Defining Anesthesia Profitability

Anesthesia profitability has been defined in many ways over the years, but rarely has it been defined in a way that actually relates to the fundamental economics of the specialty. Physician anesthesiologists used to define it in terms of their own compensation. A profitable practice was one where the physicians earned a good income. This assumed that (a) the volume of services was strong and consistent, and (b) the payer mix was favorable such that the yield per billed unit was above average. While this might have been a good way to designate favorable practices from those that would need a subsidy, it does little to actually measure profitability in a way that allows for its assessment or improvement. The reality today is that most anesthesia practices require some level of financial support from the hospitals they serve. The question is why and how things could be improved.

The Five Factors

Five distinct factors determine the economics of a given practice, and every practice is unique with regard to how each factor influences the overall equation. Failure to delineate each and track it over time will necessarily result in an inaccurate understanding of the current situation and an imperfect assessment for potential viability over time. Here’s a look at these factors:

• Surgical and obstetric case volume is what most practices focus on, but the reality is that not all cases are the same; and so shifts in case mix may result in dramatic changes in actual billable unit production, which is the truest measure of actual production.

• The effective net yield per billed unit is a function of payer mix, which many practices track without really assessing its impact on net yield. As the American population ages and the percentage of Medicare subscribers increases, typically by one percentage point per year, the impact of significantly discounted Medicare units can have a dramatic impact on the net yield per unit, especially if managed care contract rates cannot be adequately renegotiated to offset the drop.

• Coverage and call requirements are a significant determinant of staffing requirements. A comparison of coverage requirements and actual production is increasingly highlighting the disconnect. As hospitals continue to rely on anesthesia coverage to create operating room availability, anesthesia practices find themselves increasingly covering venues where the actual collections do not cover the cost of the necessary staff.

• There are many ways to staff an anesthesia practice. Anesthesiologists could provide the services alone or with the help of CRNAs. In 17 states, it is even possible for the CRNAs to provide the requisite care without physician direction or oversight. The financial implications of a particular approach can be significant, although identifying the optimum staffing model can be elusive. As so many practices have learned when they have attempted to reduce the cost of providing anesthesia care, changing staffing models can be quite challenging.

• Ultimately, it is hospitals that are being asked to fund anesthesia practice deficits. For many practices, convincing hospital administrators how much money is necessary to make a practice viable is their most frustrating challenge, and many simply fail to successfully work through the process. Anesthesia practices have been going out of business in record numbers.

Summing It All Up

These are the five main management challenges for today’s practices. Having the knowledge, the data and the resources to deal with them all is what defines today’s successful practices. It used to be that great practices were defined by consistent and superior clinical outcomes. Quality is still a requirement, but now it is ultimately profitability that is the predictor of success.  

What then is the best way to measure profitability? Let us take a lesson from business. Large corporations constantly measure and monitor the profitability of each division. Unprofitable divisions are either restructured or sold off. How does this apply to anesthesia? Each anesthetizing location is essentially a distinct line of business and should ideally be profitable. In other words, the revenue potential of each operating room should cover the cost of the anesthesia manpower required to cover it.

Many anesthesia providers will argue they know which venues are profitable and which are not. The question is how they use this information to impact and influence the decision-making of the hospital administration to improve profitability. We all know that most anesthesia practices have more and better data with regard to what actually happens in the operating rooms and delivery suites than the hospital or any of its departments. This is the specialty’s trump card that must be played with finesse.

In other words, most management reports help identify the symptoms but not the actual health of the practice. The application of true cost accounting is essential for the success of today’s anesthesia businesses. The goal of every practice should be to help the administration define what coverage and call makes sense and how their decisions could be best enhanced with the insights of anesthesia. 

If you have questions for us on this topic, please contact your account executive or reach out to us at info@anesthesiallc.com.