Kathleen V. Brooks
Dan C. Krupka

Momentous impending changes in healthcare payment systems are prompting increased efforts to improve both clinical and financial performance across the nation's hospitals. Finance leaders have an important role to play in guiding such efforts.

At a Glance   

  • Hospital finance leaders should work with their organizations' perioperative leaders to implement a three-step process for identifying projects with the greatest potential for improving quality while reducing costs and increasing revenue.
  • In essence, this process involves mapping the strategy, developing a list of potential projects, and culling projects that cannot reasonably be accomplished with available resources.
  • The extent to which staff resources are available for such projects can best be measured using a simple spreadsheet designed for tracking special assignments of each staff member.

As the U.S. healthcare system continues its unprecedented shift from volume-based to value-based payment systems, and with reductions in Medicare payments looming large, hospitals across the nation are intently striving to improve both clinical results and financial performance. Improvement efforts are under way in every part of the organization, and the systems used for managing surgical care delivery from hospitalization to discharge-i.e., perioperative systems-are no exception.

In many hospitals, perioperative leaders are initiating or contemplating a variety of improvement projects aimed at improving quality, reducing costs, and increasing revenues. In some cases, they are choosing wisely; in others, they are investing limited resources in programs with little or no impact. Often, they overload the organization with too many projects, causing it to miss its targets.

Hospital finance executives can work with perioperative leaders in developing a systematic approach to identifying a portfolio of projects that is consistent with the strategic objectives of the organization and that takes into account available resources for each project.

Building a portfolio of projects is analogous to selecting a portfolio of financial instruments. In essence, the effort involves a three-step process:

  • Map the strategy.
  • Develop a list of projects.
  • Limit the project wish list.

Step 1: Map the Strategy

The first step is to set target performance levels and determine the largest and most critical performance gaps. This effort requires a framework for defining project categories and objectives for each category. The most convenient means of establishing such a framework is to develop a strategy map, a visual tool introduced by the creators of the balanced scorecard.a  

As an example, consider the simplified strategy map for a perioperative system shown in the exhibit below.

Exhibit 1


The first level of this sample strategy map, based on one used by an actual 380-bed hospital, presents two performance objectives: to deliver the best possible outcomes for patients while contributing to the hospital's financial success. The second level shows the targeted improvements in clinical and operational processes by which the hospital intends to achieve the desired objectives and addresses the requisite organizational capabilities and assets.

In level one of our sample strategy map, under outcomes, the first two metrics shown-risk-adjusted 30-day mortality and morbidity-represent standard measures of the American College of Surgeons' National Surgical Quality Improvement Program (ACS-NSQIP).b The third metric is an important, and more subjective, outcome measure. The financial metrics adopted are the overall profitability of the perioperative system, the margin achieved by important service lines, staffing expenses, and supply expenses.

In level two of the map, regarding clinical and operational processes, the hospital's focus is on improving compliance with the measures identified by the Surgical Care Improvement Project and with the organization's own clinical protocols, raising the percentage of first cases started on time, and reducing turnover time for short cases.c Regarding capabilities and assets, four areas are identified for attention:

  • The number of highly qualified clinicians hired in the past 12 months
  • The turnover rates for surgeons, anesthesiologists, and nurses
  • Whether the hospital had enough sufficiently qualified process-improvement leaders
  • Whether technologies (e.g., information systems) had been successfully implemented in the past 12 months

Once the metrics have been selected, target values for each metric should be established and a gap analysis performed, assessing the extent to which clinical outcomes, financial performance, and clinical and operational process fall short of the target levels. The gaps between target and current performance-particularly where they are the largest-represent areas where resources should be concentrated for improvement. It also is necessary to set a timeframe for achieving targets (e.g., by the end of the calendar year) where performance is seen to fall short.

In establishing target values for financial performance in particular, hospital leaders might want to identify strong objectives. For example, the objectives identified by the hospital that employed these metrics were to reduce operating costs by $0.5 million and to increase revenue from surgical programs by $3 million.

The exhibit below shows findings of a gap analysis of the sample outcomes. The findings indicate large performance gaps for risk-adjusted 30-day mortality and 30-day risk-adjusted morbidity. By contrast, patient satisfaction with pain management is already at the target level. Based on these findings, the hospital can proceed to the next step, which involves identifying a project or a set of projects that can close these two performance gaps.

Exhibit 2


Step 2: Develop a List of Potential Projects

The ability to identify projects for closing gaps in performance is limited only by the imagination of empowered front-line staff and the hospital leaders charged with this effort. The types of projects that a hospital might want to consider can perhaps best be illustrated by looking at examples of four actual projects.

