This is the fourth post in a series. You might consider checking out earlier posts: 

What does Patient-Level Profitability look like at the patient level?

When a surgeon is operating on a patient’s carpal tunnel, the last thing they are thinking about is money. OK, we hope money is the last thing they are thinking about.

Hospital leaders, on the other hand, are probably thinking about money the entire time the patient is sedated, recovering, and even back home watching TV.

Payers are pushing to move services from inpatient to outpatient settings. Patients demand minimally-invasive procedures with fast recovery times. We want these things for ourselves and our family members, but they’re not easy for hospitals to deliver.

The pressure from payers and patients ultimately puts pressure on hospital margins (which, for most hospitals, are desperately thin as-is). It’s easy for hospital leaders to lose sleep, wondering ‘how will we be able to afford to deliver all the care our patients need with our margins contracting?’

Nothing short of ill-advised government action could stop downward pressure on prices. CMS and the major payers are systematically whittling down the prices of all the most common hospital services. When prices are falling, where do hospital leaders focus if they want to preserve margins?

Hospital leaders need to help their teams eliminate waste.

And unless you know how much your services cost you to deliver, it’s very difficult to eliminate waste.

We built our patient-level profitability model to help us find waste and eliminate it.

An ‘income statement’ view of two patients

To give you a better idea what that looks like, here is a look at two patients who both had surgery to alleviate carpal tunnel pain. One patient was profitable to treat. The other patient wasn’t.

  • Patient “Fred” and patient “George” had carpal tunnel surgery at the same hospital.
  • The principal procedure on each of their bills was “01N50ZZ – RELEASE MEDIAN NERVE, OPEN APPROACH”
  • Both patients had the same payer
  • Both patients had surgery within 6 months of each other
  • Both patients were operated on by an orthopedic surgeon (not the same provider)

By examining the differences between these two cases, you’ll be able to see how patient-level profitability comes together at a more detailed level. And ultimately, I hope, you’ll be able to appreciate what a powerful tool patient-level profitability is for waste reduction.


Patient Fred’s gross revenue (charges) were higher than George’s by $400. That suggests Fred required marginally more total hospital services than George.

Both patients had equal net revenue (reimbursement) from the insurance company. They had the same procedure, so we billed the same CPT codes, so we got the same amount back.

If we got paid the same for both patients, and only one was profitable, that means we need to look at expenses to find answers.

Direct Expense

Direct expense = stuff directly related to patient care (opposite of indirect expense, stuff like Human Resources and Administration).

Labor expense

We spent $160 more on labor for patient Fred than patient George. Labor was our biggest expense (no surprise) and a significant gap between the two patients.

What drives labor expense? The simplest answer is: hospital employees working in the pre-op area, operating room (OR), post-acute care unit (PACU), and the nursing floor (though for a carpal tunnel surgery, a patient probably wouldn’t have a room charge).

Possible explanations: Maybe we employed more contract labor to take care of Fred (more expensive than direct staff). Maybe Fred spent more time in the OR (more staff-per-patient than in the PACU or a nursing floor).

The more complex answer is: labor expense isn’t perfectly accurate at the patient level. We don’t have a perfect record of every staff member who touched every patient, so we have to make educated guesses here. Want to hear the gory details of cost accounting? Send me an email.

Provider expense

We spent $30 more on physicians for patient Fred than patient George. Not a significant gap.

What drives provider expense? The simple answer is: the physician who did the procedure plus the physician(s) who took care of the patient after surgery.


We spent $90 more on supplies for patient Fred than patient George. Supplies were a significant expense and the third biggest driver of the difference between Fred and George’s total cost.

What drives supplies expense? For surgical cases, the biggest driver is what tools and implants the surgeon prefers.

Want to have the least fun conversation of your life? Try to convince a surgeon to use different implants than they are accustomed to using.

Surgeons don’t want to hear from administrators. And they certainly don’t want to hear from skinny nerds.

If surgeons don’t want to hear from us (the people with the information), how can we be expected to reduce waste?

We found that patient-level profitability shines a bright light on differences in practice.

If we found two providers doing the same surgery with vast differences in supplies expense, we might ask surgical leadership to facilitate a conversation where the two colleagues would compare notes. If, in comparing notes, a surgeon found (for example) that he had been using a certain adhesive his colleague found unnecessary, that might convince him to reconsider his choice of supplies.


We spent $220 more on drugs for patient Fred than for patient George. Drugs were almost half the difference between their cases. What happened?

What drives pharmaceuticals expense? Could it possibly be as obvious as it sounds? Actually, it is!

Patient Fred really got more expensive drugs than patient George.

We can find the difference if we look at charges, or at the electronic health record (EHR). We might find patient Fred had an infection that required antibiotics. We might find Fred couldn’t eat solids and had to have IV medication where George had tablets. We might find Fred went home carrying a 30 day supply of pain medication where George went home with a 7 day supply.

When we found systemic problems like overuse of IV medications where oral would suffice, or overprescribing pain medicines at discharge, we couldn’t solve those problems alone. We would work with the pharmacy team to convert IV to oral (you might read about this in a later post). We would work with our friends in Clinical Informatics to lower the default order quantities in the EHR.



Looking at the bottom line, we see both Fred and George had positive contribution margin (meaning the hospital made more in reimbursement than it cost to deliver care directly). Some call this number ‘contribution to overhead’ — which is exactly what it sounds like.

When we incorporate indirect costs (stuff like HR, Corporate Finance, IT, and Business Intelligence), we see that Fred’s case ‘contributed’ only $200 to cover $500 of overhead costs.

It’s not uncommon for individual cases to be technically ‘unprofitable’. Patient Fred certainly didn’t do anything wrong. And it’s likely we delivered appropriate care.

What would be wrong would be failing to learn from our past results. Maybe Fred’s case hints at a larger trend (like relying too heavily on contract labor, choosing unnecessarily-expensive surgical supplies, or inappropriate drug prescribing patterns). If so, we owe it to ourselves to examine Fred’s case (and as many analogous cases as we can get our hands on) with a critical eye.

Using patient-level profitability, we can examine any subset of patients. We can see patterns emerge in labor expense, supplies expense, and drug expense. And we can highlight those patterns to start a conversation with the people who deliver care.

That conversation is the first step toward reducing waste.

Are you a person surgeons want to listen to? Even if you’re not…