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Assessing New Technology: The Role of Feasibility Analysis

Richard N. Beveridge, MBA, President Richard Beveridge & Associates, Inc. Salt Lake City, Utah
March 2006
Industry marketing efforts that extol the benefits of the latest technologies are often targeted at the general public. The general public, in turn, applies pressure to providers to provide the latest devices and/or treatment modalities. Providers don’t want to be perceived as less advanced than their competitors. They often purchase equipment to satisfy this perceived need without fully investigating the feasibility and impact the new technology will have on their program and the hospital in general. Payors frequently demand proof of a significant improvement in the ability to diagnose and treat a specific condition utilizing the new technology before they will reimburse for it. Limited capital resources require that as new technologies become available, a thorough understanding of the costs and benefits be studied. In today's fast-paced environment, it is critical that medical providers have an understanding of the role and importance of a feasibility analysis to determine not only the clinical and technical capabilities of new technology, but also its financial impact.
Typically, there are four areas that must be addressed when assessing the feasibility of adding new technology: 1. Technical assessment; 2. Cultural assessment; 3. Political assessment; 4. Financial assessment. Technical Assessment Performing a technical assessment for new technology involves looking at the application, role and appropriateness of the new technology and understanding the associated best practices. Performing a technical assessment requires a thorough review of the pertinent information provided by the manufacturer, information contained in the major journals and other research publications, and should include contact with providers that are using the new technology. The clinical and technical capabilities of new technology must be assessed by those with the corresponding clinical and technical knowledge and skills associated with the technology. Typically, a TAG team, or Technology Assessment Group, is established. Physicians, technologists and financial personnel should be included on the TAG Team. A full review of the available information and research related to the technology should be undertaken during this feasibility analysis phase to identify whether or not the technology is clinically appropriate.
The Realistic Market Potential (RMP) for the new modality must also be assessed. Projected utilization rates for the technology, applied to local population demographics, should be laid out. Unique service area demographic trends and geographical nuances that affect potential demand should be incorporated into the analysis in order to arrive at a RMP for the modality. In addition, the RMP must take into account whether the new modality is a substitute or a complement to existing technology. If the new modality is a substitute technology, utilization of the original modalities will decrease. One example of substitution technology is the drug-eluting stent (DES). Percutaneous coronary intervention (PCI) utilizing DES is a substitute modality to coronary artery bypass graft (CABG) surgery. As a result of advances in angioplasty capabilities associated with technological advances in guide wires, balloons, stents, operator proficiency, etc., the RMP for CABG surgery has dropped. However, another effect of PCI with DES is that the number of repeat PCIs has also dropped; DES does not only affect CABG surgery utilization, but also affects PCI utilization. Impact factors such as these must be taken into account when assessing the feasibility of adding new technology. Cultural and Political Assessments Most programs perform technical and financial assessments while neglecting cultural and political assessments. Yet these two types of assessments are also crucial to the success of new technology implementation.
Cultural. A cultural assessment involves an evaluation of how things are routinely done in the program, such as how decisions are made and how readily the service line staff members embrace and assimilate new technology. Culture can be defined as the way we do things around here. If the program’s culture is one of early adoption of new technology, the new modality will be readily accepted and utilized in the service line. However, if the culture is one of late adoption or complacency on the part of staff members in learning new skills, acceptance of the technology will be slow and assimilation difficult without a fundamental shift in staff perception and behavior. There are numerous examples where equipment was purchased but then sits idle because staff members and providers were uncomfortable with the technology or didn’t have time to learn how to operate it effectively and proficiently.
Political. The political assessment portion of the feasibility process is perhaps the most important aspect when assessing the impact new technology will have on any program. If referring physicians do not understand the new technology’s importance, relevance and/or significance, as well as how it can provide a better diagnosis or treatment for their patients, they will not be as likely to refer potential patients for this technology. Thus, educational and informational programs about the new technology, targeted to referring physicians, are necessary. If referring physicians understand the importance and role of the new technology, how it relates to the old technology and how it will save time and cost, there is clearly an increased likelihood that they will refer their patients for these services.