In each case, the hospital opted to pursue the project, so results also are presented. Describing the actual results helps to highlight key points that a hospital should consider when undertaking the third step of this overall process, which involves assessing the relative merits and limitations of each project and deciding whether it is feasible to pursue it. Such considerations (e.g., team size, project intensity, and project duration) are discussed in this context because, although the process of building a portfolio of projects is described as involving three consecutive steps, the second and third steps are actually performed in tandem.

Project 1: Reduce postsurgical complications. This program-actually a set of projects-was designed to reduce the hospital's risk-adjusted 30-day morbidity, with the reasonable expectation of also reducing the mortality rate. A 2007 ACS-NSQIP report for general and vascular cases had disclosed that the hospital's risk-adjusted 30-day morbidity rate and O/E ratio for patients undergoing general or vascular surgery-17.7 percent and 1.69, respectively-were among the highest examined. (The O/E ratio is the number of observed risk-adjusted events divided by the number of expected risk-adjusted events. An O/E ratio of 1 is analogous to scoring par in golf, while an O/E ratio below 1 corresponds to scoring under par.)

In response to the distressing results, the head of surgery proposed that several project teams be created that would operate in parallel, each with the responsibility of reducing a specific class of complications (e.g., catheter-associated urinary tract infection [CAUTI], pneumonia, or complications associated with specific types of surgery). Each team, consisting of about a dozen nurses and physicians, would be challenged to achieve a specific improvement in a specified interval, typically six months.

During this ongoing program, team members would need to acquire new capabilities. One would have to develop additional expertise in statistics to identify improvement opportunities more confidently; some would need to become experts in wound care.

In undertaking the program, all participants-including the physicians-improved as team players thanks to coaching from a former commercial pilot. And morale improved. By 2010, the hospital's complication rate and O/E ratio had improved to 11.9 percent and 0.93, respectively, placing the hospital among the higher performers in ACS NSQIP. Thus, over a three-year period, the complication rate dropped about 6 percent in absolute terms. For a hospital performing 10,000 inpatient surgeries per year at the time of implementing such a program, this result would translate into 600 fewer patients suffering complications.

By reducing complication rates, the program created additional capacity for surgical inpatients because the length of stay (LOS) for patients with complications is greater than the LOS for patients without complications. By backfilling that capacity with more surgical inpatients, a hospital has the potential to increase its reimbursement revenue by more than $6 million, or about $2 million per year of the program, based on inflation-adjusted data from a study performed in the past decade.d  

For any hospital assessing such a project, because the morbidity rate reflects the impact of postsurgical infections, pneumonia, and other complications, it is necessary to identify the classes of complications that contribute most to the overall morbidity rate, and then to decide on the clinical responses. It also is necessary to answer several questions:

  • How long does it take to reduce the postsurgical complication rate substantially?
  • Should the project focus on different classes of complications one at a time or all together?
  • How large should the teams be?
  • How often should they meet?
  • Will new capabilities be required?

For the case study hospital, this program has required a major commitment of staff energy. At any one time, about 50 members of the perioperative staff and the surgical inpatient unit are assigned to the program. Individual teams meet monthly to discuss the progress and challenges.

Project 2: Reduce cost of equipment and supplies. Because a typical hospital's cost structure includes only 10 to 15 percent in variable costs, it is difficult to achieve large cost reductions.e Perioperative leaders in the case study hospital explored one approach for reducing costs that many hospitals have used with some success: standardizing instruments and supplies in the operating room (OR). They developed a project aimed at reducing annual supply costs for laparascopic cholecystectomy (lap chole), gastric bypass, and total joint cases by at least $200,000-that is, nearly a 2 percent reduction in the supply budget for the hospital's 10 ORs-in a six-month time frame. Teams for these procedures were set up, each comprising a surgeon, an OR nurse, an anesthesiologist or certified registered nurse anesthetist (CRNA), IT support, and the OR director or manager.

The lap chole team's assessments disclosed that one surgeon's costs were clearly lower than those of the other seven surgeons because he was using a model of trocar (a sharp-pointed surgical instrument used in minimally invasive surgery) that cost less than those used by the other surgeons, yet exhibited no significant difference in quality. After being presented with this finding, the surgeons agreed to standardize on the model of trocar, thereby enabling the hospital to negotiate a discount on trocars that reduced the average case cost per lap chole by $62. The success with this program stimulated the other teams to take similar steps, resulting an overall annual cost reduction of $230,000.

Project 3. Improve the first-case on-time percentage. Disappointed with a first-case on-time performance of 30 percent, perioperative leaders launched a project in which a team of perioperative system stakeholders was charged with raising the performance to 80 percent within six months.

After achieving the target, the team concluded that it had reduced the total annual OR delay by about 32,500 minutes. By multiplying this number by the cost of an OR minute, estimated to be $50, the team concluded that the program had saved about $1.5 million in annual costs.

