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How to build your business case

December 2006
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Published in the December 2006 issue of Today’s Hospitalist

When a hospital puts money in the stock market, it can easily calculate its annual return on investment (ROI). The same is true when building a new cath lab: The head of cardiology simply multiplies the projected number of new procedures by average payments and comes up with a convincing business case.

But a hospitalist program, which takes a big recruitment investment and annual support, still prompts scrutiny from some chief financial officers.

That is because hospital medicine often fails to make its own business case.

“If you look at ROI as what the hospitalists bill, what you pay them, what your costs are and what your profit is, then you’re not going to see much of a return on investment,” says L. Craig Miller, MD, chief medical officer of Baptist Leadership Institute, an affiliate of Baptist Health Care in Pensacola, Fla.

However, Baptist Hospital, the system’s flagship facility, is steadily expanding the hospitalist program that Dr. Miller helped launch in 2001.

One big reason: A review in early 2006 of Baptist’s top 20 diagnosis-related groups (DRGs) showed that admissions handled by hospitalists cost the hospital about $1,000 less on average than those cared for by other medical staff members.

Across the country at California Pacific Medical Center in San Francisco, Morris Flaum, MD, found even bigger savings. He reviewed a select subset of DRGs, comparing the cost per case for both hospitalist and nonhospitalist care. The result? Hospitalists saved the hospital $1,800 per patient.

“There’s a cost savings “in just those patients where we have DRG-matched data “of about $3.2 million a year,” says Dr. Flaum, who until recently was California Pacific’s chief medical officer. He is currently the chief executive officer of a multispecialty group that, like the medical center, is part of Sutter Health.

Nationwide, some hospital administrators have latched onto financial metrics to estimate how much hospitalist groups are saving them.

But experts say that hospitalists need to take the lead in making their own business case. For one, some hospital executives may not do the math and may instead have a “show me the money” mentality.

And without a firm handle on ROI, hospitalist groups have a tough time arguing that they need to recruit new physicians, add new technical or clinical support, or get a much-needed raise. That’s why savvy groups aren’t waiting for CFOs to run the numbers but are instead finding the data and defining the intangibles that prove their worth.

Affecting the bottom line
Numbers like those cited by Drs. Miller and Flaum are sure to get administrators’ attention. (See “What data do you need to calculate your return on investment?”)

But even a solid spreadsheet only scratches the surface of hospitalists’ true value. While their original calling card was cost savings, hospitalists’ portfolio of selling points has increased as they have gained experience.

“The value proposition is becoming increasingly complex and multifaceted as we understand the impact hospitalist programs can have,” explains Stephen Houff, MD, a hospitalist and CEO of Hospitalists Management Group, which is based in Canton, Ohio.

While it may be difficult to assign a cost savings to some improvements, here’s a look at some areas where hospitalists affect the bottom line:

“¢ Increased patient throughput. Hospitalists generate major revenue by clearing out a crowded emergency department (ED) waiting room.

“If you can reduce waiting time and throughput in the ED so you’re not on diversion as much, that’s a huge opportunity,” says Martin B. Buser, MPH, a founding member of Hospitalist Management Resources LLC, a hospitalist consulting firm in Del Mar, Calif. “If you divert one surgical patient, you’ve lost $25,000.”

According to Dr. Houff, hospitalists’ ability to maximize bed management goes beyond the emergency department.

“The capacity constraint may not just be the number of beds “it may be the kind of beds,” he explains. “At 3 a.m., we can help transfer a patient to create an ICU bed that’s needed or help nurses decide which patients can come off telemetry.”

  •  Improved outcomes. To calculate hospitalists’ impact on outcomes, Baptist’s Dr. Miller looks at trends over a five-year period. His hospital’s mortality rate, for example, fell from 4 percent in 2000 to 2.9 percent in 2005. Over the same period, re-admission rates at 30 days fell from 12.7 percent to 10.1 percent, while complication rates fell from 1.9 percent above predicted to 4.5 percent below predicted.

How much credit goes to the hospitalists? “The entire medical staff had an impact,” says Dr. Miller, “but having a formal hospitalist program created a focus on process and outcome that benefited all patients.” With mortality rates trending down every year that the program has grown, he adds, “the impact of rapid response teams and 24-hour inhouse coverage cannot be ignored.”

  •  ED call relief. How to relieve ED call panels remains one of the medicine’s biggest problems. Some hospitals are now paying subsidies of up to $3 million or more to subspecialists to take ED call.

