Healthcare reform and new payment models are changing the revenue model of the hospital surgery department. Finance leaders must focus on the new elements of managing surgical services margin—safety, clinical outcomes, and cost control.

At a Glance  

Five elements have helped Advocate Lutheran General Hospital control the surgical quality, safety, and cost outcomes that are the focus of new payment models:

  • Single-path scheduling
  • Document management
  • Presurgical testing
  • A daily huddle
  • Surgical safety initiative

Under fee-for-service payment, the main driver of operating room (OR) profitability is case volume. By contrast, under new value-based payment models, two key drivers of surgical services revenue are clinical quality and patient outcomes. This difference makes cost management more important than ever.

Thus, as fee-for-service payment shifts to value-based payment, a hospital’s finance department must recalibrate the gauge it uses to manage OR revenue. Monitoring case volume is no longer enough. Finance should pay careful attention to the factors that affect surgical safety, surgical outcomes, and OR expenses. What should finance leaders do to protect OR revenue? Considering that OR revenue accounts for more than 65 percent of margin in better-performing hospitals, the answer is critical. The first step is to understand how new payment models affect surgical services.

How New Payment Models Affect the OR

New payment models offer a complex mix of incentives around quality and cost control. Surgery department performance figures prominently in the mix, as shown in the exhibit below. (For more information about specific provisions in these payment models, visit the Centers for Medicare & Medicaid Services [CMS] website.) The bottom line is that OR revenue now depends on reducing surgical complications and readmissions, eliminating surgical errors, and controlling perioperative costs. How can finance leaders work with clinicians to monitor and help manage these factors? The key is to understand the processes that drive OR clinical and financial performance.



Processes That Drive OR Clinical and Financial Performance

Surgery is arguably the most complex of all hospital services. Every surgical procedure is the culmination of an intricate flow of information, equipment,supplies, processes, and expertise. When any element is missing, a poor outcome can result. For example, if information about a patient’s hypertension is not communicated to the right staff, the patient could beat higher risk of heart attack or stroke. Poor central sterile processes can increase a patient’s risk of infection. Failure to communicate effectively during surgery can lead to a retained object.

Time is a critical factor. Without time constraints, all the elements of a safe surgery could beassembled carefully and correctly, with ample opportunity for review and correction at every step. In the real world, though, everything must come together rapidly on the day of surgery and facilitate excellent real-time decision-making during the procedure.

Hospitals across the country have been working to improve surgical care coordination for decades. At Advocate Lutheran General Hospital in suburban Chicago, OR leaders have created a series of processes that ensure strong communication at every step of the perioperative pathway. These processes have helped Lutheran General control the surgical quality, safety, and cost outcomes that are the focus of new payment models. Lutheran General attributes its success to five key elements: single-path scheduling, document management, presurgical testing, a routine meeting referred to as “the daily huddle,” and a surgical safety initiative.

Single-path scheduling. In many ORs, schedule requests come in via several routes—phone, fax, email, written note, and verbal request. Requests typically lack full information on the patient and the procedure, creating many opportunities for error. To solve this problem, Lutheran General developed a standard schedule request fax form.

Mandatory fields include complete procedure information and anesthesia requirements, patient comorbidities and allergies, test andpreventive care orders, and equipment needs. The form captures all the information the OR needs to prepare for a case, identify high-risk patients, and avoid time-crunch errors.

Document management. Assembling patient information prior to surgery is a challenge. In many cases, key documents are unavailable when needed. Lutheran General addressed this weakness by adopting a software solution that digitizes, indexes, and stores incoming faxes. The system coordinates scheduling forms, lab results, imaging studies, consults, and all other patient documentation. Every item is reviewed upon receipt. Clinical staff act on incoming information, then drop items into electronic patient folders. All documentation is available on the day of surgery.

Presurgical testing. Presurgical testing is often perceived as onerous and expensive. Lutheran General has found that identifying patient risk factors before surgery is the key to reducing expensive postsurgical complications. Five years ago, a clinical team began developing standard protocols for pre-anesthesia testing (PAT). The protocols include testing algorithms for normal and high-risk patients, lab and imaging guidelines, and a list of medications that should be withheld from patients before and after surgery. Patients are screened by phone shortly after scheduling. Starting three days before surgery, pre-anesthesia nurses actively manage cases to ensure complete patient preparation. During this time, a physician reviews all abnormal test results, and the anesthesia department reviews charts for all high-risk patients.

