The document discusses how a break-even analysis for new healthcare technologies needs to expand beyond traditional assumptions to account for changing costs, reimbursement models, and clinical factors. It provides an example analysis of a tele-ICU program, outlining costs, utilization projections, and reimbursement estimates. The analysis shows that while an in-house tele-ICU program may not reach break-even, the clinical gains around reduced length of stay and mortality could offset the financial costs. The document concludes that healthcare organizations need to use expanded break-even analyses that consider evolving economic, legislative, and clinical factors when making technology acquisition decisions.

1. The New Break-Even Analysis:
Expanding the Scope and Assumptions of
the Traditional Break-Even Analysis
January 29th, 2015

2. James Laskaris EE, BME
EmergingTechnology Analyst
MD Buyline
• Joined MD Buyline in 1994
• Over 30 years in healthcare field
• Previously served as Clinical
Engineering Department Director
• Primary Analyst for Emerging and
High-EndTechnology
• Covers legislative and
reimbursement impact on
healthcare
Presenter

3. - It is historic revenue projection
- Consumables, labor, capital and overhead costs
traditional hard dollar items
- Volume projections more art than science
- Break-even analysis
- Changes the technology acquisition discussion
- Does not use volumes based on historical data
- Uses hard data to determine the business plan of a proposed project
- Finds target point when or if a proposed project will start to pay for itself
What is a Break-Even Analysis?

4. - Healthcare costs Americans $2.8 trillion/year
- Medicine is more reliant on technology, which:
- Drives improved outcomes
- Increases costs
- Key to hospital financial viability is selecting the right technology to
support a service line
- IT a major target for reducing health costs are:
- Process improvement
- Reduce Administration costs
- Account for 31% of hospital and professional expenditures
Health Affairs 2014;33(1):67-77.
The State of Healthcare

5. - Balance Budget Act 1997
- Previously, cost was passed onto the payor
- The BBA made one payment for prescribed therapy of diagnostic study
- Affordable Care Act 2009
- Financial penalties based on negative outcomes
- Included Health InformationTechnology for Economic and Clinical Health
(HITECH) Act
- HITECH Act
- Incentivized hospitals to adopt health information technology
- EMR projected to save $81 billion annually
- Improve healthcare efficiency, safety and the management of chronic
disease
Health Affairs 2005; 24(5):1124-6.
Legislative Issues

6. Provider competition and consolidation
Vendors using “Razor-Razorblade” Model
Outcome-based payments
Population demographics
Increase in IT integration
The Changing Healthcare Landscape

7. - Population demographics and geographic competition
- Age, health and size of the population
- Impact ability to support potential volumes needed for technology
- Aggressive negotiations
- Service contracts, consumables and licensing fees
- Licensing fees can increase ongoing costs by 10-20% per year
- Reimbursement issues
- Length of stay
- Never events
- Hospital readmissions
- Meaningful use
How Does the Break-Even Analysis
Need to Change?

8. Cost
capital, labor,
consumables and service
Payment and Margins
reimbursement
Utilization
technology life expectancy
Clinical Considerations
population demographics
geographical competition
Main Components of Break-Even
Analysis

9. Cost
- Capital
- Multiple configurations, installation and discounting lead to price variations
- Vendors shifting cost to consumables, service and licensing fees
- Labor
- Key cost factor for any clinical technology or IT investment
- HCIT can help make staffing more efficient
- Labor equates to 50% of hospital expenses
- Cost of labor increased due to shortages or RNs, laboratory personnel and
imaging technicians
- Consumables/licensing fees
- Consumable costs over equipment lifetime can exceed original capital outlay
- Cost of IT support and licensing ~10-20% of capital costs per year

10. Cost
- Service
- Healthcare spends $14 billion on service in the U.S.
- Service accounts for 3%-7% of original technology costs per year
- IT 10%-15%
- Cost of service can make or break return on low utilization technologies
- Use 1/2 to 2/3 of the OEM service contract when budgeting
- Length of Stay (LOS)
- Less invasive technology has potential to reduce OR time, recovery time and LOS
- Projecting patient LOS
- Inpatient: Geometric LOS for each DRG provided by CMS
o Estimate $500 per day for nursing and $1,200-$3,000/day for ICU
‐ Outpatient: $600, 23hr stay