Subspecialists are increasingly asking hospitalists to triage ED patients on their behalf. Orthopedists, surgeons, nephrologists and others are “starting to use the hospitalists as their first line of defense for emergency room admissions,” says Mr. Buser. “They are saying, ‘Take as many as you possibly can and call me as a consult.'”

  •  Better DRG reimbursement. Hospitals also benefit from hospitalists’ chart documentation.

Hospitalist Stacy Goldsholl, MD, is now president of the hospital medicine division of TeamHealth, a national hospitalist management company. But in an ROI analysis she did in a former position at a hospital in Saginaw, Mich., she was able to put a number on the value of that meticulous documentation: a $750 positive variance (vs. non-hospitalist physicians) for each patient a hospitalist cared for.

“That added up to an additional $1.1 million dollars a year of generated revenue,” says Dr. Goldsholl. “When you add that figure to length-of-stay savings, the ROI for the hospitalist is significantly higher.”

  • Competitive advantage. In San Francisco, Dr. Flaum says, the use of hospitalists has “really become part of being in the business in this market.” (The hospitalist program at California Pacific started in 1994.)

But in other parts of the country, hospitalist practices still give hospitals a much needed edge. According to David Joyce, CEO of Delphi Healthcare Partners, a hospitalist staffing and management company in Raleigh, N.C., one recent prospective client reported that family physicians who no longer wanted to round on their inpatients were flocking to competing hospitals that had hospitalist programs.

“If you’re in an area where you’re putting in the first hospitalist program,” he says, “you’ve got a huge leg up.”

  • “Nursing satisfaction. Hospitalists are readily available when a nurse needs them, as opposed to physicians who spend most of their time in offsite offices. As a result, says Dr. Houff, hospitalist programs provide “an advantage in recruitment and retention that can have tremendous value.”
  • Managing unassigned patients. By helping uninsured patients connect with community clinics and resources for medications, hospitalists can reduce the demand for emergency department services and subsequent re-admissions. At Baptist Hospital, Dr. Miller estimates that a hospitalist-led strategy to manage the care of uninsured patients is saving the hospital more than $1 million a year.
  • Fewer construction projects. When a hospital maxes out on inpatient capacity, the first line of thinking is to add more beds.

“We’re now hearing hospital CFOs say, ‘I think I can avoid a capital expense of $50 million just by putting out $500,000 a year into this program,’ ” says Mr. Buser. “That makes sense when the construction of a new bed might cost between $1.5 million and $2 million and take five years to build.”

  • Increased outpatient capacity. Many primary care physicians would rather stay in their offices than dash to the ED or make hospital rounds “and many hospital CFOs want them to stay put as well. Baptist’s Dr. Miller recalls one hospital administrator who pointed out, “The more patients they see in their office, the more admissions I’m going to get.”
  • Fewer denied days from health plans. Hospitalists can stay on top of tests and treatments, thereby preventing avoidable days in the hospital. According to Mr. Buser, hospitalist programs that significantly reduce these so-called “denied days” can rack up savings of $50,000 a year or more.

Factoring in quality
Steven Nahm, vice president of The Camden Group, a consulting practice in El Segundo, Calif., points to another big factor in making the case for hospitalists: the growing push to tie financial incentives and hospital revenue to quality improvement.

According to Mr. Nahm, hospital CEOs face the daunting challenge of implementing pay-for-performance programs and publicly-reported patient care scores. More executives, he says, are figuring out that hospitalists are the key to better performance.

“A mature program may care for as many as 60 percent of the patients in a hospital,” says Mr. Nahm. That, he adds, makes them the frontline “change agents” to standardize care and realize quality targets.

Hospitalists are also a big factor in what Mr. Nahm calls “the halo effect” for quality improvement. By being the first adopters of such tools as diagnosis-related order sets, hospitalists create the kind of buzz that puts pressure on other physicians to follow suit.

“As a result,” says Mr. Nahm, “there will be more comprehensive quality reporting on other specialties “and outliers will be identified and worked on.”

Lola Butcher is a health care business writer based in
Springfield, Mo.

How to calculate your return on investment

When it comes to hospital medicine, just like with any other business, “Data drive decisions,” says hospitalist Stacy Goldsholl, MD, president of the hospital medicine division of TeamHealth, a national hospitalist management company. “Data ultimately determine value “and in a subsidy industry, value is the real differentiator.”

