Optimizing the OR for bundled payments: A case study

Of the innovative reimbursement models developed under the Affordable Care Act, bundled payment will likely have the greatest impact on surgeons. Unlike other new payment models, bundled payments directly affect surgeon and hospital reimbursement. At the same time, hospitals are relying on surgeons to help make bundled services cost-effective.

The keys to maintaining operating margins under bundled payment are cost control and care coordination. But cost management in the operating room (OR) is complex. Currently, most early participants in payment bundling are focusing on direct costs—expenses related to surgery, inpatient care, post-acute care, and readmissions. The indirect costs associated with running an OR receive less attention. Many see OR labor and time allocations as incremental costs that have a minimal effect on the profitability of the service bundle; unfortunately, this view misses an important dynamic of surgical services. The OR cost structure displays a strong “stepped” effect tied to resource use. Small differences in OR efficiency can dramatically alter resource use, creating a cost impact that can erase margins under any capped payment system.

To succeed under the bundled payment model, hospitals and surgeons must collaborate to control both direct and indirect costs. The first step in this process lies in understanding the mechanics of bundled payment and how perioperative inefficiency can increase indirect costs, making bundled payment financially unsustainable. This article looks at the evolving demands to improve cost-effectiveness and resource allocation and describes how one institution was able to optimize the OR for bundled payments.

A new calculus for OR cost-effectiveness

The Centers for Medicare & Medicaid Services (CMS) launched the Bundled Payments for Care Improvement (BPCI) initiative in 2013.* The program covers 48 Medicare severity diagnosis-related groups (MS-DRGs), approximately half of which involve surgery. BPCI participants have the option of selecting one of four different payment models (see Table 1). The most comprehensive option is Model 2, which provides a single payment for both the initial hospital stay and post-acute care. This option includes all costs incurred starting 72 hours before admission; hospital OR and inpatient costs; physician services; laboratory services; and costs incurred 30, 60, or 90 days after discharge, including skilled nursing facility and home health agency services and any readmission costs.

Table 1. CMS bundled payment models

Model

Episode of care

Description

Payment method

1

Acute care hospital stay only Inpatient stay in acute care hospital (physicians paid separately by Medicare) Retrospective

2

Acute care hospital stay+ post-acute care Hospital inpatient stay and all related services; episode ends 30, 60, or 90 days after discharge Retrospective

3

Post-acute care only SNF, IP rehab, LTC hospital or home health agency services; post-acute episode ends 30, 60, or 90 days after initiation Retrospective

4

Acute care hospital stay only All services provided during IP stay by hospital, physicians, other practitioners; includes 30-day readmissions Prospective

CMS sets a target price for each service bundle based on the institution’s historical claims, less a discount. Under Models 1, 2, and 3, providers submit claims and receive normal fee-for-service (FFS) payments for services included in the episode. CMS then performs a quarterly reconciliation of actual claims to the target price. If total claims are less than the target price, the participating facility receives the difference. If claims exceed the target, providers must repay CMS for the excess. (Model 4 uses a prospective payment methodology, whereby the participating hospital receives a single prospectively determined payment for a patient hospital stay and any 30-day readmissions; the hospital pays physicians and other practitioners for services provided during the inpatient stay.) CMS monitors post-discharge services to ensure costs are not being shifted outside of the bundle period.*

Surgeons are eligible for gainsharing under the BPCI initiative. Under Model 2, for instance, hospitals can share savings related to both cost target performance and internal cost reductions with physicians. (All gainsharing arrangements must comply with applicable Stark Law waiver requirements.)

For participating organizations, the transition to bundled payment makes it very important to monitor cost-effectiveness. But two separate components drive the potential for a positive margin on the bundled payment episode: hospital resource utilization (including the OR, as well as postoperative management) in the acute phase of care, and coordination of outpatient services after the acute phase.

