The New Break-Even Analysis: Expanding the Scope and Assumptions of

the Traditional Break-Even Analysis

January 29th, 2015

James Laskaris EE, BME

Emerging Technology Analyst

MD Buyline

• Joined MD Buyline in 1994

• Over 30 years in healthcare field

• Previously served as Clinical

Engineering Department Director

• Primary Analyst for Emerging and

High-End Technology

• Covers legislative and

reimbursement impact on

healthcare

Presenter

- It is historic revenue projection

- Consumables, labor, capital and overhead costs traditional hard dollar items

- Volume projections more art than science

- Break-even analysis

- Changes the technology acquisition discussion

- Does not use volumes based on historical data

- Uses hard data to determine the business plan of a proposed project

- Finds target point when or if a proposed project will start to pay for itself

What is a Break-Even Analysis?

- Healthcare costs Americans $2.8 trillion/year

- Medicine is more reliant on technology, which:

- Drives improved outcomes

- Increases costs

- Key to hospital financial viability is selecting the right technology to support a service line

- IT a major target for reducing health costs are:

- Process improvement

- Reduce Administration costs

- Account for 31% of hospital and professional expenditures

Health Affairs 2014;33(1):67-77.

The State of Healthcare

- Balance Budget Act 1997- Previously, cost was passed onto the payor

- The BBA made one payment for prescribed therapy of diagnostic study

- Affordable Care Act 2009- Financial penalties based on negative outcomes

- Included Health Information Technology for Economic and Clinical Health (HITECH) Act

- HITECH Act- Incentivized hospitals to adopt health information technology

- EMR projected to save $81 billion annually

- Improve healthcare efficiency, safety and the management of chronic disease

Health Affairs 2005; 24(5):1124-6.

Legislative Issues

Provider competition and consolidation

Vendors using “Razor-Razorblade” Model

Outcome-based payments

Population demographics

Increase in IT integration

The Changing Healthcare Landscape

- Population demographics and geographic competition

- Age, health and size of the population

- Impact ability to support potential volumes needed for technology

- Aggressive negotiations

- Service contracts, consumables and licensing fees

- Licensing fees can increase ongoing costs by 10-20% per year

- Reimbursement issues

- Length of stay

- Never events

- Hospital readmissions

- Meaningful use

How Does the Break-Even Analysis Need to Change?

Costcapital, labor,

consumables and service

Payment and Marginsreimbursement

Utilizationtechnology life expectancy

Clinical Considerationspopulation demographicsgeographical competition

Main Components of Break-Even Analysis

Cost- Capital

- Multiple configurations, installation and discounting lead to price variations

- Vendors shifting cost to consumables, service and licensing fees

- Labor

- Key cost factor for any clinical technology or IT investment

- HCIT can help make staffing more efficient

- Labor equates to 50% of hospital expenses

- Cost of labor increased due to shortages or RNs, laboratory personnel and imaging technicians

- Consumables/licensing fees

- Consumable costs over equipment lifetime can exceed original capital outlay

- Cost of IT support and licensing ~10-20% of capital costs per year

Cost- Service

- Healthcare spends $14 billion on service in the U.S.

- Service accounts for 3%-7% of original technology costs per year

- IT 10%-15%

- Cost of service can make or break return on low utilization technologies

- Use 1/2 to 2/3 of the OEM service contract when budgeting

- Length of Stay (LOS)

- Less invasive technology has potential to reduce OR time, recovery time and LOS

- Projecting patient LOS

- Inpatient: Geometric LOS for each DRG provided by CMS

o Estimate $500 per day for nursing and $1,200-$3,000/day for ICU

‐ Outpatient: $600, 23hr stay

Utilization- Traditionally determined from physician input and historical data

- Break-even point offers more effective estimation

- Cost and revenue utilized to determine the number of procedures needed for technology to reach profit

- Taxpayer Relief Act

- Ties payment rates for high-end imaging to utilization

- Lifespan of the equipment

- AHA Guide for Useful Life of the Equipment offers benchmark

- Often overestimates true life expectancy

- Most CFOs target payback period of 1-2 years

Reimbursement/Profit Margins

- Reimbursement tied to two key provisions under the Affordable Care Act

- Never events

- Hospital readmissions

- Tying reimbursement to outcomes makes projecting revenue difficult

- Hospital margins range from 5% to negative numbers

- Acquiring cost reducing technology can make all the difference

- Average CMS reimbursement used as a guide

- Historically, Medicare payment worst case scenario

- Private pay reimbursement is no longer significantly higher than Medicare

- Meaningful Use

- IT incentivized with negative reimbursement

Clinical Considerations- Value analysis teams need to think across department lines

- Consider tradeoffs of LOS, infection control and readmissions with new technology

- Population and geographical concerns dictate reimbursement and volumes for specific procedures

- Population demographics

- Areas with a large percentage of non-Medicare patients

- Most common DRGs: labor and delivery

- Areas with a large percentage of Medicare patients

- Most common DRGs: pneumonia, COPD, heart failure and joint replacement

- Geographical competition

- Hospitals continually compete for patients and physician services

- Providers must be sensitive to competing within their own networks

Int Anesthesiol Clin. 2009;47(1):153-70., Chest. 2014;145(3):500-7., HCUP-US Statistical Brief #185 and JAMA. 2011;305(21):2175-83.

Example: Tele-ICUs- The problem

- Critical Care costs in the U.S. are roughly $80-100 billion per year

- U.S. facing a shortage of specialized physicians

- 6,000 ICUs but only 5,500 board-certified intensivists

- Providers need ways to improve patient care, reduce mortality and lower cost

- What are Tele-ICUs?