11. Utilization
- Traditionally determined from physician input and historical data
- Break-even point offers more effective estimation
- Cost and revenue utilized to determine the number of procedures needed for
technology to reach profit
- Taxpayer ReliefAct
- Ties payment rates for high-end imaging to utilization
- Lifespan of the equipment
- AHA Guide for Useful Life of the Equipment offers benchmark
- Often overestimates true life expectancy
- Most CFOs target payback period of 1-2 years

12. Reimbursement/Profit Margins
- Reimbursement tied to two key provisions under the Affordable Care
Act
- Never events
- Hospital readmissions
- Tying reimbursement to outcomes makes projecting revenue difficult
- Hospital margins range from 5% to negative numbers
- Acquiring cost reducing technology can make all the difference
- Average CMS reimbursement used as a guide
- Historically, Medicare payment worst case scenario
- Private pay reimbursement is no longer significantly higher than Medicare
- Meaningful Use
- IT incentivized with negative reimbursement

13. Clinical Considerations
- Value analysis teams need to think across department lines
- Consider tradeoffs of LOS, infection control and readmissions with new technology
- Population and geographical concerns dictate reimbursement and
volumes for specific procedures
- Population demographics
- Areas with a large percentage of non-Medicare patients
- Most common DRGs: labor and delivery
- Areas with a large percentage of Medicare patients
- Most common DRGs: pneumonia, COPD, heart failure and joint replacement
- Geographical competition
- Hospitals continually compete for patients and physician services
- Providers must be sensitive to competing within their own networks

14. Int Anesthesiol Clin. 2009;47(1):153-70., Chest. 2014;145(3):500-7., HCUP-US Statistical Brief #185 and JAMA. 2011;305(21):2175-83.
Example: Tele-ICUs
- The problem
- Critical Care costs in the U.S. are roughly $80-100 billion per year
- U.S. facing a shortage of specialized physicians
- 6,000 ICUs but only 5,500 board-certified intensivists
- Providers need ways to improve patient care, reduce mortality and lower cost
- What areTele-ICUs?
- Audio-visual remote monitoring of patients by a specialized intensivist
- Within the hospital or from a remote location
- Clinical data
- Rate of discharge 5-20% faster from ICU
- Tele-ICUs patients were:
- 25% more likely to survive ICU stay
- Discharged from the hospital 15% faster

15. Utilization Average patient volumes for each DRG scenario
Total volume Based on an 80% occupancy rate with average stay of 2 days
Reimbursement Medicare is used as a guide to represent worst case scenario
Labor Combination of LOS, lab and imaging cost from CMS’ database
Consumables Composite of pharmaceutical and other supplies
Infect Control Hosp Epidemiol. 2012;33(3):250-6., J Am Coll Surg. 2014;219(4):676-83. and Chest. 2013;143(1):19-29.
Tele-ICUs: Analysis Set-Up
- 200 bed hospital with 20 dedicated ICU beds
- Patient Population
- Tele-ICU’s not cost effective for routine surgical patients
- Specific procedures chosen represent sickest patients:
- DRG 208: patient on a ventilator
- DRG 280: acute myocardial infarction with complications
- DRG 871: septicemia

