Brian Brown is a regional vice president of operations of Meridian Surgical Partners.
Q: What is the formula for calculating operating expense per case in ambulatory surgery centers?
Brian Brown: The first two parts of calculating the operating expense per case are taking the preference card of the physician and costing it using the medical supplies used in the case.
First, ASCs usually track physicians' cost per case using preference cards and then supplies used in their cases are entered into the patient accounting system. The system pulls your inventory costs over so it automatically generates the direct costs of supplies used in the case.
Second part is from the medical record. The surgery center keeps track of time-in and time-out from pre-op, OR, PACU, etc., the departments the patient goes through. In most patient accounting systems you can enter that information from the medical record and you also have loaded in your patient accounting systems your pay rates for staff. [The system] pulls your direct labor costs over.
Direct labor and direct materials represent the biggest costs and those are the biggest indicators we use. Once net revenue is calculated (what you are going to collect on that case) and you have those two pieces of information, you have what's called the contribution margin on that case. That's where we leave it oftentimes; we just look at contribution margins by physician.
Q: How do you allocate all of the other costs of the ASC to cases?
BB: The biggest challenge is if you want to extend case costing out to include the overhead, fixed costs, of the center. It gets a little tricky. It also doesn't mean as much due to the majority of the other costs of the center are fixed and are not directly attributable to the performance of the individual case from a profitability perspective.
Here are two possible methods [to attribute overhead to cases]:
1. Start with the total number of cases performed. Let's say an ASC performed 400 cases one month and one surgeon did 100 of them. Simply take 25 percent (400 / 100) of remaining costs of the ASC and allocate it to this surgeon's 100 cases.
2. You can also look at it as a time-spent methodology. Let's say your ASC performed 400 cases in 1,000 OR hours in a month. Take the total overhead costs divided by the 1,000 OR hours and you determine how much of the overhead rate to allocate to each OR hour. Let's say one surgeon spent 1.5 hours on a case. Now use the 1.5 hours times the overhead rate you calculated and now you have your overhead allocation for the case.
Here's something to consider: Think about pain management, for example. A pain management physician might be doing 100 cases a month, so he would be seeing 25 percent of total cases in a 400 case/month ASC but if you look at his OR time, he may be 2 percent of the time because your ASC is also doing cases in specialties like orthopedics and others which take longer in the OR. Does this [pain management physician] cost you 25 percent of your overhead based on number of cases or does he cost you 2 percent of overhead based on OR time? It's just how you perceive it and how you want to look at it.
That's where the tricky part comes in and we leave the overhead out of it. Contribution margin means more to us than the overhead allocation.
Learn more about Meridian Surgical Partners.
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