Cost Accounting in the Operating Room

By: Anne Farmer, Ken Merbler
TriNet Healthcare Consultants, Inc.

A group of Orthopedic surgeons is threatening to leave the hospital and take their business to another organization. What will be the financial impact of their departure? In order to answer this question, the organization needs to determine the contribution margin of their cases. This, however, can be problematic.
One of the problems in dealing with the above scenario is the lack of timely, accurate cost data upon which to base any decisions. Cost information is inadequate in many hospital departments, but the place where the lack of accurate cost data is most evident is often the Operating Room. The Surgery department is the leader in medical supply usage for the entire hospital. Decisions are made here which have a significant impact on costs. The choices made by the physicians and clinical staff drive those costs. All need access to the data. Lack of information at this level leads to choices which can be very costly. For example, the decision to carry dozens of different types of surgical implants can result in tens of thousands of dollars wasted on obsolete inventory. Access to this cost information is needed in other areas of the hospital as well, to make decisions at a higher level. Failure here can be even more costly. How? A healthcare organization entering into fixed rate contracts without understanding its costs for specific procedures can experience financial disaster.

Accurate cost data for the O.R. does exist. The problem is transforming it into useful, accessible information. But this process is not simple. Why? Software has been created to help provide this data, but these systems rarely live up to their potential. Many times the software is too complex for the clinical staff to use. There are several reasons for this. It is easier to spend money on software than to justify adding an FTE to run the system. When software packages are installed there is often inadequate consideration given as to who is going to maintain them. A poorly maintained patient charging system adds to the problem of capturing cost data. But there are steps that can be taken to make sure that this valuable information is gathered.

In recent years, there have been some excellent software packages developed for the O.R. Examples of these systems include ESI (now McKesson HBOC), Lawson, Array, MSM, DEROYAL and ORSOS. The best of these address the operational needs of the O.R. in an integrated fashion. They include O.R. scheduling, patient billing, purchasing and inventory control modules. A key component of these systems is the physician preference card. A preference card is a detailed list of resources (labor, supplies and equipment) used by a particular physician performing a specific procedure. When one considers the number of physicians practicing surgery and the number of procedures performed by each, one can see that the number of necessary preference cards is quite large. Because of their detailed nature, there is a great amount of work needed to create and maintain them. Fortunately, most hospitals already have these cards. They have been using them for years to run the O.R. in an efficient manner. Now this data must be entered into the O.R. system in order to take advantage of the available system capabilities. This can appear to be a monumental task for the O.R. to complete in addition to everyday duties. However it is well worth the effort, and solves the cost accounting problem in the Operating Room.

Costing Approaches

The availability of detailed case information from O.R. systems such as those mentioned above enables the organization to use an actual costing approach, as opposed to the standard costing approach that might be employed in other departments such as Lab and Radiology. The advantage of an actual costing approach is that it captures the variability in costs across patients, and hence across physicians. Under a standard costing approach a cost standard would be developed for a procedure based on estimates of staff time as well as supplies used. Under an actual costing approach costs are determined on a patient-by-patient basis, based on the data from the O.R. system. Two patients undergoing knee replacements end up with differing costs, based on the staffing for the case, the duration of the case, and the supplies actually used. Now the cost accounting information can be used to examine variances in costs and hopefully to reduce costs. The diagram in Exhibit 1 outlines the advantages and disadvantages of various costing approaches in the O.R.

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