In fact, the project saved no "hard" dollars because it did not eliminate any variable expenses such as supplies or overtime or semi-variable expenses associated with staff levels. And, of course, it did not eliminate any fixed expenses.

Improving on-time performance is rarely an effective way to improve the financial performance of a perioperative system. Punctual starts are important for OR schedules that consist of very short cases (e.g., cataract surgery) where eliminating the delay might reduce overtime expenses. Otherwise, the popularity of improving the on-time percentage of first cases may stem from the incorrect calculation of the financial benefit. Portfolio builders need to understand that not all projects identified for a project portfolio will lead to meaningful cost reductions, as this example shows. Finance leaders can play an important role by assisting in the financial assessment of each proposal.

Project 4. Increase the number of short cases that can be booked daily. The hospital's chief requirement for this project was that it be accomplished with minimal additional staff. Because most perioperative costs are fixed or semivariable, increasing the number of patients can be profitable, given that adding one 80-minute case per day could increase a hospital's profitability by about $0.5 million annually.f Three conditions need to be satisfied, however, to warrant committing to such a project:

  • There must be at least one OR devoted to short cases.
  • The potential reduction in case time must be sufficiently large to allow adding at least one more case.
  • The volume of appropriate short cases must be growing rapidly enough to take advantage of the additional capacity created by the project.

These conditions were satisfied in the case-study hospital. The goal of the hospital's perioperative leaders was to increase the number of short cases that could be routinely performed in their "short-case" ORs by reducing OR nonoperative time from 65 minutes to 35 minutes.g They took three steps to accomplish this goal:

  • Introduce extensive parallel processing.
  • Redistribute the responsibilities of the circulating nurse, the anesthesiologist, and the CRNA.
  • Invest in a system of mobile exchangeable tabletops.

The third step reduced the anesthesia controlled time by eliminating transfer of patients on and off the operating table. It also reduced nonoperative time by eliminating the need to clean and prepare an operating table in the OR between procedures.

Although the team missed its target by seven minutes, it did create the potential to routinely add one procedure with a case time of about 80 minutes to the day's schedule.

The roughly $0.5 million annual increase in profitability from the added cases was offset by an incremental investment of $50,000 in the mobile exchangeable tabletops. The project also had a six-month time frame and required weekly meetings of a team of 12 drawn from the perioperative organization-comprising a surgeon, an anesthesiologist, several nurses, ancillary staff, and a business manager.

It should be noted that other hospitals might require different numbers of resources and different time frames to accomplish the projects described here, depending, in part, on how quickly the organization's strategy calls for the gaps to be closed.

Of course, in building the project portfolio, it also will clearly be necessary to consider many more projects than are listed here. Indeed, the case-study hospital added many additional projects to its "wish list" before it settled on the specific portfolio of projects that would help it achieve its goal of reducing costs by $0.5 million. Critical points to consider when identifying a range of projects with the potential to close the gaps include how significantly each potential project could contribute to closing a gap, how many team members it would require, how hard they would have to work, and how long the effort would take.

Step 3: Limit the Project Wish List

As projects are added to the "wish list," this third step is required to ensure the portfolio of projects does not exceed realistic capacity of the organization. It bears repeating that although this step is discussed separately here, it should actually be performed in tandem with the process of identifying projects that constitutes Step 2.

To create a realistic portfolio, a method is required for tracking the special assignments of each member of the perioperative staff. Some may have the interest and energy to manage two assignments, some will be able to handle only one project, and others may have no interest beyond performing their "day job." A spreadsheet such as that excerpted in the exhibit below should be sufficient for this purpose. The spreadsheet consists of a list of the members of the perioperative organization in the leftmost column, starting with those who do not have responsibilities in the OR, followed by the list of OR nurses who are candidates for working on improvement projects. (The exhibit provided here is for illustrative purposes only; the actual list will be much longer and include many more nurses.) Nurses who are not interested in participating in projects obviously need not be listed. The list of projects appears across the top row.

Exhibit 3


For the non-nursing staff (e.g., the business manager), assignments are shown as a fraction of full-time effort. For example, 10 percent of the business manager's time is to be devoted to the supply cost reduction project and 20 percent to the project devoted to reducing nonoperative time in the OR. Work time for the clinical coordinator-a position mandated for hospitals participating in ACS NSQIP-is fully consumed by the four projects shown.

For tracking nurses' assignments, a different method is needed because nurses typically squeeze in work on their improvement projects at the end of their day. Instead of estimating a percentage, it is sufficient to list the assignments by filling in the appropriate cell with a color code indicating whether the nurse's load will allow for a project or projects. For example, nurses 1, 2, 4, and 6 can handle two improvement projects simultaneously, while nurses 5 and 8 can handle only one each. All of these nurses have cells that are coded green. Meanwhile, nurse 7 doesn't yet have an assignment, while nurse 3 has three assignments and is overloaded, as indicated by the cells coded in orange, so that another nurse needs to assume responsibility for at least one of her current assignments. The spreadsheet is updated quarterly or with a frequency that makes sense for perioperative leaders.