The key to ensuring the cost-effectiveness of the episode is to minimize direct costs. On the acute care side, priorities include minimizing direct OR costs—supplies, implants, and labor—as well as hospital costs driven by length of stay and variations in care (for example, use of clinical pathways). For episodes that include post-acute care, major considerations include the cost of inpatient rehabilitation facilities, outpatient and/or in-home rehabilitation services, and postsurgical complications and readmissions.†

Yet even if a provider organization is keeping these costs under target levels and achieving profitability for the episode of care, it is still possible for the OR not to be cost-effective. To illustrate this point, consider the following example:

In a 10-hour block, a surgeon is able to perform three total knee arthroplasty (TKA) procedures. This example demonstrates moderately inefficient OR use, but under traditional FFS payment, billing would increase with procedure time and other cost allocations. As a result, the OR would cover the cost of a day of surgery and generate some margin.

Under bundled payment, however, the economics of the surgical block can be dramatically different. In this scenario, the target payment is capped for three TKA operations, but the OR still incurs the operational expenses of a full day of surgery. The bottom line: Payment may not cover OR operating costs if there are other costs generated that are above threshold expectations. Additionally, if profits are not generated under the bundled payment arrangement through cost efficiencies, no level of volume is sustainable.

Clearly, OR efficiency is important under bundled payment. Low utilization creates a high cost structure that may be unsustainable in a capped payment environment if costs are above target payments. How does this affect surgeons? Depending on the specifics of the gainsharing contract, OR losses on a service bundle could reduce surgeon payment. However, even if a surgeon group is contractually shielded from losses, it will miss out on potential gains—and the opportunity to develop bundled payment as a sustainable economic platform.

The bottom line is that surgeons participating in a bundled payment initiative should pay close attention to perioperative efficiency. As noted in the following case study, recently surgery department leaders at an East Coast academic medical center used efficiency improvements to gain control over indirect costs and optimize the OR for success within the BPCI program.

Case study from New York University (NYU) Langone Medical Center

The Hospital for Joint Diseases (HJD) is an orthopaedic surgery hospital that is part of NYU Langone Medical Center. Located in Manhattan, this 190-bed specialty facility consistently ranks among the top hospitals in the U.S. and draws referrals both regionally and nationally.

In 2013, NYU was selected to take part in the BPCI initiative. Medical center leaders elected to participate under Model 2 for several cardiovascular and orthopaedic surgery MS-DRGs, including spinal fusion and a range of joint replacement procedures. With its exclusive focus on orthopaedic surgery, HJD became an important facet of the initiative. At that time, efforts to control implant costs were already well under way at HJD.‡ In addition, surgical services leaders had recently begun work to improve perioperative efficiency. These initiatives dovetailed with the hospital’s foray into the bundled payment option.

Process problems at HJD were typical of inefficiencies found in most hospitals. Pre-surgical testing was not well organized, and the process for scheduling cases and communicating information to patients was inconsistent. As a result, the OR had high cancellation and delay rates. For the year ending July 2012, the same-day cancellation rate was 6.3 percent and the first case on-time start rate (within 5 minutes of schedule) was only 54.3 percent (n=19,234). In addition, case times for common procedures were relatively long. For instance, during the same period, the average case time (wheels in to wheels out) for multi-level spinal fusion was 221 minutes (n=895).

Overall, HJD’s participation in the BPCI initiative revealed an inefficient use of the OR. The prime-time utilization rate at HJD was just 47 percent. Low utilization is a problem for any hospital OR, given the cost of OR time and the importance of maintaining strong case volume. For a hospital entering into a bundled payment contract, low usage threatened to undercut cost savings achieved in other areas. HJD needed to increase effective capacity to operate profitably under payment caps.

New organizational structure

HJD launched its efficiency initiative by addressing the underlying reasons for poor perioperative performance. A hospital OR is the intersection point of several stakeholder groups, including surgeons, anesthesiologists, nurses, and many other clinical and support specialists. Consequently, OR efficiency can only be achieved when all the actions and goals of the stakeholders are aligned. On a practical level, this means the first step in an OR efficiency initiative must be an OR governance initiative.

In late 2012, HJD established a surgical services executive committee (SSEC) to oversee the OR. The SSEC brought together representatives from all stakeholder groups, including surgeons, anesthesiologists, nursing leadership, and hospital executive administration. The committee served as a forum for discussing the challenges of the OR and establishing the need for change. The physician-led SSEC also functioned as an operational “board of directors” for the OR. Committee members worked together to examine specific OR process problems and establish new policies and structures to improve perioperative efficiency.

