Hey Doc, What's Your P&L?

An executive at a high-volume hospital explains why at his institution, each physician is aware of profit and loss measures.

Marie Thibault

The language of Wall Street trading floors and corporate boardrooms has come to the doctor's office and hospital surgery suite.

It may surprise patients to know that their physicians may be keenly aware of how much a medical device costs, what the device's reimbursement level is, and whether a certain procedure is profitable or not. After all, doctors have historically focused solely on the business of healing. 

But, as Marvin Konstam, MD, chief physician executive at The CardioVascular Center at Tufts Medical Center, explained, the shrinking provider margins means doctors can no longer be oblivious to cost and profit measures. He pointed out that Tufts and many hospitals are seeing a shift toward Medicare and Medicaid with its lower reimbursement rates, an increased focuse on patient outcomes and quality, and a move toward the outpatient setting—all dynamics that have received plenty of attention in recent years.

These factors have led to more pressures on profits. "Most important—the other items are contributing to this—we're seeing a reduction in our margins. I think our margins and the margins of most provider systems and hospitals today are shrinking, and there's concern about that. That intensifies our view about cost reduction . . ." Konstam said, during a panel on "Valuing Medical Technology" at the 20th Massachusetts Medical Device Industry Council (MassMEDIC) Annual Conference last week in Boston. 

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The panel's discussion focused on how medical technology is evaluated by providers and insurers. Konstam said that Tufts hasn't changed the way it assesses new technology, but does so "much more intensely and much more analytically." Clinical outcomes and patient quality of life matter, he said, "and in evaluating that I think we're getting much tougher along with everybody else. Along with the payers, along with the regulators. I think there is a demand to see actual changes that are important to the patient, not just changes in heart size or some surrogate measure."

When looking at new medical technology from a financial perspective, the contribution margin is what matters. "That's still where we're living," Konstam said. At his hospital, physicians are very aware of the center's contribution margin and also their own impact on that measurement. The situation at the Tufts CardioVascular Center may be somewhat unique because it centralizes care from what would normally be a variety of departments, aligning the incentives of doctors and the hospital:

We've actually managed to integrate those across the different divisions and departments and to some extent across the physician organization and the hospital. And our physician incentive plan is, to a great extent, linked to the overall enterprise contribution margin. That's extraordinary. I think there are others that are moving in this direction. I think we've moved faster than others. The physicians are actually directly incentivized not only to their own professional values but also to the contribution margin of the organization. Read: more patients, lower cost per case, higher reimbursement per case. Physicians in our organization are interested in all of those things."

Konstam elaborated on this, noting that physicians at The CardioVascular Center see revenue, expense, contribution margin, and debt margin. Monthly profit-and-loss metrics are placed up on a board. 

As a result, the old way of selling, with a physician advocate and medtech company up against the C-suite and administration, is disappearing, Konstam said. "We care very much about the impact of technology on our patients, but also what the cost of [it] will be." 

Marie Thibault is the associate editor at MD+DI. Reach her at marie.thibault@ubm.com and on Twitter@medtechmarie.