September 2004 Volume 68	Number 9

The Cost of Inefficient O.R. Utilization

Karin Bierstein, J.D.
Assistant Director of Governmental Affairs (Regulatory)


Following up on their development of a spreadsheet program for calculating operating room (O.R.) utilization, which was the subject of this column in June 2004 and is available on the ASA Web site, Joseph Laden, Michael J. Monea, W. David Ackley, Care H. Costantini, M.D., and Robert Ison (programming), of the Kentucky/Ohio Anesthesia Managers Association (KOAMA) defined a method to determine the cost of inefficient O.R. utilization. They describe the method and its associated spreadsheet program, also downloadable, below.

Users should note that neither ASA nor KOAMA makes any representation regarding the benefits or accuracy of the spreadsheet and that we are not able to provide any user support.

Download Spreadsheet (Excel file)

Prior to presenting the new spreadsheet, we would like to make several observations.

Reasonable Utilization Rates
An anesthesiology group must be realistic in its expectations regarding utilization rates. A 100-percent efficiency level is not achievable. Experts consider a range of 75 percent to 85 percent to be the maximum attainable utilization rate. This number is arrived at for a number of reasons, including the fact that unforeseen events may affect the efficiency of the schedule. The reasons can include the following:

1. The case finishes early, and the next case cannot be moved up;

2. The patient has an unanticipated medical problem; and

3. There are planned gaps between cases by different surgeons to allow for over-runs and to avoid delaying the start of the next case.

Conversely unacceptably low levels of utilization can be created by:

1. Hospital demands for extensive and open block time, much of which may remain unused, to attract surgeons;

2. Late arrival of personnel, patient and/or surgeon;

3. Equipment, medication and supply delays;

4. Missing labs and reports;

5. Uneven scheduling, i.e., heavy in the morning and very late afternoon; and

6. O.R nurse shortage.

Calculating the Cost of Inefficiency
How do you quantify the cost of inefficiency so as to determine the levels that are acceptable to you and your institution? We have reviewed a number of methods, including:

1. Calculate the hourly cost of staffing by taking the total yearly expenses of the group (anesthesiologist and nurse anesthetist salaries and benefits, billing and administrative expenses, etc.) and dividing this amount by the total number of billed hours for that year. In our opinion, a problem with this system is the fact that it would artificially inflate total expenses due to an inefficient schedule. Specifically, if the hospital was allowing the O.R. suite to run more efficiently, it might not be necessary for the group to employ as many clinicians.

2. Calculate total income and divide that figure by the number of billed hours. This amount is then multiplied by the number of available hours not utilized in the O.R. and represents theoretical income that could be used to cover real expenses. It is, in essence, the unacceptable cost (from our perspective) of doing business. This is the method we utilize and that the spreadsheet will calculate.

Total Income — What Is Included?
There are many groups that receive subsidies and stipends from hospitals to provide services. These subsidies can include, but are not necessarily limited to: compensation for call coverage, stipends for medical director activities, compensation for differences between the cost of locum tenens and the group’s own providers, or subsidies due to poor payer mix. In calculating total income, we recommend that the anesthesiology group include only the income received that is related to providing surgical and/or obstetrical anesthesia services. For example a stipend to cover expenses because of a poor payer mix would probably be included. Income received for activities associated with medical director responsibilities might be excluded.

Determining the Optimal Utilization Rate
Recognizing that 100-percent efficiency is impossible and impractical, what is a reasonable utilization rate for your practice? Our answer is to calculate the O.R. utilization rate of a sample of the busiest O.R. schedules of the past year. For example if your utilization rate on these busy days was 70 percent, you could assume that this rate is achievable on a consistent basis. If you have determined that the average utilization rate for the previous year was 61.5 percent, then you might assume that the facility is running at an 8.5-percent inefficiency level.

The utilization rate of the busiest days can be unacceptably low, however, by local and industry standards. If your research indicates that an 80-percent efficiency rate is the more reasonable level, then, using the example above, the inefficiency level is actually 18.5 percent.

Using the O.R. Utilization Cost Spreadsheet
We will illustrate the O.R. Utilization Cost Spreadsheet through the O.R. utilization percentage rate spreadsheet that accompanied the June 2004 NEWSLETTER article [Table 1].

Table 1. O.R. Utilization Rate (Click to enlarge) Basic data on the use of O.R. time yields a 62-percent utilization rate, as described fully in the “Practice Management” column on page 17 of the June 2004 ASA NEWSLETTER.