The SSEC’s first priority was to reengineer the OR’s block schedule system. At the time, many blocks were assigned in relatively inefficient four-hour units. Surgeon use of assigned block time was not monitored, and block time rules were not enforced. Poor control created frequent schedule gaps, yet block ownership issues made it difficult for many surgeons to access the prime-time schedule. Consequently, the demand for add-on scheduling rose, which increased labor costs due to overtime and call pay.

To address this problem, the SSEC established a new set of block time rules. First, the committee eliminated four-hour blocks and began assigning more efficient eight-, 10- and 12-hour units. Second, surgeons were required to maintain a utilization rate of 80 percent in order to retain their block. The committee also set an expectation that surgeons arrive on time for all scheduled cases and instituted an automatic block time release calendar to enable the OR to fill unscheduled time. Lastly, the SSEC created several “open” rooms to accommodate add-on cases and unblocked surgeons.

The SSEC began monitoring surgeon use rates and, with appropriate warnings and probation periods, reallocating block time away from physicians who could not consistently fill their blocks. The reformed system rewarded high-utilization surgeons and became an important motivator to secure surgeon cooperation with other efforts to improve perioperative efficiency, such as scheduling process changes and new expectations regarding surgeon arrival times.

Streamlined throughput

As schedule allocation issues were being resolved, an SSEC task force began working to improve preoperative processes that affect OR throughput with the following initiatives:

Procedure scheduling

Scheduling processes at HJD were disorganized, leading to significant variation in the detail and accuracy of patient information. In addition, the scheduling system dictionary had been inadequately maintained. As a result, schedule entries often listed the incorrect procedure, which created many day-of-surgery delays and led to significant supply waste.

The first step in overhauling the scheduling process was to work more closely with surgeon office personnel. Task force members initiated a monthly meeting with surgeon office managers and clinical coordinators to discuss scheduling processes and develop process improvements. The group created new standards to ensure the hospital had complete information about the procedure and patient risk factors early in the preoperative process. In addition, the task force created standardized processes for “boarding” surgical cases. A clinical scheduling coordinator role was created to manage the schedule and ensure accuracy.

Preadmission testing

The preadmission testing (PAT) clinic at HJD used some testing protocols, but they covered only a limited number of patients, were difficult to follow, and were generally conservative. Due to disorganization in PAT, assessments were sometimes redundant. As evidence that the process was broken, the cancellation rate was higher for patients seen in the PAT clinic than for those who had never used the service.

The task force addressed the PAT clinic assessment inconsistencies by creating standardized requirements for pre-surgical optimization. Members of the task force created a standard pre-surgical testing matrix based on procedure invasiveness and patient comorbidities (see Table 2) and a common matrix for evaluating abnormal lab results. They also developed consistent medication management standards and established evidence-based protocols for the pre-surgical management of comorbidities, such as diabetes and anemia.
Table 2. New Pre-Surgical Testing Matrix

A multidisciplinary task force at the NYU Langone Medical Center HJD developed a standardized pre-surgical testing matrix based on procedure and patient risk factors. The table below details required testing for various medical conditions.

Medical evaluation

CBC

U/A

PT/PTT/INR

Basic metabolic

Hepatic

CXR

ECHO

ECG

ßHCG

T&S

Cardiovascular and cerebrovascular disease

x

x

x

x(1)

x

Pulmonary diseases (including sleep apnea, chronic obstructive pulmonary disease (COPD), emphysema) (1)

x

x

x

x(1)

x

Sleep apnea

x

x

x

x(2)

x

Diabetes

x

x

x

x

(3)

Hepatic disease

x

x

x

x

x

x

Renal failure, severe insufficiency (6)

x

x

x

x

x

Bleeding disorder (acquired or congenital abnormality)

x

x

x

x

Morbid obesity body mass index >40

x

x

x

x

x(1)

