It is still possible to operate financially viable care packages when some procedures are not viable alone, say Bill Bagnall and Nigel Coates

Securing clinician engagement in appreciating and reducing costs is essential if services are to be viable. But if the approach is simply data-driven and top-down the result is likely to be a 'so what?' from consultants. Intelligent, locally relevant costings are more likely to attract clinicians to question the profitability of their own services.

They need to be in a position to understand the implications of. questions such as: 'If I perform procedure A on patient X, will the tariff cover my costs? If not, what can I do to limit expenditure? And will the treatment of additional patients help?'

The income from completing two or three procedures may cover the total cost, even if one is not cost-effective. Good costing information can provide the awareness and discipline of sound financial control within the context of clinical choice and flexibility. Incurred costs and expected income need to be considered before an episode of patient treatment is undertaken.

Taking the loss leader concept from retail can create an environment where overall profitability is the objective. An item is sold at a loss to attract customers but the overall basket of goods is profitable. Not all procedures can generate a profit but the aim should be to break even. Hospitals can therefore operate a portfolio of care packages, constantly reviewing the viability of each.

At Leeds Teaching Hospitals trust, external support was sought from PricewaterhouseCoopers. One element was to examine the profitability of elective orthopaedics. An understanding was built of the cost per procedure by healthcare resource group in each specialty, in order to match these to tariff.

Profitability matrix
The outline profitability of orthopaedic procedures was set against the risk and opportunity - with profit and loss on one axis and core and non-core on the other. Such a matrix can indicate suitable actions for each quadrant:

  • loss/core procedures - investigate all means of reducing cost. The results might not break even but limiting the loss is a first step;
  • loss/non-core procedures - those near the break-even point could be investigated to see if only minor effort is required to break even. However, as non-core services, it is unwise to over-invest effort;
  • profit/core procedures - the majority of the workload should be appearing in this quadrant. If not, the focus may be in the wrong place;
  • profit/non-core procedures - if these procedures are non-core it is likely that these could become the point of difference with other providers and consideration should be given to creating a centre of excellence around these HRGs.

This first analysis indicated the that costs of nearly all inpatient procedures comfortably exceeded the HRG tariff. This then required a much more detailed investigation.

Looking into the fully absorbed costs gave an understanding of the relationship of all components, including overheads such as heating, lighting and rates..

The component costs were displayed on a 'wheel of influence', a powerful visual display of key costs. Slices of the chart in green were areas where clinicians had a high influence, amber areas represented shared influence and red little influence. The majority of cost drivers were green or amber.

Analysis was conducted on a number of elective procedures and a range of 'influence wheels' produced for the HRGs. For each wheel the costs were displayed alongside likely tariff income for the procedure.

The gap in profitability could then be seen in the context of the major cost areas. The striking feature of most wheels was that more than half the cost could be influenced by the clinician.

Implants generally represented about 25 per cent of total cost of any procedure using them. Given this was a variable cost strongly linked to clinician choice, it was an important area of expenditure. Normal budgets are flat-lined throughout the year but this budget was in constant flux driven by activity levels. It was therefore difficult to establish if the service was over- or underspending, or simply indulging the suppliers. However, most consultants at Leeds did not know the true value of their income and the impact that the cost of implants had on overall costs. A. surprise was the inability of the trust to reclaim VAT on implants.

Lost income
In a surgical service theatre, time may represent upwards of 30 per cent of cost. Many trusts have systems that allow them to monitor the use of theatres. This is usually based on the number of available. slots compared with those used. Most theatre lists are linked to the surgeon's job plan, so a session may often under-run to avoid overtime costs, or because operations rarely fill the time exactly. This can be as much as an hour but the total staff cost is still incurred.

Given the cost of a theatre session, this has to be viewed as a lost income opportunity.

The surprise in the analysis of wards was that ward length of stay represented less than 10 per cent of the total cost, showing that bed days was a minor focus for reducing cost. Increasing day-case rates was an obvious means of generating income.

The original challenge was to create a balance of cost and income across a range of procedures. As cost in this directorate was driven mainly by the actions and decisions in theatres and the choice of implant used, the interplay of these cost drivers had to be understood.

A break-even chart can demonstrate the link between tariff income, the use of implants of varying cost and the number of operations that would have to be performed to break even.

Using only these components, the chart would not be a true reflection of the real world as it would be unlikely that all the procedures on a list would be of the same type. Part of the theatre session cost could, for example, be covered by an arthroscopic procedure, which has no implant cost, a reduced theatre time and a beneficial tariff.

While accepting the oversimplification of this model, a basic understanding of the relationship between tariff and variable costs can allow consultants to plan their clinical workload within the available resources and without curtailing clinical freedom.

The pragmatic approach of providing clinicians with the financial parameters for an operating session can ensure practical solutions are implemented.

A simple menu-driven computer model is being developed that will allow the surgeon to input the number and type of intended procedures on an operating list, together with the choice of implant to be used. The profitability of the planned session is displayed in such a way that the consultant can vary the case-mix to break even within a session position without compromising clinical quality. -

Bill Bagnall is deputy medical director of Leeds Teaching Hospitals trust, and Nigel Coates is a senior consultant at PricewaterhouseCoopers.