18 S

Opportunity cost: A systematicapplication to surgeryAbhishek Chatterjee, MBA, MD,a Michael J. Payette, MBA, MD,c Christopher P. Demas, MD,b

and Samuel R. G. Finlayson, MPH, MD,a Lebanon, NH, and Farmington, CT

Background. Opportunity cost is the potential gain or loss when a person chooses to perform an activityover its next best alternative. With respect to surgery, opportunity cost can occur if a less efficienttechnology uses more operating time than its next best alternative. This additional operating time couldbe used in a productive way that, when economically valued, adds a ‘‘cost’’ to the less efficient technology.Although fundamental to the economist’s view of costs and widely used in economic assessments,opportunity cost analysis is infrequently used in economic evaluation of surgical technology. Previouscost comparison studies in the surgical literature have not addressed opportunity cost when estimatingthe efficiency of competing technologies. With increasing healthcare costs and new technologicadvancements in surgery, a surgeon’s ability to understand opportunity cost and apply it when choosingbetween two comparable technologies is essential. Our objective is to present a system to estimate theopportunity cost for given surgical specialties and present a model to demonstrate its principle.Methods. To demonstrate the principle of opportunity cost, our model used a hypothetical scenariocomparing two clinically equivalent technologies that differed in that the use of one device (Device A)extended operating time in a hypothetical procedure by 30 minutes compared to its competitor device(Device B). How this extra operating time could potentially be used was then valued using theopportunity cost calculated by our study design. Our study design included 5 surgical procedures from5 surgical specialties that were elective, profitable, high-volume (performed more than 100 times peryear), and had a duration of less than 240 minutes. The data were taken from a university hospitalsetting in 2007 and included procedure volume, profit margin, and duration. The outcome measure wasopportunity cost, which was estimated by dividing the selected procedure’s profit margin by its duration.Results. Surgical specialty results are presented in the accompanying Tables. Otolaryngology has thehighest opportunity cost at $38/min. This cost was calculated by using myringotomy as the procedurethat was elective, short in duration, performed in high volume, and provided the highest profit margin.By applying our model, the otolaryngology surgeon using the less efficient Device A to perform a hypo-thetical procedure would incur an opportunity cost of $1,140 ($38/min 3 30 min). This is because hecould have performed additional myringotomy procedures in the time saved had he instead used the moreefficient Device B in his hypothetical cases. General surgery has the lowest opportunity cost at $9/min;laparoscopic inguinal hernia repair was the procedure used for its calculation. Under the same model,the general surgeon using Device A would incur an opportunity cost of $270 ($9/min 3 30 min). Thisis because the general surgeon could have performed additional laparoscopic femoral/hernia repairs hadshe used the more efficient Device B in her hypothetical cases.Conclusion. In acknowledging opportunity cost, a surgeon can more accurately compare the efficiency ofcompeting surgical devices. This comparison is carried out by estimating and applying a dollar amountto the potential utility of time created by the use of the less efficient device. (Surgery 2009;146:18-22.)

From the Department of Surgery, Sections of General Surgery,a and Plastic Surgery,b Dartmouth HitchcockMedical Center, Lebanon, NH; and the Department of Dermatology, University of Connecticut Health Center,c

Farmington, CT

HEALTHCARE COSTS ARE CONTINUING TO INCREASE, with agreater push toward increasingly efficient or cost-

Presented at the 66th Annual Meeting of the Society of Univer-sity Surgeons, San Diego, California, February 7--11, 2006.

Reprint requests: Abhishek Chatterjee, MD, Dartmouth Hitch-cock Medical Center, One Medical Center Drive, Lebanon,NH 03756. E-mail: abhishek.chatterjee@hitchcock.org.

0039-6060/$ - see front matter

� 2009 Mosby, Inc. All rights reserved.

doi:10.1016/j.surg.2009.03.027

URGERY

effective technology.1-3 Surgeons play a key rolewith regard to assessment and adoption of new tech-nology. Although the clinical impact and outcomeof a surgical device is of the utmost importance, itis also important to evaluate the device’s costs to as-sess its eventual acceptance in the medical world.

In the past, methods for evaluating a newdevice’s costs have relied on accounting principlesthat consider direct and indirect costs that, in sum,lead to a total cost.4-7 Such a method of cost

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Chatterjee et al 19

assessment fails to acknowledge a device’s true costbecause it ignores the opportunity cost. Opportunitycost is the potential gain or loss when a personchooses to perform an activity over its next bestalternative.8,9 Thus, to calculate the true cost of adevice, the summation of the indirect, direct, andopportunity costs needs to be performed. With re-spect to surgery, opportunity cost can occur if a lessefficient technology uses more operating timethan its next best alternative. Examples of this in-clude laparoscopic technology (in the case of lapa-roscopic versus open colectomy) and woundclosure technology (in the case of closure with ep-idermal suture versus Steri-Strip S [3M, St Paul,MN]).10-12 This additional operating time couldbe used in a productive way that, when economi-cally valued, adds a ‘‘cost’’ to the less efficient tech-nology. Opportunity cost has been mentioned inthe medical literature but, to the best of our knowl-edge, is absent in the surgical literature.8,9

The primary purpose of this paper is to dem-onstrate the application of opportunity cost in thesurgical setting. First, we calculate the opportunitycost multipliers incurred in several surgical spe-cialties. Second, we apply each opportunity costmultiplier to a hypothetical scenario to demon-strate the surgical specialty’s opportunity cost. Thishypothetical scenario is as follows:

A new device (Device B) allows for a quicker operatingtime compared to the standard surgical device (Device A).A proven advantage of Device B is that it allows the sur-geon to save approximately 30 minutes per case comparedwith Device A. The 30 minutes saved by using Device Band the way in which that time is potentially used is theopportunity cost incurred by using Device A.

