With or without the repeal of the Affordable Care Act (ACA), the healthcare industry will continue to shift away from fee-for-service. As the industry pushes for cost-efficiency measures, surgery centers will experience increased pressures to cut costs, as 40% of all hospital and physician spending is related to surgical care, according to a new study.1

One tool that could help surgery sites improve efficiency is the time-driven activity-based costing (TDABC). It’s a way to measure costs across entire episodes of care, using only the quantity of time and the cost per unit of each resource.1

“Whether we have the ACA or not, Medicare still has to pay people for delivering care, and fee-for-service is not a feasible long-term solution,” says Robert S. Kaplan, PhD, senior fellow and Marvin Bower Professor of Leadership Development, emeritus at Harvard Business School.

Bundled costs or capitated care payment models increasingly will replace the traditional fee-for-service model, and as surgery centers encounter these payment models, they’ll have to find ways to cut costs while maintaining or increasing quality of care.

“How do you measure the cost of treating a patient’s medical condition? The predominant costing models that healthcare organizations are using are not accurate and are based on charges,” Kaplan says. “If you want to make cost improvements, then you need to understand the existing costs and see where there are opportunities to deliver improvements.”

This should not be a controversial approach, as it simply is a way to measure costs based on the actual clinical and administrative processes used to treat patients, he explains.

“You can measure cost across the entire cycle of care and show that spending more time early in counseling patients and their families can have a big impact downstream,” Kaplan says.

For example, with orthopedic surgery, patient outcomes improve and costs are lower when patients are discharged home quickly to begin physical therapy, he says.

“Patients can have more successful rehab at home rather than in a skilled nursing facility, and it’s much less expensive,” Kaplan says. “But you have to tell patients that because they’re nervous about being able to walk upstairs or getting into a car.”

The solution is for surgeons to spend a little extra time with patients and their caregivers before the surgery to explain what will happen and what the patient will need to do to recover more quickly. A TDABC costing model can demonstrate how this extra time will benefit surgery centers in a bundled payment environment, Kaplan says.

“So if the methodology shows that a surgeon’s time costs $5 or $6 per minute, then a 30-minute conversation with a patient can cost close to $200,” he explains. “But if the patient is discharged home instead of to a skilled nursing facility, then this can save around $5,000.

“We just did a study of costs in surgery and found a two-to-one variation in costs between the most expensive and least expensive hospitals doing joint replacement,” Kaplan continues. “They have the same patient population and the same outcomes, but what allowed some to have half the cost was a shorter length of stay in the hospital and discharges to home.”

The more efficient organizations mobilized physical therapists earlier and had patients doing more active physical therapy, which produced positive patient outcomes and lower total costs, he adds.

Often, patients and payers can save surgical costs by using ambulatory surgery centers (ASCs), which are much less expensive for most patients, Kaplan notes.

“Some hip replacements are being done in ambulatory surgery centers,” he says. “For patients who are obese or have other risk factors, then the surgery might need to be in an academic medical center.”

But even ASCs can become more efficient, and the first step is to understand their costs over a complete cycle of care, he says.

Look at each cost and activity separately. Surgery centers can divide costs into the various steps, including pre-surgical visit, tests, imaging, intervention, and post-anesthesia recovery room, Kaplan suggests.

The way to do this is to measure all time spent per activity and the costs of each activity. Then determine how much time a patient spends with surgery center staff, divided by their discipline: receptionist, nurse, technician, and surgeon. Include the cost of drugs and other items. Then analyze each unit of time for its cost, based on that particular employee’s hourly cost to the center, he explains.

Note the costs that can be reduced or eliminated. Here’s an example: A physician might need to take notes while meeting or shortly after meeting with a patient. But the surgeon is slow at keypunching the notes, which uses high-cost surgeon time at $6 a minute when a lower-cost employee could key in notes for the doctor at a cost as low as 35 cents per minute. And the lower-cost employee would do the task just as well or better, he says.

“This leaves more time for the surgeon to do things that only the surgeon can do,” Kaplan says.

Use time-driven activity-based costing data to inform operational changes. Such data might suggest that certain surgical activities could be replaced with lower-cost ones that produce the same outcomes. Data also could demonstrate why it’s more efficient to perform certain surgeries in ambulatory surgery centers rather than in hospital settings, he says.

Collecting efficiency data helps ensure the case for protocol changes.

“Sometimes, doctors are not doing the things they should do because they’re under pressure because of productivity demands,” he says. “We have an example of a severe kidney disease, and the patient goes on dialysis as the kidney fails,” he says. “Evidence says the patient should go into dialysis with graft/fistula surgery, but it takes 45 days to heal. If the doctor doesn’t do the surgery, then the patient has to have a catheter.”

The catheter might cost $20,000 over the next six months, a great deal more than the relatively low-cost graft/fistula intervention. But the doctor doesn’t have time to explain the surgery to the patient, so he or she recommends a catheter. A medical conversation with the patient and the patient’s family might take 30 minutes, a very low cost even when factoring in the doctor’s per-minute salary expense, Kaplan says.

“By having a $200 conversation with the patient to prepare the patient for the next stage of the disease, you could save $20,000, and the procedure could be done inexpensively on an outpatient basis in an ambulatory surgery center,” he explains.


  1. Najjar PA, Strickland M, Kaplan RS. Time-driven activity-based costing for surgical episodes. JAMA Surg Nov. 2, 2016. Epub ahead of print.