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Leadership/Management

Promoting Innovation in EMS: Business Acumen Part 3—The Costs of Innovation

It’s important to capture all potential costs to help ensure the revenue derived from any innovation covers its cost.

Over 2018 EMS World, in conjunction with the National Association of EMTs, will provide detailed implementation strategies for key recommendations of the Promoting Innovation in EMS (PIE) project. The PIE project utilized broad stakeholder involvement over four years to identify and develop guidance to overcome common barriers to innovation at the local and state levels and foster development of new, innovative models of healthcare delivery within EMS. Each month we will focus on one recommendation and highlight the document’s actionable strategies to continue the EMS transformation. 

Now that we’ve covered the basics of conducting a financial analysis of traditional EMS service delivery, we can explore the cost analysis for implementing more innovative models. It’s important to capture all potential costs to help ensure the revenue derived from any innovation at least covers its cost to the agency, which is crucial for sustainability.

Marginal Cost/Shared Resource Analysis

In our last column we provided mechanisms for determining the overall activity, or utilization of resources, in the EMS system. Unit-hour utilization(UHU) is a rough calculation based on the number of staffed unit-hours the system has on duty and the time those resources are committed on patient care activities. In our prior example Anytown EMS had an average task time—the time from unit dispatch to unit available for another call—of 60 minutes and operated at a response UHU of 0.114, essentially meaning its units were on a call 11.4% of the time they were on duty. It may be that Anytown EMS can add marginal activity to these units and still maintain relatively high availability for EMS responses. 

We use the term marginal to imply there may not be a need to create additional resources to conduct additional activity. Generally there is lower cost associated with creating additional activity for units already on duty. 

Let’s use this example: Suppose Anytown EMS enters into an agreement with Anytown General Hospital to provide a single follow-up home visit for recently discharged heart failure patients. Anytown EMS agrees to conduct visits consisting of an environmental assessment, medication inventory, ensuring understanding of the patient’s discharge instructions, and a fall risk assessment. It anticipates the time required to complete this visit to be one hour. The hospital anticipates referring about five patients per week into this program, so it will likely create five hours per week of additional EMS activity.

The good news is that generally, when Anytown EMS performs these home visits, those providers could still be available for an emergency call. Upon arrival at the home, the crew could explain to the patient and family that, in the event they’re needed for an emergency call, they will have to leave but will return later to finish the visit. Patients and families are very understanding of this, and many EMS agencies use this approach when they have the capacity to do so. 

Recall from our earlier discussions that the ambulance unit-hour cost for Anytown EMS is $82, including the cost of physician oversight. Some might presume that if the home visit takes an hour of time, the cost to Anytown EMS would be $82—but that’s a logical determination only if the Anytown unit was out of service for the home visit. Since the ambulance is available for a call during the visit, the $82 per hour is really the “cost of readiness” for an EMS response and already allocated, even if Anytown didn’t conduct the additional activity. Therefore the home visit does not cost $82 but rather a small fraction of that amount.

There are some costs to consider for this model. It’s likely the EMS personnel will require several hours of additional training by a qualified instructor. The medical director may need a stipend for protocol development, additional training, and quality assurance activities. There will also likely be a need to purchase equipment such as an i-STAT blood analyzer, a scale, and medication pill boxes to help patients remember which medications to take and when. Some medical supplies will need to be purchased for use on home visits as well. For example, an i-STAT uses single-use cartridges that cost about $25 each. Finally, there are costs related to traveling to the home visit, such as fuel and perhaps even wear and tear on the vehicle. 

Taking these costs into account and presuming the program lasts one year, Table 1shows what a detailed cost analysis reveals.

As long as Anytown can keep using existing capacity in its system, it’s likely any payment amount in excess of $34.88 would cover the cost of the visit. However, it may not make the program financially sustainable in the long term. If the program is successful, Anytown may exceed its ability to use existing resources, so leaders must consider the costs associated with scalability and build them into cost determinations.

