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A hospital used to be successful if its operating room was successful. Successful ORs, in turn, followed a straightforward business strategy: grow market share in high-margin specialties. A high volume of well-paid procedures translated directly into strong revenue.

New payment models, however, are redefining success for surgical departments. With readmission penalties, bundled payments and other initiatives, ORs are financially responsible for poor patient outcomes and high costs. Those that cannot deliver high-quality care and control expenses will suffer economically.

The consequences could be dramatic. In better-performing hospitals, surgical services account for 65 percent of contribution margin. Trustees can help hospitals protect OR profitability by keeping leadership focused on this new definition of success.

Five Drivers of OR Revenue

As the federal government phases in several new payment initiatives during the next few years, five clinical and operational goals are becoming key drivers of surgical revenue.

  1. Increasing surgical quality. Under Medicare's new value-based purchasing program, hospital payments are linked to performance on a range of quality metrics. The metrics include several measures from the Surgical Care Improvement Project. High-performing hospitals will earn a 1 percent base DRG payment bonus. Low performers will be penalized 1 percent. Starting in 2017, the at-risk amount will jump to 2 percent.
  2. Minimizing post-op complications. In 2015, the value-based program will incorporate surgical outcome measures like postoperative blood clots. Separately, Medicare in 2015 will begin penalizing hospitals with high rates of health care-associated infections, including surgical-site infections. HAI penalties will amount to 1 percent of payment.
  3. Eliminating surgical errors. Medicare does not pay for care related to such errors as retained surgical objects and wrong-site surgery. Starting in 2015, high error rates will trigger the 1 percent HAI penalty.
  4. Reducing surgery readmissions. Medicare could expand the hospital readmissions-reduction program in 2015 to cover several cardiovascular surgeries. Payment penalties for high-readmission hospitals will reach 3 percent that year. In addition, readmissions directly reduce OR revenue under shared savings mechanisms that are part of the Medicare Bundled Payments for Care Improvement Initiative and the Medicare Shared Savings Program.
  5. Controlling OR operating costs. Even optimistic hospitals expect relatively thin margins under bundled payment and other accountable care models. Given the constraints of these models, controlling operating expenses will be critical to maintaining profitability.

These new revenue drivers are not unique to Medicare; private payers are developing similar models. What can hospitals do to maximize performance in these critical areas? Advocate Lutheran General Hospital, a national leader in surgical quality, has shown that ORs can improve outcomes significantly by strengthening communication and coordination.

More and Better Information

Lutheran General is a large teaching and referral hospital in suburban Chicago. Over the last five years, OR leaders have created several new processes to improve the flow of information before and during surgery:

  • Scheduling. Many surgical problems occur because OR staff lack key patient information. Lutheran General created a standardized case scheduling system that captures case details and patient risk factors.
  • Patient prep. New processes ensure that patients are fully prepared for surgery. Staff follow standard protocols for imaging, labs and other tests. Physicians review all abnormal results and high-risk patients. Nurses actively manage patients starting three days before surgery.
  • Daily huddle. OR nursing leaders, anesthesiologists and others meet every afternoon to discuss upcoming cases. Participants make sure all patient health risks are managed and all special needs have been addressed.
  • Aviation safety tools. Mistakes occur when individuals do not feel empowered to voice concerns. Lutheran General adopted crew resource management, a set of safety techniques pioneered in commercial aviation. CRM facilitates safety-critical communication among OR teams. The department also adopted the World Health Organization surgical safety checklist to ensure consistent adherence to safe surgery practices.
  • Culture of safety. OR leaders consciously fostered an environment that emphasizes learning from mistakes rather than assigning blame. Anonymous error reports bring safety problems to light. Staff use process analysis tools to understand shared weaknesses and devise solutions.

These changes have had a big impact on patient outcomes. Over the last five years, lung and kidney complication rates at Lutheran General have fallen significantly. Urinary tract infection and blood clot rates have been cut by roughly 75 percent. Surgical patient readmissions now stand about 25 percent below the national average. In 2010, the hospital had the lowest postsurgical complication rate of all hospitals participating in the National Surgical Quality Improvement Program of the American College of Surgeons.

Process improvements also have helped Lutheran General control OR operating expenses. Reliable scheduling processes have enabled the surgical department to implement just-in-time inventory management. Inventory costs have declined and tighter product control has reduced supply waste due to expiration and obsolescence.

Because patient risk factors are completely managed prior to surgery, case cancellations have become rarer. Since 2010, Lutheran General's same-day cancellation rate has declined from more than 4 percent to less than 1 percent. Given the high cost of OR time, the savings are significant. For every 60 minutes that cannot be filled because of a late cancellation, an OR loses approximately $3,600.

Leveraging Surgical Value

Lutheran General's process improvements represent more than just a new clinical model. They contribute to a new OR business model in which superior outcomes and lower costs equal greater profitability. Over the last few years, the hospital has leveraged patient outcomes and cost control to negotiate favorable contracts with a number of payers. Case volume has increased due to the OR's preferred provider status and peer recommendations from surgeons. And just as important, the OR is prepared to thrive as the government ramps up new payment models during the coming years.

These payment models present a challenge to hospital surgical departments, but trustees can help hospitals respond to this challenge by becoming strong advocates for OR quality, safety and cost control.

David Young, M.D. (, is director of perioperative services, Advocate Lutheran General Hospital, Park Ridge, Ill., and managing partner, Surgical Directions LLC, Chicago. Jeffry A. Peters ( is president and CEO, Surgical Directions.

Sidebar - Seven Questions for OR Leaders