Enhancing hospital performance through perioperative services.

For many hospitals, perioperative services are the foundation of financial performance. On average, perioperative services account for 55 to 65 percent of a hospital's margin, according to a recent Towers Perrin study. Clearly, any hospital that seeks to improve its financial performance must look at ways to improve the volume and margin contributed by perioperative services.

In comparison to medical/primary care admissions, perioperative services generate significant contributions to a hospital's bottom line. Cardiac surgery shows the largest contribution by case, but the volume of cases is declining nationwide due to increasingly effective preventive measures and non-invasive cardiac procedures.

Other types of surgery, including neurosurgery, vascular surgery and orthopedic surgery, deliver smaller margins but are holding steady or increasing in case volume.

However, many hospitals are finding their perioperative service lines under attack. The attackers are new entrants to the market, including for-profit specialty hospitals, physician-owned surgical hospitals and ambulatory surgery centers jointly operated by competitive hospitals and physician groups. All are vying for a portion of the surgical services market, especially in the categories that deliver the highest margins.

As these new competitors meet with some success, hospitals are learning that future success depends on their surgical services improvement.

Joint ventures

For example, at an academic medical center in the southern United States, cardiologists and cardiovascular surgeons ran into difficulty scheduling procedures. When they were able to schedule procedures, start times were often delayed or rescheduled without notice. These difficulties led the physicians and surgeons to believe that the hospital placed little importance on them or the revenue they generated.

Given this environment, the cardiologists and cardiovascular surgeons were ready to listen when a national firm entered the picture to propose a joint venture. The firm proposed building a facility dedicated to cardiology and cardiovascular procedures and offered potential users investment opportunities.

Within a few years, this joint venture captured nearly 40 percent of the market for cardiac surgery. In addition, the physician investors realized return on investment of more than 40 percent.

This joint venture enjoyed spectacular success for several reasons including:

* A clear vision of its market niche

* An operating structure that emphasized smooth service to surgeons and their patients

* Robust financial results that provided the means for capital investments and satisfied investors

At the same time, the volume of cardiovascular procedures and surgeries performed at the academic medical center decreased, affected by both the joint venture and continuing competition from three other cardiovascular surgery programs in the state.

From 1996 to 2001, the medical center's annual volume of coronary artery bypass graft (CABG) procedures declined from 1,847 to 1,100--an example of how quickly a vulnerable department of surgery can lose competitive advantage.

Many hospitals already face this type of competition. Others see the trend and are taking pre-emptive steps to strengthen their perioperative service lines. Those that are most successful take an organized approach to improvement.

A business focus

Hospitals need a clear focus on their opportunities to increase business in existing perioperative service lines, branch out into new surgical niche markets or establish joint ventures with surgeons.

Currently, hospitals that meet with the greatest success from a business standpoint are those offering surgeons joint venture opportunities. One example comes from a geographically disadvantaged hospital with 10 competitors--seven hospitals and three ambulatory surgery centers--within its market. The very survival of this hospital depended on attracting more physicians and patients from areas where the hospital had little market share.

The hospital's solution was to create a same-day surgery center as a joint venture with surgeons not on its medical staff located seven miles from the main campus. The hospital served as general partner and the surgeons as limited partners, a typical structure for this type of organization. By its third year, the same-day surgery center showed steady growth in cases and net revenue. It also delivered annual returns of more than 25 percent on the original investments made by the hospital and surgeons.

What drove the success of this joint venture? Surgeon satisfaction. The center met their needs for on-time procedures including rapid turnover of operating and procedure rooms, and nursing staff with good clinical and interpersonal skills. The organization's structure was also designed to promote business growth. The center management included a director of business development to attract more surgeons and patients to the facility.

Not all hospitals are growing their surgical business.