Full Cost Analysis

In busy systems that lack the capacity to allow existing resources to conduct additional activities, a full cost accounting approach may be necessary. This requires an analysis of all costs associated with the intervention. Modifying the example used previously, let’s change Anytown EMS’ UHU to 0.550, making it unreasonable to use existing on-duty ambulances for home visits. Therefore Anytown will have to hire, train, and equip an employee for the service enhancement. A typical annual cost analysis for this is shown in Table 2.

Once we have the total yearly cost, Anytown should consider what capacity this new unit would provide if it were exclusively supporting this specific program. If a visit takes one hour, after allowing for travel time between visits, Anytown could probably perform approximately five visits per day.

If they work 48 weeks a year, minus two weeks for training, continuing education, and administrative duties, they could at most perform about 1,150 visits per year. Assuming a more realistic efficiency level of 80%, we could expect an annual visit capacity of 920. Dividing our annual costs by our capacity gives us a cost per visit of $117.39.

Note the calculation: In this instance a unit has the capacity to perform approximately 920 visits per year. If the hospital only contracts for 260 home visits (one visit per patient), the cost per patient might be $413.46. However, pricing according to that cost would likely seem outlandish relative to other options the hospital might have for postdischarge care. Pricing off the price per visit would be much more attractive and might stimulate a higher number of referrals or even attract new customers.

It is true that if the volume is only 260 in the first year, the program would not be paying for itself. But like any business we have to price for sustainability and may need to find alternative value-added tasks for the provider while Anytown works to grow the volume of its new innovative service line.

In both of these scenarios, the overhead costs for program administration and billing would be similar and should, to some extent, be taken into account for the financial analysis. Also note that in this analysis we used one person working a 40-hour week. If the service were required to operate 24/7, or if two persons were necessary to operate it, the cost would be substantially higher.

Potential Revenue Lost

Many EMS innovations designed to improve the experience of care and reduce costs have another cost that’s often not considered. Let’s say one of the goals of the Anytown EMS partnership with its hospital is to reduce preventable emergency department visits and hospital admissions. This could mean fewer ambulance transports for Anytown EMS. 

Let’s say 30% of the patients referred into the program were expected to use an ambulance. Thirty percent of 260 patients is 78 ambulance trips avoided. Recall from our earlier column that the average revenue generated per transport for Anytown EMS is $319.20.

Running 78 fewer ambulance transports at $319.20 apiece means a revenue loss of $24,897.60. Pure cost accounting would add this cost to the two previous cost analyses, resulting in a new per-home-visit marginal cost of $130.64 and a fully allocated cost of $509.22. If the program is targeted toward Medicaid patients or the uninsured (who may also have the most to gain from this assistance), this potential revenue loss would be lower. 

Pricing: Lessons Learned

All through this series we’ve demonstrated how to determine the cost of service delivery. We have not yet discussed the value proposition. Healthcare partners often perceive value much differently than we might. 
One of the lessons learned through multiple EMS innovations is to never, ever be the one to offer the price for the innovation service delivery. It is important to know your cost, but when the time comes to discuss what the payer is willing to pay, allow them to make the first offer.

In many cases we have found the payer is willing to pay more than we were going to charge. This is largely due to the additional value of the cost avoidance experienced through advantages such as reduced ED visits and hospital admissions.

We’ve invested a lot of your time over the last three columns on the finance of EMS innovation. In our next column we will embark on the clinical consideration of EMS innovations. 

Matt Zavadsky, MS-HSA, NREMT, is chief strategic integration officer at MedStar Mobile Healthcare, the exclusive emergency and nonemergency EMS/MIH provider for Fort Worth and 14 other cities in North Texas. He is a member of the EMS World editorial advisory board.

Kevin G. Munjal, MD, MPH, is an emergency physician who completed an EMS fellowship with the New York City Fire Department (FDNY). He is the founder and chair of the New York Mobile Integrated Healthcare Association (NYMIHA), an organization seeking to empower EMS providers to play a larger, more integrated role within the healthcare system by promoting new models of mobile healthcare. 

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