Hospitals and health care systems are already seeing the effect of health care reform with declining dollars. Hospital services, which had narrow financial margins in the past, will have further challenges. This article will review definitions, challenges, and potential financial solutions for labor and delivery units. Improving quality, efficiency, and cost requires substantial physician cooperation in the changing paradigm from physician-centric care to the transparent safety of teams. The financial contribution margin should increase the net revenue, but significant volumes are also needed. The challenge of this model for obstetrics is the slowing birth rate with the ultimate limitation for growth. Therefore, cost containment is imperative for sustainability. Standardization of hospital policies and procedures can improve quality and cost-savings with new incentive models. Examples include decreasing expensive pharmaceuticals, minimizing elective inductions of labor, and encouraging breast-feeding. As providers of health care to women, we all must engage in the triple aim of (1) improving the experience of care, (2) improving the health of populations, and (3) reducing per capita costs of health care. Although accountable care organizations presently are focused on Medicare populations for cost containment, all health care providers and institutions must be vigilant on both quality cost-effective care for sustainability, especially in obstetrics.
Health care reform is moving forward because the Supreme Court has upheld the statute by navigating it as a tax. Regardless, hospitals and health care systems are already seeing the effect with declining dollars. Hospital services, which had narrow financial margins in the past, will have further challenges. Clinical integrated networks and patient-centered medical homes are novel approaches to improve health care delivery, even with rising health care costs. Hospitals and physicians attempt to address many fundamental problems with the current health care system by improving quality along with a reduction in health care spending.
Financial margins
For a hospital to be sustainable, it must be profitable. To derive revenue, a robust positive contribution margin is needed. A contribution margin (M) is price (P) minus direct cost (C) or M = P – C. Hospitals contract with insurance companies for payment for procedures and hospitalizations. The margin should increase the net revenue, but significant volumes are also needed. Traditionally, it has been stated that 1000 obstetrical deliveries are needed for a labor and delivery unit to be financially solvent. It is unclear where this finite number was derived. However, what is apparent is that obstetrics does not have a robust financial margin when compared with gynecology. The challenges of this model for obstetrics are the slowing birth rate with the ultimate limitation for growth. Look at it another way, more individuals have cardiovascular disease than give birth.
Revenue is the income generated from payments based on volumes. Certain aspects of revenue are specific to individual hospitals. Actual payments vary by hospital based on the payer mix (private and governmental). Hospitals in low-income areas experience high charity care and less reimbursement for the patient care services that are provided.
Costs are defined as direct or indirect. For hospitals, direct costs are those costs that are associated with direct patient care. Direct costs include expenses that can be traced directly to a department or process. Costs such as labor, material, fuel, or power are uniform for health care or production with some variation of volume. Department overhead is also a component of fixed direct costs. For a hospital, these are expenses that exist at the patient care department level for the provision of patient care services. Fixed labor for department managers and unit secretaries on patient care units are examples of department overhead costs. Indirect expenses for a hospital are those expenses not associated with providing patient care. An indirect expense is incurred in joint usage and therefore difficult to assign a specific cost center or department. Indirect costs are usually constant and are grouped under fixed costs.
Not only can hospitals and organizations classify costs differently, but also hospitals can allocate costs according to different methods used. Some hospitals apply costs at the charge level. This method is a more accurate way to allocate costs, but it can be tedious to maintain current costs for each charge. Other hospitals apply the cost-to-charge ratio at the department level from the most recent Medicare cost report. The cost-to-charge ratio cost allocation is a less accurate costing method but is easy to maintain.
Quality improvement platform
Standardization of Ongoing Professional, Practice Evaluation (OPPE) can improve cost savings and quality. Using the backbone of the clinical integrated network and patient-centered medical home concepts, we embarked on sequential quality improvement projects and OPPE in our labor and delivery unit, which included policies to reduce costly elective procedures, to standardize direct costs, to communicate physician performance with scorecards, and to inform patients of their medical options by using consent forms ( Figure 1 ).
To reduce costly elective procedures, we developed hard stops for elective inductions at <39 weeks’ gestation. Before this initiative, elective induction resulted in a higher rate of cesarean deliveries, which resulted in higher length of stay (LOS) for mothers and infants and the extra costs for the cesarean delivery. Since the hard stop initiative began, the overall cesarean delivery average LOS declined from 4.8-3.85 days ( Figure 2 ). This is more congruent with national data that revealed an average LOS for cesarean deliveries without complications at 3.1 days and cesarean deliveries with complication at 4.5 days. The overall cesarean delivery cost per case declined by an average of $642, and the contribution to overhead as a percent of net revenue increased from 21.4-24.8%. During the entire performance improvement process, our obstetrics contribution margin went from 13.7-23.1%, thus demonstrating that decreased costs improve the contribution margin.