(8)

x

Malignancy, active on chemotherapy, including leukemia

x

x

x

x

x(4)

x

Hypertension,poorly controlled:diastolic blood pressure >110mmHg, systolic blood pressure >160mmHg

x

x

x

Neuromuscular disease (7), central nervous system (CNS) disease or seizure disorder

x

Rheumatoid arthritis

x

(5)

x

Seizures, CNS disease, and on meds that can affect bleeding

x

x

x

x

x

Alcohol consumption> 2 drinks per day

x

x

x

History of anemia hemoglobin (Hgb) <10

x

x

  1. For active, acute process, or history of COPD, moderate to severe asthma, recent pneumonia, oxygen therapy, dyspnea, tachypnea, and pulmonary function tests, if symptoms are severe
  2. If greater than 10-year history
  3. Hgb A1C / recommended but not required in diabetics
  4. If malignancy is in thorax
  5. Neck films and consider chest X ray (CXR)
  6. Renal failure: potassium day prior to or day of procedure (post-dialysis)
  7. Neuromuscular disease: amyotrophic lateral sclerosis, Parkinson’s, muscular dystrophy
  8. As indicated by examination

Task force leaders also developed a telephone screening process for triaging patients to the appropriate pre-op care. HJD staff now call all patients shortly after scheduling and use a risk-based questionnaire to determine which patients must visit the PAT clinic for special assessment. This process has helped reduce the patient volume in the PAT clinic while ensuring higher-risk patients receive an aggressive evaluation.

Final clearance

Previously, a significant portion of HJD patients arrived for surgery with unresolved medical issues. The task force addressed this problem by creating stronger processes for ensuring medical optimization prior to the day of surgery.

HJD staff held a short meeting every afternoon to examine the next day’s schedule for problems with equipment or staffing, but this meeting did not address clinical/patient issues. The task force strengthened the process by converting the meeting into a true clinical review. Now, representatives from anesthesia, nursing, central sterile processing, and other areas examine the schedule for the next 24, 48, and 72 hours. They identify patients who need further clearance and resolve any scheduling problems, which helps to ensure all patients are fully optimized and ready for surgery before the day of their procedure.

Case time reduction initiative

As noted previously, average case times at HJD were relatively long. In response, the SSEC created a physician-led task force to remove delays from the system of care. Key interventions included:

Redesigning operational metrics

The first step was to create a more useful clinical measurement strategy. Task force leaders redesigned perioperative operational metrics to focus on six key intervals:

  • Patient in to anesthesia-ready
  • Anesthesia-ready to prep end
  • Prep end to incision start
  • Incision start to incision close
  • Incision close to OR-discharge-ready
  • OR-discharge-ready to patient out

These intervals are useful because they allow OR leaders to analyze distinct phases of patient throughput separately. In addition, each interval is “owned” by a different individual, providing a built-in point of accountability within the system.
The task force performed an initial study to provide baseline data, then began monitoring and analyzing case time performance. Case time data were also provided to OR staff and individual surgeons via dashboard reports. Data transparency helped fuel organizational change among all stakeholders.

Creating parallel workflows

Previously, patients were not brought into the OR until all instrument tables were completely prepared, but this sequence delayed case starts unnecessarily. Now, patients are wheeled into the OR once the room has been cleaned, and staff finish setting up the back table as patient prep moves forward. Similar parallel processes have also been created in the closure and breakdown phases.

Improving anesthesia workflow

The case time task force also examined ways to make anesthesia processes more time-efficient. Previously, anesthesiologists began all patient IVs, arterial lines, and pain blocks inside the OR. As part of the efficiency project, anesthesiologists started performing these procedures in the preoperative holding area, thus using the time patients spend in the holding area instead of valuable time in the OR. This change reduced in-room prep times while smoothing out the anesthesia workflow.

Deploying specialty support

Many orthopaedic surgery procedures require complex setup that can be very time-consuming. HJD addressed this issue by hiring physician assistants (PAs) to provide support for complicated surgeries. Specialized PAs also help speed up case times by providing better intraoperative support and assisting with closing.