16. Tele-ICU: Break-Even Analysis
SCENARIO 1 SCENARIO 2 SCENARIO 3 SCENARIO 4
Purchase Price $590,000 $590,000
Residual or Buyout Value $59,000 $59,000
Clinician Cost $1,155,000 $460,000 $460,000
SPECIFIC PROCEDURE VOLUMES (YEAR 1)
Proc#1 1,150 1,150 1,150 231
Proc#2 1,750 1,750 1,750 455
Proc#3 500 500 500 155
3,400 3,400 3,400 841
REIMBURSEMENTS
Reimbursement for procedure #1 $12,835 $13,511 $13,511 $13,511
Reimbursement for procedure #2 $9,785 $10,123 $10,123 $10,123
Reimbursement for procedure #3 $10,394 $10,732 $10,732 $10,732
LABOR PER PROCEDURE
$11,128 $10,778 $10,778 $10,778
$8,800 $8,450 $8,450 $8,450
Procedure #3 $8,200 $7,850 $7,850 $7,850
SUPPLIES/CONSUMABLES
Consumables/Procedure #1 $1,200 $1,200 $1,200 $1,200
Consumables/Procedure #2 $1,300 $1,300 $1,300 $1,300
Consumables/Procedure #3 $2,500 $2,500 $2,500 $2,500
COST PER PROCEDURE $10,942 $10,932 $10,758 $11,146
PROFIT OVER THE TERM ($) -$606,000 $7,258,500 $10,202,500 $84,240
NET PRESENT VALUE -$539,561 $6,462,710 $9,015,221 $6,282
LOS 5 Days / Lab
DRG 280 AMI with Major Complications
Procedure #1
Procedure #2
LOS 5 Days / Lab / Imaging / Vent
LOS 4.7 Days Lab / Imaging
Pharm / Supplies
Pharm / Supplies
Comprehensive Calculator
DRG 208 Respiratory with Vent
Pharm / Supplies
Traditional ICU
ICU with 3
Intensivist on-site
Discharged from
ICU 10% faster
Tele-ICU
Discharged from
ICU 10% faster
Break Even
for Tele-ICU
Discharged from
ICU 10% faster
DRG 871 Septicemia
Total Procedures (Year 1)
CPT codes: 99233 and 99291

17. - Financial cost offset
by clinical gains:
- Decreased mortality
- Improved care
delivery
- Decreased LOS
- Reduce infections
- Other considerations:
- Training and
coordination
- Staff acceptance
- Multi-department
buy-in
- Establishing new
protocols
Tele-ICU: Outsourced vs. In-House
SCENARIO 1 SCENARIO 2 SCENARIO 3
Purchase Price $590,000 $50,000
Residual or Buyout Value $59,000 $5,000
Clinician Cost $460,000
Fee Per Procedure Payment $350
SPECIFIC PROCEDURE VOLUMES (YEAR 1)
Proc#1 400 400 400
Proc#2 800 800 800
Proc#3 200 200 200
1,400 1,400 1,400
REIMBURSEMENTS
Reimbursement for procedure #1 $12,835 $13,511 $12,835
Reimbursement for procedure #2 $9,785 $10,123 $9,785
Reimbursement for procedure #3 $10,394 $10,732 $10,394
LABOR PER PROCEDURE
$11,128 $10,778 $10,778
$8,800 $8,450 $8,450
Procedure #3 $8,200 $7,850 $7,850
SUPPLIES/CONSUMABLES
Consumables/Procedure #1 $1,200 $1,200 $1,200
Consumables/Procedure #2 $1,300 $1,300 $1,300
Consumables/Procedure #3 $2,500 $2,500 $2,500
COST PER PROCEDURE $10,822.29 $10,876.71 $10,828.71
PROFIT OVER THE TERM ($) -$552,000 $2,109,000 -$597,000
NET PRESENT VALUE -$491,481 $1,809,056 -$537,372
Procedure #2 LOS 4.7 Days Lab / Imaging
LOS 5 Days / Lab
Total Procedures (Year 1)
DRG 871 Septicemia
Tele-ICU
Discharged from
ICU 10% faster
DRG 280 AMI with Major Complications
Procedure #1 LOS 5 Days / Lab / Imaging / Vent
Traditional ICU
Comprehensive Calculator
DRG 208 Respiratory with Vent
Outsourced
Tele-ICU
Discharged from
ICU 10% faster
Pharm / Supplies
Pharm / Supplies
Pharm / Supplies
CPT codes: 99233 and 99291

18. Changes in the economic and legislative environment have
complicated the capital acquisition landscape
In Conclusion
Hospitals and health systems should:
Think beyond the standard assumptions of capital,
labor and consumables
Use a Break-Even analysis to project a business plan
Quantify the clinical aspects of equipment and
technology acquisition decisions