Editorial
What does one minute of operating room time cost?

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Reasons to measure costs

A cost is defined as a resource (eg, an ampoule of propofol) sacrificed to achieve an objective (ie, patient well-being during surgery) [2]. All organizations, including hospitals, have 4 basic reasons to measure costs: 1) to make economic decisions for resource allocation, for example, whether to replace existing anesthesia machines; 2) as justification for reimbursement or as a basis for establishing a fair price, eg, what to charge the patient who undergoes a kidney transplant; 3) to

Cost versus charge

Incentives to reduce costs in the United States result from the fee-for-service system. Two important terms, often confused when discussing the business of health care, are:

Cost = the amount of hospital expenditures for resources (ie, buying supplies) to deliver medical care. However, it is very difficult for hospitals to know the true cost attributable to delivering care. There are no published formal data on true OR costs. Excluding physician costs, OR administrators may use a ballpark number

“Top-down” costing

Hospitals traditionally have used a “top-down” costing approach to determine the cost of a surgical procedure, or the cost of OR time. The most prevalent top-down costing method is the cost-to-charge ratio (Table 1). This top-down method estimates costs by computing an overall ratio of facility costs to facility charges as they appear on patients' hospital bills. In the example shown in Table 1, if the sum of all charges for all patients cared for in the OR suite equals $1,000, and the total

“Bottom-up” costing – a more precise way to measure costs

An alternative costing approach, which is increasingly being adopted by organizations that require accurate cost data for contracting, is “bottom-up” costing, sometimes referred to as “micro-costing.” This method is more precise, but it is more difficult to do as each step of care is analyzed and costed individually. There is an incremental cost (people and software) to proper accounting of hospital costs. It was unnecessary when hospital reimbursement was based mainly on discounted fees,

Fixed costs versus variable costs

One advantage of bottom-up costing is that total costs can be separated into fixed and variable components. Fixed costs (eg, rental of a building that houses the surgery suite, acquisition cost of an anesthesia machine) do not change in proportion to volume of surgical cases. Hospital administration (eg, contracts office, billing, security, human resources), depreciation, hospital computer system, medical records department, insurance, and housekeeping/dietary are components of overhead costs.

Contribution margin

The contribution margin is the hospital revenue generated by a surgical case, less all the hospitalization variable labor and supply costs. Theoretically, any case with a contribution margin greater than zero, which can be done safely, is financially worth doing to a facility. Even a service that loses money may be worthwhile to a hospital if other non-financial benefits are derived, such as providing community service.

In the U.S., fee-for-service hospitals have a positive contribution margin

Conclusion

Most hospitals perform all cases scheduled by its surgeons, provided a case can be done safely. This reflects the desire to retain and grow surgeons’ practices, to enhance market share and reputation, and to fulfill community service missions. Evaluating the effectiveness of OR management often depends on who you ask, but often includes the most “throughput” of cases, with the least cost including a low cancellation rate [14]. Each surgical facility needs a clear understanding of its economic

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