Some of our obstetrics groups (including our staff service) have eliminated elective inductions of labor completely from their practice. The major expense for induction of labor is in LOS that is directly related to employee labor (direct cost) for care. Induction of labor of favorable services is less expensive than unfavorable services. Unfavorable inductions result in longer stays in the labor and delivery unit before delivery, increased number of cesarean deliveries, increased maternal hemorrhage, and increased admissions of infants to the special care nursery/neonatal intensive care unit.
These undesirable clinical outcomes increase variable costs: (1) labor costs include nursing, laborists, anesthesia, support personnel, neonatal physicians; (2) equipment costs include depreciation for fetal monitoring, infusion pumps, surgical equipment, neonatal equipment; (3) supply costs include drugs, operating room packs and instruments, blood, and laboratory tests. The only clinical circumstance for which reimbursement covers the cost of the elective induction is when the induction results in a vaginal delivery with at Bishop score of >6, then the margin is approximately $89. In every other case, the labor and delivery unit may lose money.
On the other hand, implementing and following quality indicators as outlined has led to bonuses for high-quality performing physician groups. A review of our participating health care plans revealed 1 incentive model for following quality procedures that awarded physician groups for shorter LOSs. The award was given to physician groups that met the 50th percentile of LOS of <3.04 days, based on patients being in a specific diagnosis-related group, under certain procedures, meeting exclusion criteria, and identifying patient outliers. In 2011, Summa Care rewarded 13 of 16 obstetric groups for meeting the quality metrics. With the new accountable care reimbursement model, we anticipate that other insurers will follow this type of incentive model that rewards physicians and hospitals for meeting quality metrics.
Standardizing certain drugs, such as induction formulary agents, can lower costs. The use of lower cost drugs with the same clinical outcome lowers costs directly. For example, the cost of the induction agent Cytotec (misoprostol; G.D. Searle & Company, Skokie, IL) is $2.50/25 mcg per vagina every 4 to 6 hours vs Cervidil (dinoprostone; Forest Laboratories, New York, NY) at $198/10 mg per vagina every 12 hours. Dinoprostone may increase LOS because women receive 1-3 doses over 8-24 hours. At some hospitals, the culture is to admit the patient in the evening with the use of the slower-acting agent dinoprostone, which results in a high-cost room with the additional cost of nursing care before labor begins.
Substantial physician communication and cooperation is required to move from physician-centric care to transparent team approach care. Our institution’s OPPE encourages repeat communication of quality patient outcomes along with the financials at department meetings, which is propagated through the minutes. In addition, memorandums, e-mail messages, posters, and messaging on electronic health records increases awareness to the team. As quality changes become accepted, they can be expanded with further feedback to physicians that would include the use of peer review and provider outcome letters. At our institution every 6 months, physicians receive a personal outcomes score card of how they compare in their own practice group and in the Department. As per our policy, a physician must reply to the review if there are incidences where standardized care is not followed.
Quality improvement communication is not just for physicians and hospital staff; it is also for the patient. Informing patients that quality care does not require high costs, and, vice versa, low cost care does not mean lower quality care. Patient consents can evolve to include more detailed education material on the risks, benefits, and alternatives to elective inductions and procedures because not all physicians counsel their patients the same way. These educational strategies empower the woman to make informed “patient-centered” choices about her care in concert with her physician and the medical team. Because literature has demonstrated that women are the main decision-makers for driving health care business, making women part of the decision process is essential. Also, using common communication strategies such as social media with blogging and Twitter can help reinforce messaging, not only to public but also to health care providers.
In labor and delivery units, quality patient outcomes are often achieved more by what we do not do than by expensive interventions of care. Quality improvement is an ongoing, transparent process. Health care is changing to patient-centered care to facilitate optimal outcomes. As providers of health care to women, we all must engage in the triple aim: (1) improving the experience of care, (2) improving the health of populations, and (3) reducing per capita costs of health care. Although accountable care organizations presently are focused on Medicare populations for cost containment, all health care providers and institutions must be vigilant on both quality cost-effective care for sustainability, especially in obstetrics.
The authors report no conflict of interest.
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