It is absolutely critical that the political environment be assessed. We are aware of programs that performed a formal feasibility assessment, determined that the new technology (modality) would be financially viable, that the technology would be appropriate for the services provided in the hospital, that it could be assimilated very quickly by staff members and yet, from a political assessment perspective, would not be supported by those in positions to refer patients. As a result, the procurement of the new technology service modality was postponed until the referring physicians could be informed and educated about the new technology, its associated risks and benefits, and the demand for the services in the service area. Financial Assessment Finally, understanding the impact the new technology will have on existing capabilities, services and equipment is essential. Without an understanding of the impact in terms of volumes, costs and financial reimbursement, it is nearly impossible to make an educated decision about procuring the technology. The capital costs of acquiring the new technology must be determined along with the fixed and variable costs associated with providing the service.
Projecting the revenues for the new technology can be difficult and tedious. Utilizing DRGs, APCs or CPT codes and determining the associated reimbursement is generally the starting point. Once the reimbursement amount per associated code (DRG, APC or CPT) is determined, the amount can be multiplied by the projected number of procedures or cases to arrive at total revenues. Costs can be identified by line item, such as staff, benefits, supplies, occupancy, overhead, etc. The costs can be divided into fixed and variable cost categories. Fixed costs are those costs that are incurred whether or not a procedure or case is performed. Fixed costs do not vary during the considered period, usually one year. Variable costs are those costs that vary with volume, such as supplies.
Financial projections should be developed to assess the financial potential of the new modality. In the example shown in Table 1, total capital costs are estimated at $400,000 in order to cover the nuclear equipment, including the hot lab, truck and start-up costs. Debt service is based upon a five-year period at 100% financing at 9% interest. Depreciation, a non-cash expense, is calculated with a 20% salvage value over five years utilizing straight-line depreciation. (Note: these assumptions are for example purposes only.)
Projected revenues per case are projected and multiplied by the projected volumes. A Bad Debt amount is projected in order to account for provided procedures that will not be reimbursed. Subtracting the Bad Debt amount from the Total Gross Revenue figures identifies the Adjusted Revenues. (In this example, the revenue figures represent collections, not charges.)
Expenses can be projected in a similar manner, as shown in Table 2. Once the revenues and costs associated with the service modality have been identified, subtracting the Total Expenses (Table 2) from the Adjusted Revenues (Table 1) will determine the projected net income. A break-even sensitivity analysis can then be performed (Table 3).
Figure 1 shows a break-even chart utilizing the information from Table 3. The point where the Total Cost line intersects with the Total Revenue line is the break-even point. As shown in our example, in order to break even, 47 procedures are required on a monthly basis. This means 2.2 procedures per day are required in order to break even (see Table 4).
Once monthly break-even procedure volume levels have been calculated, annual and daily break-even procedure volumes can be determined. These break-even procedure volume figures must be compared with the RMP to determine the feasibility of adding the services or new technology. If the daily break-even procedure volumes require an abnormally or unreachable market share of the RMP to achieve, and there are competing services in the area, the services may not be feasible.
Other financial indicators can also be projected, including Operating Margin %, Payback Period, and Return on Investment (ROI) (Table 5).
With a break-even analysis, the TAG Team can then understand what the impact will be from a reimbursement perspective. Importantly, in order to complete the analysis, the impact the new technology will have on the existing equipment/services must also be evaluated. As the new technology is added to the service line, existing technology will typically experience a decrease in procedure volume, e.g., PCI with DES and CABG surgery. Performing a financial analysis with the decreased volumes, then subtracting this amount from the financial analysis for the new technology will provide a more accurate understanding of the new technology’s impact on the existing program. A Final Note In conclusion, when assessing the feasibility of adding new technology or services, it is absolutely critical that not only a detailed financial assessment occur, but that three other areas of feasibility analysis take place: technical, cultural, and political assessments. Without these assessments as part of the feasibility analysis process, it is difficult, if not impossible, to make an educated decision about adding new technology or services. It must be remembered that just like patients, physicians typically want the latest and greatest technology available. However, after performing a feasibility analysis on the new technology, it may be determined that this new technology is not sufficiently superior to existing technology to justify the investment, not only financially but within a service line’s cultural and political environments. Each of the four assessments, technical, cultural, political and financial, adds to the overall feasibility process when determining the viability of adding new technology and/or services. Richard Beveridge can be contacted at (801) 565-0909 or admin@rbaconsult.com
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