- Audio-visual remote monitoring of patients by a specialized intensivist

- Within the hospital or from a remote location

- Clinical data

- Rate of discharge 5-20% faster from ICU

- Tele-ICUs patients were:

- 25% more likely to survive ICU stay

- Discharged from the hospital 15% faster

Utilization Average patient volumes for each DRG scenario

Total volume Based on an 80% occupancy rate with average stay of 2 days

Reimbursement Medicare is used as a guide to represent worst case scenario

Labor Combination of LOS, lab and imaging cost from CMS’ database

Consumables Composite of pharmaceutical and other supplies

Infect Control Hosp Epidemiol. 2012;33(3):250-6., J Am Coll Surg. 2014;219(4):676-83. and Chest. 2013;143(1):19-29.

Tele-ICUs: Analysis Set-Up- 200 bed hospital with 20 dedicated ICU beds

- Patient Population

- Tele-ICU’s not cost effective for routine surgical patients

- Specific procedures chosen represent sickest patients:

- DRG 208: patient on a ventilator

- DRG 280: acute myocardial infarction with complications

- DRG 871: septicemia

Tele-ICU: Break-Even AnalysisSCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4

Purchase Price $590,000 $590,000

Residual or Buyout Value $59,000 $59,000

Clinician Cost $1,155,000 $460,000 $460,000

SPECIFIC PROCEDURE VOLUMES (YEAR 1)

Proc#1 1,150 1,150 1,150 231

Proc#2 1,750 1,750 1,750 455

Proc#3 500 500 500 155

3,400 3,400 3,400 841

REIMBURSEMENTS

Reimbursement for procedure #1 $12,835 $13,511 $13,511 $13,511

Reimbursement for procedure #2 $9,785 $10,123 $10,123 $10,123

Reimbursement for procedure #3 $10,394 $10,732 $10,732 $10,732

LABOR PER PROCEDURE

$11,128 $10,778 $10,778 $10,778

$8,800 $8,450 $8,450 $8,450

Procedure #3 $8,200 $7,850 $7,850 $7,850

SUPPLIES/CONSUMABLES

Consumables/Procedure #1 $1,200 $1,200 $1,200 $1,200

Consumables/Procedure #2 $1,300 $1,300 $1,300 $1,300

Consumables/Procedure #3 $2,500 $2,500 $2,500 $2,500

COST PER PROCEDURE $10,942 $10,932 $10,758 $11,146

PROFIT OVER THE TERM ($) -$606,000 $7,258,500 $10,202,500 $84,240

NET PRESENT VALUE -$539,561 $6,462,710 $9,015,221 $6,282

LOS 5 Days / Lab

DRG 280 AMI with Major Complications

Procedure #1

Procedure #2

LOS 5 Days / Lab / Imaging / Vent

LOS 4.7 Days Lab / Imaging

Pharm / Supplies

Pharm / Supplies

Comprehensive Calculator

DRG 208 Respiratory with Vent

Pharm / Supplies

Traditional ICU

ICU with 3

Intensivist on-site

Discharged from

ICU 10% faster

Tele-ICU

Discharged from

ICU 10% faster

Break Even

for Tele-ICU

Discharged from

ICU 10% faster

DRG 871 Septicemia

Total Procedures (Year 1)

CPT codes: 99233 and 99291

- Financial cost offset by clinical gains:

- Decreased mortality

- Improved care delivery

- Decreased LOS

- Reduce infections

- Other considerations:

- Training and coordination

- Staff acceptance

- Multi-department buy-in

- Establishing new protocols

Tele-ICU: Outsourced vs. In-HouseSCENARIO 1 SCENARIO 2 SCENARIO 3

Purchase Price $590,000 $50,000

Residual or Buyout Value $59,000 $5,000

Clinician Cost $460,000

Fee Per Procedure Payment $350

SPECIFIC PROCEDURE VOLUMES (YEAR 1)

Proc#1 400 400 400

Proc#2 800 800 800

Proc#3 200 200 200

1,400 1,400 1,400

REIMBURSEMENTS

Reimbursement for procedure #1 $12,835 $13,511 $12,835

Reimbursement for procedure #2 $9,785 $10,123 $9,785

Reimbursement for procedure #3 $10,394 $10,732 $10,394

LABOR PER PROCEDURE

$11,128 $10,778 $10,778

$8,800 $8,450 $8,450

Procedure #3 $8,200 $7,850 $7,850

SUPPLIES/CONSUMABLES

Consumables/Procedure #1 $1,200 $1,200 $1,200

Consumables/Procedure #2 $1,300 $1,300 $1,300

Consumables/Procedure #3 $2,500 $2,500 $2,500

COST PER PROCEDURE $10,822.29 $10,876.71 $10,828.71

PROFIT OVER THE TERM ($) -$552,000 $2,109,000 -$597,000

NET PRESENT VALUE -$491,481 $1,809,056 -$537,372

Procedure #2 LOS 4.7 Days Lab / Imaging

LOS 5 Days / Lab

Total Procedures (Year 1)

DRG 871 Septicemia

Tele-ICU

Discharged from

ICU 10% faster

DRG 280 AMI with Major Complications

Procedure #1 LOS 5 Days / Lab / Imaging / Vent

Traditional ICU

Comprehensive Calculator

DRG 208 Respiratory with Vent

Outsourced

Tele-ICU

Discharged from

ICU 10% faster

Pharm / Supplies

Pharm / Supplies

Pharm / Supplies

CPT codes: 99233 and 99291

Changes in the economic and legislative environment have complicated the capital acquisition landscape

In Conclusion

Hospitals and health systems should:

Think beyond the standard assumptions of capital, labor and consumables

Use a Break-Even analysis to project a business plan

Quantify the clinical aspects of equipment and technology acquisition decisions