Establishing surgeon expectations

Task force leaders observed that if the attending surgeon was not in the OR during setup, positioning, and draping, the pace of work tended to slow down. When the attending did arrive, he or she often requested setup changes, creating further delays. In addition, when the attending surgeon was not present through the end of the case, closure could be extended significantly depending on the skills of the resident or fellow. To address both these issues, the SSEC established a requirement that the attending surgeon must be in the OR upon patient arrival and must stay through most of closure. These two changes helped ensure that OR teams maintain a steady work pace, further reducing average case times.

Planning for discharge throughput

The final case time interval (OR-discharge-ready to wheels out) was often extended because the post-anesthesia care unit (PACU) had no available capacity to receive additional patients. In many instances, the PACU was full because rooms were not ready on the surgical inpatient floor. Task force leaders addressed these problems by working directly with the PACU and inpatient nursing leadership to improve communication and capacity planning, enabling a timely OR discharge for a greater percentage of patients.

The SSEC also examined the impact of schedule issues on inpatient costs. Previously, a disproportionate share of spine and joint replacement procedures were performed on Friday. For these patients, discharge to a post-acute care facility could often be delayed due to weekend staffing issues. The result was extended length of stays for late-week orthopaedic procedures. The committee addressed this problem by working with surgeons and OR managers to schedule more spine and joint cases earlier in the week, effectively evening out case volumes and helping to reduce inpatient care costs.

Strong outcomes

Efficiency improvement initiatives at HJD led to significant gains in perioperative performance within a short time frame.
Between July 2012 and March 2014, improvements in upfront scheduling, pre-surgical testing, and perioperative coordination reduced the same-day cancellation rate from 6.3 percent to less than 1 percent. During the same period, first-case on-time starts increased from 54.3 percent to greater than 90 percent. Contributing to this improvement, the surgeon on-time rate increased dramatically.

HJD’s case time initiative also achieved strong results. For example, between the fourth quarter of 2012 and the first quarter of 2014, the average case time for total hip arthroplasty declined by 12 percent and the average case time for total knee arthroplasty declined by 6 percent (see figure).

Case time reduction in orthopaedic surgery

Case time reduction in orthopaedic surgery

An OR initiative at HJD reduced average case times for several orthopaedic surgery procedures. As detailed in this figure, efficiencies in six process intervals cut average THA and TKA case times by 12 percent and 6 percent, respectively.

 

These improvements in operational performance, coupled with the reform of the block time system, helped to improve OR utilization. Between July 2012 and March 2014, prime-time utilization climbed from 47 percent to 81 percent.

Gains in efficiency and usage enabled HJD to accommodate additional volume without accruing additional costs. Indeed, the more attractive operating environment created by efficiency gains helped drive volume growth. In the third quarter of 2012, annualized surgery volume at HJD was 659 cases per room. In the first quarter of 2014, annualized OR volume grew to 712 cases per room—an increase of 8 percent.

The increases in OR efficiencies and improvement in pre-surgical testing enabled HJD to participate successfully in the CMS BPCI. Perhaps more importantly, gains in operational efficiencies and cost controls have positioned the institution to compete in a health care marketplace that is increasingly focused on value and cost of care.

Aligned goals

Bundled payment is a powerful mechanism for building productive partnerships between hospitals and surgeons. At HJD, shared responsibility for clinical and financial outcomes helped align hospital and physician goals. All stakeholders worked together to control both direct and indirect costs while maximizing patient outcomes. This collaboration is critical to ensuring that hospitals operate profitably under bundled payment and that surgeons benefit from current and future bundled payment initiatives.


*Centers for Medicare & Medicaid Services. Bundled Payments for Care Improvement (BPCI) initiative: General information. http://innovation.cms.gov/initiatives/bundled-payments/. Accessed September 19, 2014.

†Bosco JA, Karkenny AJ, Hutzler LH, Slover JD, Iorio R. Cost burden of 30-day readmissions following Medicare total hip and knee arthroplasty. J Arthroplasty. 2014;29(5):903-905.

‡Bosco JA, Alvarado CM, Slover JD, Iorio R, Hutzler LH. Decreasing total joint implant costs and physician specific cost variation through negotiation. J Arthroplasty. 2014;29(4):678-680.

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