The daily huddle. Lutheran General established this 35-minute daily meeting as a process stepfor making a final check to ensure that all elements of a safe, efficient surgery are in placethe day before a procedure. The surgery department holds the daily huddle every day at 2 p.m. with representatives from nursing, anesthesia, PAT, scheduling, materials management, and other areas. Participants review current-day issues and then preview cases scheduled for the following day and two days forward. Checkpoints include outstanding tests, comorbidity management, special equipment needs, and overall schedule flow. Problematic cases are resolvedor rescheduled.

The surgical safety initiative. The Joint Commission has identified poor communication as the most common cause of medical errors. In 2010, Lutheran General and other Advocate Health hospitals launched a surgical safety initiative to improve team communication. Surgeons, anesthesiologists, and nurses were trained in crew resource management (CRM), a set of techniques from commercial aviation that support open communication among team members, regardless of professional status. OR teams also adopted a modified version of the World Health Organization (WHO) Surgical Safety Checklist to ensure consistent adherence to best practices in safety and quality. In addition, the surgery departments instituted an anonymous error reporting system and worked to strengthen a “just culture” that focuses on understanding and preventing errors rather than assigning blame.

High-Value Outcomes

Stronger preoperative and intraoperative processes have helped Lutheran General achieve exceptional performance on a wide range of critical performance metrics. These metrics—focusing on quality, postsurgical complications, length of stay, readmissions, and operating costs—are aligned with the quality, safety, and cost measures that are key to maintaining revenue under new payment models.

Quality measures. As publicly reported on the CMS Hospital Compare website at the time this article went to press, Lutheran General met or exceeded both U.S. and Illinois performance on all 11 measures that CMS adopted from the Surgical Care Improvement Project (SCIP), a national quality partnership of organizations interested in improving surgical care by significantly reducing surgical complications. Lutheran General’s retained object rate was 0.000 per 1,000 patient discharges,compared with an overall U.S. rate of 0.028.

Postsurgical complications. Between 2007 and 2011, Lutheran General’s rates for postsurgical deep vein thrombosis (DVT) and urinary tract infection (UTI) each declined by approximately three-quarters. Kidney complication rates have been reduced by 80 percent. Postsurgical pneumonia went from a rate of 1.4 percent in 2007 to zero occurrences in 2011. Lutheran General was cited in 2010 by the American College of Surgeons for achieving the lowest rate of postoperative complications of all participants in the National Surgical Quality Improvement Program.

Length of stay. Lower complication rates have reduced length of stay (LOS) for surgery patients. For example, the national average LOS for complicated aortic surgeries is approximately nine days. At Lutheran General, patients who undergo these procedures are often discharged in five days.

Readmissions. Rehospitalization rates are also down significantly. Nationally, the 30-day readmission rate for surgery patients is approximately 12.5 percent (“Statistical Brief #127, 30-Day Readmissions Following Hospitalizations for Chronic vs. Acute Conditions, 2008,” Healthcare Cost and Utilization Project, Agency for Healthcare Research and Quality, February 2012). Despite high patient acuity, surgical patient readmissions at Lutheran General are approximately 9.3 percent and falling.

Operating costs. Better scheduling processes now allow the surgery department to anticipate supply needs days or weeks in advance, which has enabled the OR to create a true just-in-time inventory system. Inventory costs have decreased significantly over the past several years, and better presurgical preparation has led to fewer case cancellations. Over the past two years, same-day cancellations at Lutheran General have been reduced from 18 per month to 3 per month, or a rate of 0.7 percent.

According to internal calculations, taking down an OR room and setting it up for another procedure can cost between $1,100 and $2,000. Part of this expense is the cost of supplies that must be discarded or reprocessed. Another issue is simply wasted time. OR time in a tertiary care hospital has been valued at $60 per minute (Sandberg, W.S., “Identifying Inefficiencies in Perioperative Processes” [moderator], 2012 American Association of Clinical Directors Perioperative Leadership Summit, New Orleans). If a late cancellation leads to a 90-minute slot that cannot be filled, the utilization cost is $5,400. Better preoperative processes have also helped Lutheran General complete more surgical cases during daytime hours, helping control overtime costs and total nursing hours per case.