Table 1. O.R. Utilization Rate
Adding some information from the group’s billing data, we produce a dollar figure for the potential additional revenue that could be realized, as shown in the last column in the new spreadsheet appearing in Table 2A and Table 2B. (Note: For those of you who enjoy reviewing such things, we have included in the downloadable file a worksheet [ORUE tab] that defines the new spreadsheet’s formulae.)

Table 2A and Table 2B. The Cost of a Low Utilization Rate

• Column EI: During the time period selected, 24 percent of all services were performed after hours. After-hours O.R. use is excluded from the core hours utilization rate.

• Column II: The income of $6.6 million is the total received for services performed; 24 percent of the $6.6 million is deducted in the calculations in the Results Table [Table 2B]. The O.R. management stipend paid to the group by the hospital is not included.

• Column NI: Based upon discussions with the hospital and a review of the literature, the group felt that a utilization rate of 75 percent for this facility was reasonable.

Results Table [Table 2B]

• Column DR: The utilization rate for the facility was 62.01 percent on average during the eight-hour time frame examined. What does this mean for the hospital and the anesthesiology practice?

• Column FR: Specifically, at a utilization rate of 62.01 percent, there are, in theory, 2.43 O.R.s not being used at any one time during the eight-hour day. (To see that this is correct, reduce the number of eight-hour rooms in Table 2A, Column KI from “14” to “12.” The utilization rate moves very close to the ideal of 75 percent.)

• Columns GR, HR and IR: Based upon this group’s average time per case [Column HR] (calculated by dividing total billed minutes for the period by total cases), the hospital could theoretically schedule 5.86 additional cases per day in these rooms. For the group’s historical mix of long cases requiring long turnover times (e.g., cardiac surgery) and short cases requiring frequent but shorter turnover times (e.g., tonsillectomies), 5.86 additional cases per day would generate 3,461 additional billable hours.

Note: Potential Billable O.R. Hours [Column IR] reflect the following:

a. The 2.43 O.R.s unused even at the greatest efficiency level (Column FR) are still idle 25 percent of the time; and

b. Turnover of 20 minutes per case.

This unused capacity represents the time during which the anesthesiology group (and for that matter, the hospital, too) is incurring expense without generating income.

• Columns JR and KR: At a calculated rate of $303.61 per hour (which factors in turnover), the group could potentially generate more than $1 million in additional income if the hospital had sufficient cases to bring utilization up to 75 percent.

Table 2A : The Cost of a Low Utilization Rate (Click to enlarge) Adding revenue data plus an ideal utilization rate produces the potential revenue not earned.

Table 2B : The Cost of a Low Utilization Rate — Results Table (Click to enlarge)

Negotiating With the Hospital
The group is now in a position, using the spreadsheet and establishing that a 75-percent utilization rate would be acceptable while a 62-percent rate is not, to ask the hospital either to provide financial support to compensate for the inefficiency or to change the number of O.R.s that the group is expected to staff.

A hypothetical outcome of the negotiations might be as follows:

1. The hospital reduces the total number of O.R.s that must be staffed by anesthesia personnel from 14 to 12. Two sites, however, become 10-hour rooms.

2. The hospital commits to decreasing turnover time from 20 minutes to 15 minutes.

The impact of these changes is shown on the row headed “Hosp/Var #2 in Table 3.

1. Unused O.R.s, even at the ideal room utilization level, drop from 2.43 to 1 (Column FR). This means that at any given time during the day, at least one O.R. is available for a surgeon to add on a case at the last minute.

2. Potential billable revenue (Column KR) for the anesthesiology groups decreases by more than $500,000, but actual income, of course, remains the same.

3. The reduction in the number of rooms that must be staffed allows the practice to release two locum tenens providers at a potential savings of $400,000 or more per year.

Table 3. A Negotiated Increase in Efficiency (Click to enlarge) If the hospital reduces turnover time and the number of rooms, the increased efficiency can create significant savings.

This outcome is a classic win-win situation for both the hospital and anesthesiology group. At the very least, the hospital lowers its overhead by no longer having to keep two O.R.s running while maintaining its capacity to provide service at the same level as before with continued room to grow. The anesthesiology group saves on the cost of clinical personnel.

The ability of this new spreadsheet to create, review and check various options has been, for us, significant. We hope that our friends in the specialty will find it equally helpful.