As the portfolio is assembled by adding projects to the wish list, tentative assignments are entered into the spreadsheet until several members of the staff are shown to be overloaded. At that point, it's time to review the portfolio and select the project or projects that will have to be dropped or delayed. This process provides an effective way for a hospital to build a portfolio of projects that can achieve the organization's objectives in the desired timeframe. Moreover, the process is cyclical, with the cycle repeating as the organization incorporates improvements developed by each project and begins to investigate further opportunities.

At present, we do not know of any perioperative leaders who are using the process described here with such a spreadsheet tool. The method has been used with great success in industry, however, particularly in situations where individuals' time allocations can be managed, as with the clinical coordinator in our example. Industry managers who have used the method report that it was highly effective in increasing their organizations' productivity because it allowed them to control the number of projects under way at any time and thus to complete them on schedule without wearing out and frustrating their staff.h  

A Clinical-Financial Collaboration

The new environment being shaped by healthcare reform and the shift to value-based payment are forcing perioperative leaders to play a greater role in ensuring the financial well-being of their organizations by identifying effective ways to improve quality while reducing costs and increasing revenues. It is therefore important that these leaders possess the tools and techniques for selecting projects that are likely to have the greatest impact and for staffing these projects with full awareness of the organization's capacity.

As the examples presented here suggest, some projects targeted at improving outcomes can have a substantial positive financial impact, while some traditionally popular projects aimed at improving operations may have little or no effect on the bottom line. Finance leaders should understand what is required to identify projects that are most likely to produce positive results, and they should work collaboratively and effectively with their perioperative colleagues to help them implement the processes described here. Those who do so will contribute not only to improving the performance of the perioperative organization, but also to enhancing the capabilities of perioperative staff-all while strengthening the relationship between finance and clinicians.

Kathleen V. Brooks, PA, FACMPE, is vice president, Jackson Surgical Assistants, Atlanta (kbrooks@jacksonhealthcare.com).

Dan C. Krupka, PhD, APC in Economics, is managing principal, Twin Peaks Group, LLC, Lexington, Mass. (dan.krupka@twinpeaksgroup.com).


a. Kaplan, R.S., and Norton, D.P., Strategy Maps, Harvard Business School Press, 2004; and Kaplan, R.S., and Norton, D.P., The Balanced Scorecard, Harvard Business School Press, 1996.

b. For more information, visit www.acsnsqip.org. It should be noted that for hospitals that have heart bypass programs, the list of outcome metrics should also include metrics identified by the Society of Thoracic Surgeons (STS): operative mortality and five measures of postoperative morbidity. Most hospitals do not yet track, let alone publish, clinically based outcome results. However, an era of much greater transparency is approaching, and the ratings devised by the STS have been described as "a watershed event in health care accountability" (Ferris, T.G., and Torchiana, D.F., "Public Release of Clinical Outcomes Data-Online CABG Report Cards.," The New England Journal of Medicine, Oct. 10, 2010).

c. The Surgical Care Improvement Project is sponsored by CMS in collaboration with other national partners, including The Joint Commission. For details on measures, search on SCIP.

d. Krupka, D.C., Sandberg, W.S., and Weeks, W.B., "The Impact on Hospitals of Reducing Surgical Complications Suggests Many Will Need Shared Savings Programs with Payers," Health Affairs, November 2012; and Dimick, J.B., Weeks, W.B., Karia, R.J., Das, S., and Campbell, D.A., "Who Pays for Poor Surgical Quality? Building a Business Case for Quality Improvement," Journal of the American College of Surgeons, June 2006.

e. Rauh, S.S., Wadsworth, E., Weeks, W.B., "The Fixed Cost Dilemma: What Counts When Counting Cost Reduction Efforts?" hfm, March 2010.

f. Dexter, F., Blake, J.T., Penning, D.H., and Lubarsky, D.A., "Calculating a Potential Increase in Hospital Margin For Elective Surgery by Changing Operating Room Time Allocations or Increasing Nursing Staffing to Permit Completion of More Cases: A Case Study," Anesthesia & Analgesia, January 2002.

g. OR nonoperative time is defined as the sum of OR turnover time and anesthesia-controlled time, or the interval from the instant that the dressings are complete to the time that the next patient is induced and handed over to the surgery team by the anesthesia team.

h. Wheelwright, S.C., and Clark, K.B., "Creating Project Plans to Focus Product Development," Harvard Business Review, March 1992.


Publication Date: Monday, December 03, 2012

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