Tying It All Together

Lutheran General has used reductions in postsurgical complications and lengths of stay to secure preferred rates with private payers. For example, the hospital has been designated as a center of excellence for knee and hip replacement by Blue Cross and Blue Shield of Illinois. Overall, private-payer contractual rates have increased approximately 10 percent in recent years. Additionally, surgeons who operate at Lutheran General are eligible for gainsharing incentives negotiated through Advocate Physician Partners, the system’s physician-hospital organization (PHO).

Looking forward, Lutheran General is wellpositioned to optimize OR revenue as all payers transition from volume-based to value-based payment. Lutheran General’s high performance on SCIP measures will help it thrive under the Medicare Value-Based Purchasing Program, and the hospital’s low rates of postoperative infection, blood clots, and other complications give it a head start on the program’s coming expansion into surgical outcomes measures. Low complication rates and superior safety outcomes willminimize Lutheran General’s exposure to Medicare hospital-acquired condition (HAC) penalties starting in 2015. Low rehospitalization rates will help the hospital maintain patient revenue if Medicare readmission penalties expand to surgical procedures in the coming years.

Lutheran General is also well prepared to benefit from bundled payments and other shared savings models. In this area, low complication rates are key. According to the American College of Surgeons, a DVT generates an average of $10,804 in additional costs; a surgical site infection (SSI) adds an average of $27,631 to the cost of patient care (National Surgical Quality Improvement Program, “Business Case,” .

Exhibit 2


Lutheran General’s success at lowering rates for these and other complications will help it maintain margins. The surgery department’s ability to control operating costs, especially supply expenses, is also critical. Nonlabor costs account for approximately 70 percent of an OR’s operating expenses. Lean inventories and other OR expense savings will help Lutheran General protect the operating margins of its surgical service lines.

All these performance gains are critical as Lutheran General participates in the development of Advocate Care, the accountable care organization (ACO) recently launched by Advocate Health. Low readmission rates and high patient satisfaction scores achieved by Lutheran General and other Advocate hospitals were particularly important in securing initial contracts to operate as an ACO.

Quality and safety are critical to maintaining revenue under new payment models. Care quality is also instrumental in driving strong, organic revenue growth through increased case volume. The key driver is surgeon satisfaction. Effective perioperative processes help ensure that when surgeons schedule a case at Lutheran General, the procedure can be performed safely and efficiently, with well prepared staff, correct supplies and equipment, and minimal last-minute problems. At a time when surgery volumes are decreasing at most hospitals, Lutheran General has experienced strong growth in case volume, much of it driven by physician word-of-mouth. Between 2011 and 2012, the hospital’s annual surgical volume increased by approximately 750 cases.

How to Prepare for New Payment Models

As surgical quality, safety, and cost outcomes improve, finance leaders should focus on leveraging OR performance improvements to strengthen net revenue and overall financial results.

Preparing the OR for new payment models will require close cooperation between the CFO and clinical leadership. As a starting point, the finance executive and clinical leaders should work together to identify areas for improvement in quality, safety, and costs. They should use the Surgical Revenue Checklist on page 114 to identify areas of focus, relevant metrics, and performance targets. The next step after this gap analysis is to create a surgery department dashboard to help all stakeholders drive performance improvements.

Surgical outcomes may be outside the finance department’s traditional area of expertise, but working with clinicians to monitor and manage performance will be critical to maintaining strong OR revenue in the years ahead.

Jeffry A. Peters, MBA,is president, Surgical Directions, LLC, Chicago, and a member of HFMA’s First Illinois Chapter (

David Young, MD, is director of perioperative services, Advocate Lutheran General Hospital, Park Ridge, Ill., and partner of Surgical Directions ( 

John White, MD, is chair of the Department of Surgery, Advocate Lutheran General Hospital, Park Ridge, Ill. ( 

Cindy Mahal-van Brenk, RN, BSN, MS, CNOR, is executive service line director, Advanced Surgery & Orthopedic Institute, Lutheran General Hospital, Park Ridge, Ill.

Publication Date: Monday, April 01, 2013

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