Gerry Biala, Part II of The Healthcare's Guide to Navigating the Surgical Suite

Gerry Biala, The Healthcare Executive’s Guide to Navigating the Surgical Suite: A Roadmap to the OR and Perioperative Services

Chapter 1: 

“Unique Challenges from Surgical Services”

Part II

by Gerald E. Biala, MSN, RN, CNOR, CSSM, Senior VP of Sullivan Healthcare Consulting
and Therese A. Fitzpatrick, PhD, RN, FAAN

Published by Sigma

Missed Part I? Read the first installment here.

This book provides experienced and novice healthcare leaders with the information, leadership structures, and practical strategies needed to successfully oversee both patient outcomes and balance sheets.

Surgical Services and the Transformative Changes in Healthcare


The next sections describe four major forces that are transforming healthcare in surgical services and beyond, and the response required of surgical services leadership.

Changing Payment Structures for Surgical Care


Highsted and Peters report that “in a financially healthy hospital, surgery generates up to 65 percent of contribution margin” (2017, para. 2)  This suggests that any reluctance to prioritize the efficiency and effectiveness of all aspects of surgical services places the organization and the executive at significant risk.  The Centers for Medicare & Medicaid Services (CMS) just released final guidance on mandated episode or bundled payment programs for both joint replacements and cardiac rehabilitation (2017).  Despite canceling mandatory participation in the bundles, CMS continues to believe that bundled payments offer opportunities to improve quality and care coordination while lowering spending. CMS is leaving the door open for voluntary efforts by providers to create less expensive models that offer value and accessibility. Although this particular approach to incentive payment has been suspended (possibly temporarily) by the government, it is clear that the payment environment is rapidly moving to a value-based model.  Executives must expect payer reimbursement methodologies that incentivize the delivery of care in less expensive settings, and through less expensive means, with significant emphasis on value and outcomes.

Simply put, as the most expensive operation within most organizations, and the one generating the highest contribution to an organization’s overall strategic and financial health, surgical services will continue to find itself under the greatest pressure to cut costs.  This makes it a target for disruption as payment strategies evolve. Porter and Kaplan (2016) in the Harvard Business Review discuss two likely payment alternatives in the evolution toward value-based reimbursement: capitation and bundled payments. Each has significant impact on the provision of surgical services.

With capitation, the organization receives a fixed payment per year per covered life and must meet all care needs of that population, including required surgical procedures.  With the bundled payment system, by contrast, providers are paid a set rate for the entire care episode for a certain diagnosis or procedure, such as joint replacement, cardiac surgery or congestive heart failure.  Within this payment, the organization must provide all tests, procedures, devices and medications.

The authors do not expect a single payment approach in the short term but do foresee plenty of payer-driven experimentation with unique market and geographic nuances.  The impact to surgical services likely will be significant, as the total cost of a surgical procedure and the often-lengthy recovery will consume an inordinate percentage of that payment.  This phenomenon is accelerating the development of innovative models in surgical services to efficiently manage the episode of care across the entire system, including preoperative preparation, choice of implantable device and trajectory of postoperative recovery.

The challenge for many legacy hospitals is a lack of agility to make expeditious changes to care models, including development of the most cost-effective venue for care.  Disruptive provider models that compete on both cost and convenience threaten expensive, overhead-laden operating rooms. Where community hospitals once competed with other hospitals in town, now surgeon- or investor-owned surgical centers – with considerable ability to provide excellent care at less expense and greater convenience – challenge hospitals to an entirely different scale of operations.  In fact, future competition may come from investor-owned facilities or hospitals nationwide or across the globe in the form of domestic or global medical tourism.

The Evolving Market for Surgical Care


As if cost pressures from government and private payers were not challenging enough, traditional market forces governing healthcare are experiencing sea changes as well.  The notion that healthcare is local is being challenged from a number of perspectives. Hospitals historically have defined their market based on local demographics. Patient proximity, coupled with aggressive marketing of a skilled team of surgical experts and the most cutting-edge technology, was assumed to be enough to recruit profitable surgical cases to the organization.  A stable base of primary care practitioners helped to ensure the pipeline of surgical cases through well-established referral patterns.

While this served hospitals well prior to the advent of value-based shopping for surgical services, Slotkin, Ross, Coleman and Ryu (2017) suggest that the traditional approach for defining a market is now experiencing significant disruption.  Tired of raising insurance costs and opaque quality and clinical outcomes data, large employers like Lowe’s, Walmart, GE, and Boeing are setting the quality criteria for a successful surgical outcome at a price they are willing to pay and are negotiating directly with providers to obtain such surgical care for employees irrespective of provider location.  This means that a Boeing employee living and working in Chicago’s corporate office may be directed to a hospital in Ohio or Seattle for a hip replacement or cardiac procedure.

The majority of surgical procedures performed annually are considered elective or semi-elective (clinically necessary but not emergent) and hence, can be “shopped” by employers.  Employers nationwide are partnering with payers, payer intermediaries and business coalitions to identify providers of surgical care that meet specific quality and cost standards.  In order to be considered for participation in this type of network, surgical care providers will need to demonstrate value in the purest economic terms – which outcomes can be guaranteed at what cost.

For the hospital looking to participate as a destination provider, the implications are significant.  Systems and processes must be reengineered, workflows redesigned, best practices implemented across all practitioner groups, and all unnecessary clinical variation removed. The data and analytical requirements will involve significant investment to provide continuous evidence of value.  Next-generation scorecards and performance metrics will provide the evidence that care that heretofore was considered aspirational has indeed become “hardwired” into the organization.

Stay tuned for part III or sign up for our email list to receive a notification directly to your inbox. Missed Part I? Read the first installment here.

Gerry and Karen have teamed up to assist preoperative teams.

About Kirby Bates Associates


Kirby Bates Associates drives healthcare organizations to achieve high quality, cost-effective patient care with our comprehensive portfolio of proven leadership services, including Executive Search, Interim Leadership, Leadership Coaching, and Operations Consulting. As former CEOs, COOs, and CNOs, our effective approaches achieve sustainable solutions for our clients’ greatest leadership challenges.

About Sullivan Healthcare Consulting


Sullivan Healthcare Consulting (SHC) helps maximize the return on investment in the perioperative suites of hospitals and ambulatory surgery centers. The firm’s consulting practice serves clients across the United States and Canada. Toll free number: 866-303-8968.


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