The MSP Guide To

The MSP Guide to…

Preparing a Compelling Cost Benefit Analysis

By Hugh Greeley, Peggy A. Greeley, Michael Greeley

The Medical Staff Office (MSO) is often responsible for significant hospital fund expenditures. In the past, these costs were easily absorbed within the hospital’s overall budget. This is not the case today. In many states, over fifty percent of hospitals have no operating margin at all. In other words: no profit.

Each expense is subject to a more rigorous analysis than in the past. And even with this thorough analysis, many worthwhile projects are not funded.

Many projects previously funded without being subject to intense scrutiny are now being delayed or denied due to lack of available funds. These include medical staff bylaw projects, leadership retreats, leadership development programs, new technology, sophisticated software programs and even additional personnel.

In the current environment of diminishing resources, most prudent CEOs will be more likely to seriously consider requests that can clearly and effectively show a positive return on investment (ROI) for the organization. As a result, as a requester of funds it is most effective to frame a request in these terms. Performing a cost-benefit analysis can aid an MSO in focusing and submitting a request for funds.

A description of performing a cost benefit analysis follows, from definition, to applicability and the process, broken down into five points.

Definition

Cost benefit analysis, or CBA, can be defined as a systematic process for calculating and comparing benefits and costs of a project for two purposes:

1. to determine if a project or acquisition is a sound investment
2. to see how one project or acquisition compares with alternative initiatives.

When contemplating multiple options, a cost benefit analysis is useful in identifying which project(s) are likely to benefit the organization more than others. For example, if the MSO is interested in purchasing a multifunctional photocopier there are multiple choices of products and vendors. Each vendor may vary in product availability, service, warranty, long term as well as initial cost. A CBA will clearly identify the most important factors in deciding which vendor to choose and compare those factors.

A CEO might request a CBA in order to determine if the gains justify the cost for a variety of initiatives, including adding personnel, purchasing new technology, renovation of office space or implementation of a medical staff project.

Applicability

When Cost Benefit isn’t Applicable

While considering all projects in the light of cost versus gain is advantageous, creating a cost benefit analysis is not essential or desirable to justify all MSO projects. The time necessary to conduct and document a CBA may not always be appropriate.

If a project is required or the importance or priorities have already been established, it is not necessary to perform a CBA. This includes projects motivated solely by a need to meet legal or accreditation requirements. This includes new standards such as Joint Commission requirements for FPPE, revision of background checking, or health status confirmation. Also within this category fall changes in medical staff organization size, building of new facilities or the provision of new services that are a part of a broader hospital master plan.

For another example, undertakings motivated by a need to address specifically identified deficiencies in personnel, technology, space or skill level of either MSO personnel or medical staff leaders would not be organized using an CBA. Also, projects that are merely maintenance in nature, such as an ongoing agreement for existing technology or equipment would not justify a CBA. It is important to remember that a CBA is a valuable tool that requires time and should be utilized in exploring and justifying new projects of whose details are not yet known.

Cost Benefit Appropriate

A cost benefit analysis is most applicable for evaluating proposed projects that meet the following criteria:

1. The potential expenditure is significant enough to justify spending resources on forecasting, measuring and evaluating the expected benefits and impacts.

Example

Purchase of a standalone piece of equipment or training costing less than $1000 would not justify the time and resources necessary to perform a comprehensive cost benefit analysis. However, if the intended purchase is more than $1000, or if there will continuing costs incurred for maintenance, supplies, leasing, it may be a candidate for a CBA. Discussions with management will determine what should be the subject of a complete CBA. After these discussions the MSP can develop criteria to be used in the future to determine if such a study should be undertaken for any type of project.

1. The purpose of the proposition is to improve the ability of the MSO to carry out expected duties and functions such as credentialing, organizing and supporting committee meetings, filing, orientation, improving medical staff leadership skills or improving hospital/physician relations. (As opposed to meeting a legal requirement or social goal.)

1. The project is in regards to environmental, regulatory/accreditation or medical staff issues that have articulated benefit(s) but have previously not been measurable or have had intangible benefit to the hospital.

Some different initiatives that warrant a cost benefit analysis:

1. Purchase and installation of software that has the intended benefit of improving the speed and accuracy of the credentialing process. This may be a new acquisition or may entail switching from an existing software vendor to a new vendor.

