An Interactive Decision-Support Tool for Telemedicine:

Making the Business Case

Susan E. Palsbo, PhDNational Rehabilitation Hospital

George Mason University

Michael J. McCue, DBAVirginia Commonwealth University

Acknowledgements

Grant #H133E980025

Problems

• Fiscal concerns at the hospitals

• Public policy concerns

• Results of cost-benefit studies

“I don’t care that telemedicine saves the patient time and money. It does not add revenue to my hospital’s bottom line.”

Idea: Do Financial Analysis

• Make the business case for telemedicine

• Build an interactive spreadsheet decision-support tool for the CFOs to model different scenarios

• Identify the scenarios under which a telerehabilitation program can be financially profitable and self-sustaining

Pro forma Direct Revenues

• Segment the market by payer

• Model different reimbursement assumptions (copays, origination fees)

• Model different service volumes

• Model different growth rates, by payer

Pro forma Indirect Revenues

• Shortened LOS

• Increased physician productivity

• Fewer “no shows”

Pro forma Expenses

• Capital outlay

• Telecommunications expenses

• Medical expenses

Capital Outlay

• Two conceptual approaches– “Virtual clinic”– “Rental clinic”

• Type of equipment

• Lease or buy?

• One-time training costs

Operating Expenses

• Telecommunications– Fixed and variable costs– Connection charges– Servicing charges

• Medical – Hourly salaries, benefits– Need to project volume of services by CPT

code since work-hour equivalents vary by code

Medical Expense

• Include hourly salaries, benefits

• Work units per telerehabilitation procedures

Compute Breakeven Volume

Revenue per visit

- Variable expenses per visit

= Contribution margin per visit

• How many visits to cover fixed costs

• How many visits to cover fixed costs when indirect revenues are also included

Internal Rate of Return

• IRR = the interest rate that makes the net present value of all cash flows = 0.

• The return that the company would earn if they invested in the telemedicine program.

• If the IRR > the return on other investments, then the business case is made!

Examples of Scenarios

• For NRH (intranet), 4 encounters per week, volume grow at 10% a year, expenses grow at 3% a year make a profit in year #3. IRRyr5 = 29%

• If 1 extra encounter per week, but physician/psychologist sees extra 100 patients never make a profit. IRRyr5 = -1%

• If 1 extra encounter per week + 1 less no-show per week, make a profit in year #4. IRRyr5 = 18%

Key Points• The best way to think of a telemedicine clinic is as if

building a new clinic …but virtual is much cheaper than bricks and mortar.– Universities have already figured this out.

• Segment the payer market and make tailored revenue and visit projections.– Insurance companies have already figured this out.

• Urban telemedicine programs can be financially self-sustaining, especially when piggybacking on existing LANs and when there is available non-revenue producing physical space.

• Don’t need to rely on indirect revenue, but it helps!• Build up volume as much as you can to make operating

profits instead of relying on depreciation.

“Where Can I Get a Copy?”

http://www.nrhresearch.org/chdrnav.cfm?id=670

Or e-mail:

spalsbo@gmu.edu