Bozic Value-Based Health Care in Orthopaedics

Chapter 16: Orthopaedics as a Service Line

TABLE 2 T he Costs and Contribution Margin of an Orthopaedic Service Line

Cost Principles Definition


Direct costs

Cost of surgical care directly provided to patients; may be fixed or variable Expenses associated with services that are often seen as overhead; may be fixed or variable Incrementally fixed within every episode of providing care Incrementally changes with respect to vari ous episodes of providing care Most frequently cited markers of profitabil ity for a service line; there are two types: 1. Variable contribution margin: net reve nue (all the revenue the hospital receives for patient care), the variable direct cost for patients 2. Direct contribution margin: net revenue (variable direct cost + fixed direct cost)

Cost of implants used in surgi cal procedure Facility expenses, laundry, and electrical costs Cost of a specific knee implant regardless of patient Duration of operating room use and associated cost, salary of operating room nurse, and anesthetic agents

Indirect costs

Fixed costs

Variable costs

Contribution margin

Reproduced with permission from Sayeed Z, El-Othmani MM, Anoushiravani AA, Chambers MC, Saleh KJ: Planning, building, and maintaining a successful musculoskeletal service line. Orthop Clin North Am 2016;47(4):681-688.

have surgeons engaged in service line development and management to be able to make informed decisions that are fiscally responsible without adverse effect on patients outcomes. 18 HOW TO MEASURE COST Although there has been tremendous improvement in measuring and delivering higher quality of care, understanding how to quantify the costs associated with improved outcomes remains challenging. Traditional cost accounting methods use relative value units (RVU) to estimate indirect and direct costs. 19 However, traditional cost calculations are arbitrary and do not highlight the major intangi ble drivers of cost and are dependent on fixed costs. 19 Time-drive activity-based costing (TDABC) has garnered increased attention in health care as a cost estima tion method that more accurately identifies drivers of cost by allocating indirect costs to activities performed by capacity-supplying resources, including clinical/

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Value-Based Health Care in Orthopaedics

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