1. Purchase of a teleconferencing capability with the aim of reducing the amount of time physicians must spend in meetings, while increasing the amount of physician input into critical decisions.

1. Purchase of a combination high-speed scanner and digital storage unit, which will eliminate or significantly reduce the need for filing cabinets, the space they occupy and attendant security concerns.

1. The employment of a dedicated staff person to conduct telephone reference checks for all or designated applicants

1. Any situation in which your supervisor suggests that an expenditure is not “in the budget” or not worth the time and financial resources projected in your request.

The Process

While invaluable when created with time and care, A CBA is not a simple statement on the part of a manager that a technology, human resource or project is necessary in order to have a “state of the art” MSO.

It also does not assume that:

• the expected benefit will easily justify the initial cost;
• the expenditure is required by the Joint Commission;
• this is the latest thing and all MSOs either already have it or are in the process of getting it.

Consider the following actual request for a new high tech combination photocopier, digital scanner, fax and printer. This was provided as an explanatory note in conjunction with next year’s budget projection.

“While it may seem expensive, item number 4 in my proposed budget is really necessary. We are way behind the times in this area. It will allow us to clear our desks of printers, our stand alone fax, and the office photocopier. It will also allow us to scan documents for digital faxing and storage. I have seen a number of these in other MS offices and they really pay for themselves quickly.”

Though clearly stated and justified logically based on the requester’s perception, this request does not carry much weight with someone looking for clear and supported justification of much needed resources in these times. A proper analysis requires consideration of a number of steps and will result in a far more documented, polished and persuasive case for any expenditure.

The first step in conducting and documenting a valid and compelling CBA is to consider each of the following questions:

1. Purpose and Effort

What is the problem or goal that the project is intended to address? What are its intended benefits? Given the cost of the project, how much effort should be devoted to benefit-cost analysis and which aspects should receive the most attention?

1. Project Information

What will be done? Where? When? How? By whom? How will this change the status quo and to what degree? What alternative means may have the same result?

1. Know Your Audience

What is the constituency that will benefit from the project? For whom are benefits being sought? Who will incur the direct and indirect costs?

1. Project schedule

When will costs be incurred? When will benefits be realized?

1. CBA Types and Templates

Should the project be evaluated on the basis of its benefit-cost ratio, net present value, internal rate of return or some combination of these?

Purpose and Effort

Before you begin, it is important to evaluate and document the aim of analyzing the project, its purpose, and the level of effort that should be used in creating a cost benefit analysis. For these and subsequent steps to creating a cost benefit analysis, please see examples following.

Purpose of the Analysis

How will the analysis be used?

• to determine if the project should be undertaken
• to establish priorities for approved projects
• to determine how a project should be done

Example

Should the hospital have a Medical Staff (MS) lounge?

The base case would be that there is no MS lounge. The benefits and costs of the project should be determined and compared to the base case.

Which aspect of the MS lounge project should be initiated this year?

The benefits and costs of each project component should be identified and compared. The project component with the most favorable cost-benefit measure (such as net-present value, cost-benefit ratio, or internal rate of return) would be selected and implemented first.

Defining the purpose will help determine what benefits and costs should be included, as well as other aspects of the analysis.

Purpose of the Project

What problem(s) does the project seek to solve or mitigate? What goal(s) does it address? What are the intended direct and indirect benefits?

Example

Project: Purchase and installation of “Software Solution”

Purpose: To reduce paperwork, increase storage, eliminate stand-alone equipment and improve employee productivity.

Unintended impacts: Increased demand for technology from other departments, increased training needs, potential increased maintenance costs.

Benefits: Reduce paper consumption, improve environmental awareness, eliminate “hard” storage needs, and reduce specific maintenance/replacement requirements.

The nature of the problem or goal will determine its intended benefits and intended recipients. But significant unintended impacts, whether negative or positive, must also be included in the analysis. Impacts on other departments or people may or may not be included in the CBA, but they should be identified, because they will be potential sources of support for - or opposition to - the project.

Level of Effort

The appropriate level of effort to be invested in the analysis depends on its cost and expected benefit.