A successful urban hospital saw its surgical services volume decline more than 20 percent within a year. The hospital had historically strong financial performance--in fact, it was the most profitable hospital in its multi-hospital system. However, its operating room facilities had become dated. In addition, its anesthesia group split it services and attention among five other hospitals. As a result, anesthesia was not committed to the hospitals' success.

[ILLUSTRATION OMITTED]

The hospital also faced growing competition from a dozen ambulatory surgery centers, a new hospital for orthopedic surgery and neurosurgery, and six new operating rooms being built at another local hospital two miles away. With all these pressures, the hospital went quickly from profitability to financial trouble.

This is a bleak picture, but there are a number of steps the hospital could take to improve its position in the perioperative services market. The hospital needs to focus on meeting the needs of specialists who perform high-margin procedures.

[TABLE OMITTED]

Profitability analysis will reveal what types of surgery present the best opportunity to increase profitability. Surgical services that generally show good profitability include:

* Bariatric surgery

* ENT

* Cardiovascular surgery

* Orthopedic surgery (specifically, sports-related)

* Neurosurgery

* Urological surgery

* Lithotripsy

Bariatric surgery, which is growing nationwide at a rate of about 40 percent per year, is proving to be especially profitable. This type of surgery enables morbidly obese patients to reduce their weight through gastric bypass. Payers reimburse providers for bariatric surgery because it can mitigate so many other health problems for morbidly obese patients.

Surgeon satisfaction

Because surgeon satisfaction is so essential to the success of perioperative services, it is important for a hospital to have an accurate, reliable process for tracking surgeon satisfaction.

Successful hospitals are beginning to use a process for surgeon satisfaction measurement and improvement similar to the process Lexus uses for customer satisfaction. The luxury carmaker's service and customer satisfaction levels exceed those of service champions Ritz-Carlton Hotels, Four Seasons Hotels and The Walt Disney Company.

But how can hospitals best prioritize areas for service improvement? They must identify service attributes most closely associated with surgeon loyalty. Loyalty is a measure of a surgeon's willingness to continue to operate at a hospital and recommend the institution to colleagues. Correlation analysis is used to identify the key problems with services that impact loyalty.

In approaching performance improvement programs, hospitals must resist the temptation to try to change everything at once. Instead, they should concentrate on one or two areas that either mirror the organization's goals or represent extreme sources of dissatisfaction for surgeons.

Hospitals can make these decisions by using the performance planning guide that measures scores along the dimensions of importance and satisfaction.

Attributes with the highest importance have the most impact on patient loyalty. Service attributes of high importance but with low satisfaction scores (upper left box) signal a significant problem. These problems need to be addressed immediately. Those of high importance and high satisfaction scores (upper right box) translate into success and do not require attention.

Attributes of low importance with high satisfaction scores nudge groups to move into maintenance mode, while those with low satisfaction and low service importance merit a cautionary approach.

Organizational improvement

Hospitals can also improve surgeon satisfaction and overall performance by making changes to the management of perioperative services. Surgical services are typically managed by directors of nursing for surgical services. Unfortunately, many of these individuals often have little or no advanced finance and marketing management education or experience--yet, they are responsible for managing services that generate 50 percent or more of hospital revenue.

One solution recognizes that the clinical and business aspects of perioperative services require different management skills. This model establishes a new type of position, which could be titled "business manager for surgical services." The position requires an individual who is skilled at sales and business development and can manage the expansion of the service line. This individual could also take on responsibility for budgeting, financial analysis and materials management, further breaking out the business and clinical aspects of perioperative services.

The fact is that management of perioperative services requires strong nursing and physician leadership. One solution is an atypical model that establishes two positions--a director of perioperative services, who has a nursing back-ground, and a medical director of perioperative services, who is a physician. Both report to the hospital's chief operating officer.

Currently, successful hospitals are more likely to create the position of "medical director for perioperative services," who also leads operational improvement. The physicians who fill these positions generally spend about 75 percent of their time in a clinical capacity and about 25 percent of their time managing the service line.

