cost savings into specific areas. According to Dr. Greeno, one program found that hospitalists used 1.46 fewer medications per case than non-hospitalists, which yielded a savings of more than $100 per case. When those savings were applied to all 3,787 cases the hospitalists cared for that year, the hospital’s drug costs dropped by $378,000.
Dr. Greeno also authored the section on measuring value in hospitalist programs in the recently published “Comprehensive Hospital Medicine: An Evidence-Based Approach,” a new book that Dr. Holman co-edited. (See “New reference takes aim at all of hospital medicine.”)
Revenue generation
In addition to reducing costs, hospitalist programs also generate revenue by increasing bed capacity and reduced emergency room diversions, Dr. Greeno pointed out.
“Very simple calculations can be done to determine that potential, and I highlight the word ‘potential,’ ” he said. He added, however, that some hospital chief financial officers consider revenue generation to be soft dollars. That’s because it’s difficult to say exactly which factors account for increased patient revenue.
Here’s a look at several formulas Dr. Greeno outlined to calculate new potential revenue.
“¢ Open bed days. This particular metric, he explained, “is most applicable to hospitals that are near or at capacity.” If a hospital has lots of extra capacity, there is less potential for open bed days to drive revenue.”
To calculate open bed days, find the difference between the average lengths of stay produced by both the hospitalist program and non-hospitalists. Multiply that difference by the number of admissions that hospitalists care for over the course of a year, and that’s the number of open bed days the hospitalists create by reducing length of stay.
Divide that number by the hospital’s average length of stay, and you have the number of new admissions “or “new admissions capacity” “that could be generated by the hospitalists. “If you then multiply that number by the average hospital revenue per case,” Dr. Greeno pointed out, “that gives you the incremental potential revenue that this increased capacity can create.”
Here’s the example he gave: Hospitalists at one small hospital averaged 3.9 days per-case length of stay compared to non-hospitalist cases of 5.5 days, a 1.6-day difference. During their first year, hospitalists handled 1,381 admissions. By multiplying 1,381 admissions by the 1.6 day difference, the
hospitalists created 2,209 open bed days.
“If those open bed days were filled with patients, even with the longer length of stay posted by the non-hospitalists, that would allow for more than 400 new admissions that year, with no additional building, staffing or equipment costs,” Dr. Greeno pointed out. With the hospital’s average revenue running about $8,500 per case, that increased capacity could translate into $3.4 million in additional annual revenues.
In year two, the number of admissions increased to nearly 3,200, while the hospitalists’ average length of stay declined further to 3.7 days, compared to the 5.5-day non-hospitalist baseline. The number of open bed days increased to 5,700, allowing more than 1,000 new admissions “and $8.8 million in additional potential revenue.
Another point to keep in mind, Dr. Greeno said: When a hospital is full, what kinds of patients are not being admitted? “Those are elective cases,” he said, “which tend to have the highest margin in terms of hospital stays.”
“¢ Decreased ED diversions. Creating open bed days also helps generate revenue by decreasing ED diversions.
According to Dr. Holman, the entire issue of hospital throughput and ED diversions is very complex. While he acknowledged that hospitalists cannot claim full credit for reducing ED diversions, he urged hospitalists to at least be appropriately recognized for “playing a critical role” in heading off diversions by boosting bed capacity.
He gave this hypothetical example, encouraging hospitalists to plug in numbers from their own facility: Say a hospital’s ED is on divert 5% of the time, and assume that 33% of ED visits lead to a hospital admission.
Being on diversion, then, costs a hospital that has 15,000 ED visits a year approximately 750 ED visits and 250 inpatient admissions. Based on an average revenue per admission of $8,500, the hospital could lose more than $2.1 million by diverting ED patients.
Dr. Holman also pointed to another cost of ED diversions: a negative public image of the hospital. With many EDs on diversion between 5% and 30% of the time, “What kind of image does that project about how we’re serving the community?” he asked. “This is not only a financial discussion, but it’s a patient safety and patient service problem. What value does your hospital place on those messages?”
“¢ Driving market share. Another component in generating potential soft-dollar revenue is helping to drive a hospital’s local market share.
According to Dr. Holman, “A hospital medicine program is one of, if not the most, under-marketed and under-leveraged resources to drive volume to the hospital.” Hospitalists who do leverage their service to increase referrals need to track that metric as well.
If expanded referrals lead to 10 new admissions a month, that adds up, at an average per-case revenue of $8,500, to about $1 million a year in new revenue. Plus, Dr. Holman pointed out, admissions from specialists for either medical or procedural cases “tend to be from a higher, more favorable payer mix.”
“¢ Pay-for-performance and improved documentation. One emerging area of potential revenue: Payers may increasingly tie reimbursement to performance on quality measures.
One proposed pay-for-performance program for Medicare patients, for example, would involve a three-tiered reimbursement model, Dr. Holman said. Depending on hospital-wide performance, one hypothetical model would pay the highest tier 2% above baseline, while those at baseline would see no change in reimbursement and a third tier would be paid at 2% below baseline.
That possible scenario could put 4% of Medicare reimbursement at risk. For a hospital that has 5,000 Medicare admissions a year and an average revenue of $8,500 per case, that 4% spread equals $1.7 million.
Finally, many hospitalist programs should be able to point to increased revenue in the here and now related to improved documentation practices. Dr. Holman gave this example: Through better coding and documentation, hospitalists improved their average per-case collections from $6,292 during their benchmark year to $7,351 their second year, an improvement of roughly $1,000 per case. Multiply that improvement by 3,000 cases, and you get a total of $3 million.
“That is not just $3 million in increased revenue,” Dr. Greeno pointed out. “This is $3 million in increased reimbursement and profit.”
Jay Greene is a freelance writer specializing in health care. He is based in St. Paul, Minn.
Practicing “cost avoidance”
When it comes to demonstrating return on investment, hospitalist groups often focus on how they help reduce costs and length of stay and bring in more revenue. But one area that often goes unnoticed is how hospitalists practice what one expert terms “cost avoidance.”
During a recent presentation on the Web, Russell Holman, MD, chief operating office for Cogent Healthcare, said that one example of how hospitalist groups can help avoid costs is in decreasing medical liability through improved quality and safety.
He also said that there’s another important area of cost avoidance that hospitalists should use in detailing their return on investment: reducing re-admission rates.
He gave the example of a hospital that over three years reduced 30-day re-admission rates from 9.2% to 5.5%, which translated into avoiding 650 uninsured re-admissions. While Dr. Holman stressed that he wasn’t chalking that entire savings up to the hospitalist program, “the hospital considered the program to be the centerpiece of its strategy to reduce re-admissions.”
With the average re-admission cost for each of these patients at around $7,000, he added, the resulting cost avoidance was $4.5 million “which in itself paid for the hospitalist program.
