An Interactive Decision-Support Tool for Telemedicine: Making the Business Case

1. An Interactive Decision-Support Tool for Telemedicine: Making the Business Case Susan E. Palsbo, PhD National Rehabilitation Hospital George Mason University Michael J. McCue, DBA Virginia Commonwealth University

2. Acknowledgements Grant #H133E980025

3. 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.”

4. 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

5. 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

6. Pro forma Indirect Revenues • Shortened LOS • Increased physician productivity • Fewer “no shows”

7. Pro forma Expenses • Capital outlay • Telecommunications expenses • Medical expenses

8. Capital Outlay • Two conceptual approaches • “Virtual clinic” • “Rental clinic” • Type of equipment • Lease or buy? • One-time training costs

9. 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

10. Medical Expense • Include hourly salaries, benefits • Work units per telerehabilitation procedures

11. 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

12. 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!

13. 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%

14. 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.

15. “Where Can I Get a Copy?” http://www.nrhresearch.org/chdrnav.cfm?id=670 Or e-mail: spalsbo@gmu.edu