The position is often filled by a clinically respected anesthesiologist who offers strong interpersonal skills. An anesthesiologist can be an especially good choice because he or she will have a global perspective on surgical operations as well as front-line experience. An anesthesiologist as medical director for perioperative services also tends to improve the performance of the hospital's anesthesiology department, which contributes to physician satisfaction.

Respected medical directors have a good working relationship with the nursing director of surgical services. They view their responsibilities as jointly managing the surgery department.

[ILLUSTRATION OMITTED]

In general, the medical director is responsible for overall perioperative services scheduling and data gathering, providing leadership to clinical staff and serving as a liaison to hospital administration, nursing administration and operating room committees. The medical director must have the support of the hospital administration and the authority to be the final arbiter of any inter-departmental issues.

Operational improvement

In seeking to make operational improvements in perioperative services, one of the most important areas to consider may be block time. As a general rule, a hospital should never block out more than 80 percent of its inpatient operating room time and should always maintain flexibility in the schedule to accommodate both emergent and emergency cases.

Hospitals should continuously track operating room utilization, compare it with scheduled block time on a regular basis and make adjustments at least quarterly. It may be beneficial to set criteria for reducing block time based on utilization. For example, if a surgeon or surgical specialty uses less than 80 percent of allocated block time for three consecutive months, block time will be reduced accordingly. Of course, the hospital should keep surgeons informed of their allocated block time and their most recent utilization percentage each month.

New strategies for block time made a tremendous difference in the performance of a 750-bed hospital with a declining share of the perioperative services market. In addition to excessive block time of more than 85 percent, the hospital had other problems, including:

* Inefficient operating room turnover

* An operating room director with an autocratic style

* High turnover among registered nurses

* Surgeons who found it difficult to schedule operating room time

To improve the situation, the hospital established a surgical leadership committee that named a medical director of perioperative services. The medical director established block time release standards that required earlier release of unscheduled block time.

The medical director also reduced block time to about 60 percent of the operating room schedule. Together, these actions opened more operating room time for more surgeons, increasing their satisfaction. The hospital's market share rebounded and profits increased.

Any downturn in perioperative services can have a serious impact on a hospital's overall financial performance. As more specialty surgical hospitals and same-day surgery centers spring up around the country, hospitals can take steps to protect or even expand their share of the perioperative services market.

Perioperative Services Drive Hospital Financial Performance

Surgical Specialty            Margin Contribution per Case

Cardiac                       $12k
Neuro                          $8k
Vascular                       $7k
Orthopedic                     $6k
General                        $5k
Oncology                       $5k
General Medical Primary Care   $1.5k

Suggested Release Standards for Surgical Block Time

                           Release Block Time When
Surgical Specialty         Unscheduled This Far in Advance:

Burn Service (Inpatient)    1 Day
Cardiac                     1 Day
General                     7 Days
OB/GYN                      7 Days
Health and Neck             7 Days
Neuro                       4 Days
Ophthalmologic              7 Days
Orthopedic (Joint)         14 Days
Orthopedic (Spine)          3 Days
Pediatric                   7 Days
Plastic (Cosmetic)         14 Days
Radiological                3 Days
Vascular                    2 Days
Thoracic                    3 Days

By Jeffry Peters and Tom Blasco, MD

Jeffry (Jeff) Peters is president of Health Directions, LLC, in Chicago. He is a national leader in the financial and operational improvement of hospital-affiliated physician group, physician group practices, MSOs, academic medical centers and hospitals. He can be reached at 312-396-5403 or [e-mail]

[ILLUSTRATION OMITTED]

Tom Blasco, MD, is a practicing anesthesiologist and the co-director of perioperative services at Lutheran General Hospital in Park Ridge, IL. He also serves as a consultant to hospitals and has been effective at increasing surgeon satisfaction and perioperative services operating and financial performance. He can be reached at 847-723-5524.

[ILLUSTRATION OMITTED]