Resources (time, materials, and expertise) needed to perform the cost –benefit analysis should be weighed against the value of the analysis in determining the most cost-effective project or approach. If the proposed project has very high costs, it is clearly worth considerable effort to determine whether benefits exceed costs and to identify the most economically advantageous alternative. Conversely, the analytical effort should not be greater than what would be lost by pursuing a project that was not cost-beneficial or selecting the less cost-effective of two projects. In most situations, the incremental payoff from choosing the right alternative far exceeds the resources consumed in doing the cost-benefit analysis

Example

Designing and building a Physicians Lounge

This project has very high monetary costs and significant environmental, economic, and noise effects. A thorough cost-benefit analysis including all of these effects and comparing the project to operational modifications that could provide similar benefits is justified.

In any analysis, effort should be concentrated on estimating and valuing the benefits and costs that are largest and that differ the most between alternative or competing projects.

Project Information

Project Description and Timing

What will be done? Where? How? By whom? When?

The project must be described in sufficient detail for its benefits and costs to be estimated. The description may change during the course of the analysis if it is seen that a more extensive (or less extensive) project or a different way of doing it may be more cost-effective.

Example

What will be done: The Dragon will be purchased and installed. It will permit rapid scanning, electronic faxing, printing, storage and copying of medical staff documents, minutes, applications, and forms.

Where: It is anticipated that the Dragon will be located in the Medical Staff Office, northwest corner, replacing the existing stand-alone photocopier.

How: the vendor will handle all installation, as well as all initial employee training.

By whom: Vendor

When: The Technology will be operational by June 15, 2008.

Sometimes the optimum timing for a project and its alternatives can only be established after costs and benefits have been estimated. At that stage the timing of an option can be tested through sensitivity analysis, using different dates, to reveal the impact of project timing on the outcome.

Basis for Analysis: Base Case

The impacts of a project are measured in comparison to some base case that is a realistic representation of current and expected future conditions.

The base case is the situation that will prevail if the project is not undertaken. The base case could be "no build/no buy," maintain existing technology or "some build," or "degradation."

Examples

"No Build"A decision not to build a Medical Staff lounge. The base case is continuation of the current situation which might be a simple medical staff coat/mail room with a few outdated journals and an unused computer station.

"Some Build" Attempt to renovate a small space so that physicians will have greater space and access to a modest assortment of chairs and a television.

"Degradation" Phase out all consideration of a Medical Staff lounge and discontinue support for the existing Coat Room and mail center.

Alternatives

A CBA describes alternative actions that might be taken to achieve results similar to those of the project, or alternative actions for which the project's funds might be used.

Both the base case and alternatives should be described in as much detail as the actual proposed project, and should include all the actions necessary to make it work. For example, the benefits of building a modern medical staff lounge or purchasing video conferencing technology might not be fully realized unless there was simultaneous development of a medical staff leadership program.

Furthermore, each alternative should include only incremental benefits and costs attributable solely to that alternative, over and above those resulting from other approved projects. Including the costs or benefits of other projects misrepresents actual benefits and/or costs.

If cost-benefit analysis is being used to decide how, where, or when to do something that has already been decided on, there may be no base case. Project alternatives will be compared against each other. In some cases no alternatives are considered, and the project is compared only to the base case.

Know Your Audience: Departmental Perspective

Whose costs and benefits should be considered in the evaluation of the project?

Some people would argue that a cost-benefit analysis should consider all benefits and costs that accrue to anyone. But sometimes management gives greater weight to the costs and benefits that accrue to physicians on the Medical Staff. The perspective of management should be established before the analysis is begun. Other groups to whom significant benefits and costs accrue should also be identified and their costs and benefits estimated because they are potential sources of support or opposition to the project.

If a particular group has much higher costs than benefits, some means of compensating it might be considered; conversely, if a group has much higher benefits than costs, it might be possible to find a way to obtain compensation for those benefits.

Timetables

Project Schedule

Because benefits and costs will be summed (added) over future years, a project's schedule can affect the outcome of the cost-benefit analysis.

Schedules for both the proposed project and its alternatives should maximize benefits relative to costs. In some situations, project schedules can be very complex, such as where project alternatives involve staged construction or major rehabilitation during the period covered by the analysis. The optimum timing for each can be established after costs and benefits have been estimated. Then the timing of each option can be tested through sensitivity analysis, using different dates. This reveals the impact of project timing on the outcome.