To get those data, practices are turning to hospitalist-specific software (or designing their own system) to track and compare their financial performance. According to Martin B. Buser, MPH, a founding member of Hospitalist Management Resources LLC, a hospitalist consulting firm, hospitalists need the following financial data to make their case:

  • average length of stay by DRG;
  • charges/costs per DRG;
  • severity adjusted data;
  • denied days;
  • re-admission rates;
  • responsiveness to the emergency department (ED);
  • ED throughput; and
  • appropriate use of specialists.

Groups should analyze hospitalists’ performance by physician group, individual physician and payer. They should also compare their data to that of the rest of the medical staff, a key part of quantifying the value they bring.

What if you don’t have your own tracking software? Dr. Goldsholl recommends that hospitalist leaders foster good relationships with different hospital administrators and other departments.

During a presentation on the power of data at this fall’s hospital medicine conference at the University of California, San Francisco, she pointed out that clinical resource specialists in your case management department can provide severity-adjusted costs per case, as well as average length of stay by DRG.

Both the billing and the finance departments can provide charge and billing information, while your quality improvement department can give you re-admission rates.

The utilization review department or the office of the chief financial officer will have data on denied days and specialist use. “Ask how many consults per DRG the hospitalists are requesting vs. the rest of the medical staff,” says Mr. Buser.

And look to ED physicians, who keep track of ED responsiveness and throughput as measures of their own effectiveness.

Once you have your figures in hand, set up meetings to discuss your performance and don’t be shy about pointing to your success.

“When it comes to building relationships with administrators, remember to get to know them before you need them,” says Mr. Buser. “That will lay the groundwork for ensuring funding assistance down the road.”

ROI: a quick and easy calculation

One of the challenges in determining hospitalists’ return on investment is that there is no such thing as a “typical” hospital or hospitalist program. That said, Today’s Hospitalist asked a veteran of hospital medicine programs to provide a fast formula for how programs can prove they pay for themselves.

David L. Joyce, president and CEO of Delphi Healthcare Partners Inc., has more than 35 years experience in hospital and physician staffing. Here’s how he sizes up the business case for hospitalist programs:

  • Costs: First, start with the average costs of a four-physician hospitalist program. When you factor in salaries ($180,000-$200,000 per doctor) and benefits, along with a medical director/administrative fee, malpractice insurance, the cost of billing and collections, and other management expenses, the four-physician group will cost about $1.4 million.
  • Revenue: A group of four hospitalists can provide around-the-clock care for between 15 and 20 patients a day. That translates roughly into five admissions a day and an average length of stay (LOS) of four days.

Those five daily admissions add up to 1,825 admissions each year. Depending on the payer mix, each admission will translate into physician professional-fee collections of about $400, for a total of $730,000.

According to Mr. Joyce, it’s safe to assume that hospitalists will reduce average LOS by at least one-half day. If the hospital’s average cost of providing care is $625 a day, that LOS reduction saves the hospital $312 per admission, or $570,000 a year.

Add $730,000 in physician collections to the $570,000 in reduced hospital costs and the total is $1.3 million “$100,000 shy of breaking even.

  • Showing a profit: When you factor in other sources of revenue (not to mention intangibles like subspecialist satisfaction), a hospitalist group more than pays for itself.

Reducing patients’ length of stay frees up beds for other patients, for example, allowing surgeons to schedule more procedures and helping the emergency department avoid diversions.

Or, say the hospital has 20 primary care physicians on its medical staff. Every day, each sees as many as 30 patients “and each faces a few “to hospitalize or not” decisions.

The fact that a hospitalist program is available may tip a primary care physician’s decision-making toward admission. If one extra patient is hospitalized every other day and the hospital collects an average of $3,500 per admission, the hospital generates nearly $650,000 in new collections a year.

“The hospital just put another $550,000 in the bank, over and above the cost of the service,” Mr. Joyce says.

Need more help?

For more pointers on how to prove the value of your practice, sign up now for the Spring 2007 Hospitalist CME Series. Practice management sessions at both the Los Angeles and Boston meetings will help you measure your return on investment.

At the Los Angeles meeting on Feb. 11, Martin Buser of Hospitalist Management Resources LLC will discuss how to get the right support from your hospital. And Steve Nahm of The Camden Group will present ways to quantify your program’s value and get the data you need.

In Boston on March 11, John Thomas of MedSynergies Inc. will help you identify key performance indicators that can make or break your practice revenue. To register, go online.

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