Follow this guide to perform cost analysis

If you want to improve your ambulatory surgery program's profitability, then the first item on your "to-do" list needs to be a cost analysis. Financial pressures are driving the health care industry in these days of managed care and frugal Medicare, so everyone needs to find ways to improve profit margins, says William J. Killory, CPA, a shareholder with the accounting firm of Dermody, Burke, and Brown in Syracuse, NY.

Killory provides tax and consulting services to health care professionals and chairs the National Health Care Committee of the Atlanta-based Associated Regional Accounting Firms.

"There is more and more competition, so people are competing for the same piece of pie, and the slices are getting smaller," he says. "So the only way to squeeze out more revenues is through cutting costs." (See list of practical cost strategies, inserted in this issue.)

Try this plan of action

Killory suggests ambulatory surgery programs follow these measures:

· Look for ways to increase efficiency. Seek out roadblocks that might be wasting resources. Problems may occur in these areas:

- Fixed costs: heat, rent, power, depreciation, interest expense, and permanent staff.

- Stepped costs: hiring additional employees to maximize efficiency.

- Variable and semi-variable costs: supplies and other expenses that vary according to the program's patient volume.

A program's best bet is to focus on the stepped and variable costs because most fixed costs cannot be changed, Killory says. For example, a program might find a vendor who sells a particular supply at a lower price than the current vendors. Or perhaps it could better staff its high volume days by using a temporary service that supplies professionals than by hiring a part-time employee.

· Determine your average costs. The average cost is the total cost divided by total number of cases. "It's important to look at the average costs because you always want to get contracts that cover your average costs," he says.

Occasionally, an ambulatory surgery program will make an exception, and that is if the contract will bring in enough extra business that it could bring in extra revenues in the short term and not require the program to hire additional staff. "In the long term it doesn't make sense, but in the short term, it would pay some of the variable cost bills."

There is a caveat to accepting these types of contracts, Killory warns. "If you accept that contract, what typically happens is the patients have nowhere else to go, and so they all show up on your doorstep and push all the good cases out."

The best way to prevent this from happening is to do what the airlines do when they allocate a certain number of cheap seats per flight, Killory suggests. "You're not denying care, but you're not getting them in as fast as those with better payers," he says. "You're going to serve your best customers first."

· Determine your standard cost. Start with the budget to see what the expected number of cases are and how complex these cases will be to determine a ballpark revenue figure. "I'd take a look back at the previous year to see what you did and where the trends are," he says. "Build your revenue budget first with the number of cases and expected revenue per case."

Then develop expectations of what the costs will be with regard to wages, inflation, occupancy, and supplies. Use those figures to develop a weighted cost per case, which is your cost divided by your expected cases distributed by ambulatory patient groups (APGs) or similar classification.

· Determine actual costs and variances. Each month, track your costs and revenues, and then divide both by the number of cases to get your actual revenue per case and cost per case. Then compare this number to your standard cost per case, and the difference between the two is your variance. If the variances are close, then everything is fine. But if the actual cost is considerably higher, you will need to determine what went wrong. Some questions to ask are:

- Was it wages or fixed costs?

- Did you see as many cases as you expected?

- If the case volume was low, did this mean you failed to absorb enough of the fixed costs?

- Where can you cut costs?

- How can you increase volume?

Killory says software is available to do this type of analysis. One type, called The Complete ATAC Process, developed by Entermedica of Irving, TX, tracks activity in outpatient programs, including surgery centers, physician offices, and clinics, for a month to isolate where the roadblocks are. (For more information, see source box, above.)

Dermody, Burke, and Brown uses the software with the outpatient program to provide an in-depth analysis of financial problems and possible solutions.