MATERIALS AND METHODS

To assess the opportunity cost per time unit for asurgical specialty, we first reviewed a detailed case listfor the year 2007 from the Dartmouth HitchcockMedical Center. This case list included inpatient andsame-day outpatient data. The case list was obtainedfrom the finance department of the hospital and wassorted by diagnosis-related group(s) (DRG) codes.We analyzed cases from the general surgery, orthope-dic surgery, urology, plastic surgery, and otolaryngol-ogy departments. We matched DRG codes withcurrent procedural terminology (CPT) codes andtheir associated procedures. Associated with theDRG codes were the number of cases performed, av-erage profit margin per case, and total surgical time.

We then proceeded to select DRG procedures ofwhich 100 or more were carried out in 2007; weselected procedures that were elective, had a sur-gical time duration of less than 240 minutes, and

had a positive profit margin. We excluded DRGprocedures that had more than one associatedCPT code and those that were subspecialty-specific(eg, spine fusion procedures performed only byorthopedic spine surgeons). Our outcome mea-sure was to estimate the opportunity cost multi-plier, which was the dollar amount per minute foreach surgical specialty. This measurement wascalculated by dividing the profit margin per caseby the time it took to complete that case. Thesedata are summarized in Table I. We then used theopportunity cost multiplier for each surgical sub-specialty and applied it to the hypothetical sce-nario previously described.

RESULTS

As demonstrated in Table I, opportunity costmultipliers vary among surgical specialties. Gen-eral surgery has the lowest opportunity cost multi-plier at $9/min, with laparoscopic inguinal herniarepair being the procedure used in our calcula-tion. In our model, the general surgeon usingDevice A would incur an opportunity cost of$270 ($9/min 3 30 min). This is because the gen-eral surgeon could have performed additional lap-aroscopic inguinal hernia repairs had she used themore efficient Device B in her hypothetical cases.

To take advantage of the opportunity cost ofperforming 1 additional laparoscopic inguinalhernia repair, a general surgeon would have tocreate at least 102 minutes of time saved by usingDevice B in a hypothetical scenario (Table II).Therefore, if using Device B saves 30 minutesmore than using Device A, the surgeon wouldneed to use Device B a total of 4 times in a hypo-thetical procedure (Table II).

Otolaryngology has the highest opportunity costmultiplier at $38/min (Table I). This was calcu-lated by using myringotomy as the procedurethat was elective, brief in duration, performed inhigh volume, and provided the highest profit mar-gin. By applying our model, the otolaryngologistusing the less efficient Device A to perform a hypo-thetical procedure would incur an opportunitycost of $1140 ($38/min 3 30 min). This is becausehe could have performed additional myringotomyprocedures in the time saved had he instead usedthe more efficient Device B.

To take advantage of the opportunity cost ofperforming 1 additional myringotomy, an otolar-yngologist would have to create at least 36 minutesof time saved by using Device B in a hypotheticalscenario (Table II). If using Device B saves 30 min-utes more than using Device A, then the surgeonwould need to use Device B a total of 2 times in

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20 Chatterjee et al

Table I. Five selected high-volume elective procedures

DRGcode(s)

CPTcode(s) Procedure name(s) Volume

Averagemargin per

case, $

Averagesurgical

time, min

Opportunitycost multiplier,

$/min

Urology 335 55866 Laparoscopic prostatectomy 110 4954 228 22Otolaryngology 062 69436 Myringotomy with insertion of tube 231 1378 36 38General surgery 162 49650 Laparoscopic inguinal hernia repair 127 962 102 9Plastic surgery 261 19318 Bilateral reduction mammoplasty 155 3423 180 19Orthopedic surgery 503 29881 Knee arthroscopy 362 1260 54 23

DRG, Diagnosis-related group(s); CPT, current procedural terminology.

a hypothetical procedure. Similar analysis for theother 3 specialties is included in Table II.

DISCUSSION

When presented with 2 or more competingtechnologies, a surgeon has to consider a varietyof factors before deciding on which product to use.Of primary importance, a product has to beclinically safe and effective for the patient. Second,it must be cost effective. In evaluating the cost-effectiveness of a surgical device, the surgeon mustcompare the cost of the device to the benefits itprovides. To estimate the device’s costs, it is impor-tant to estimate true costs rather than just totalcosts. For this to happen, one has to calculatethe device’s opportunity cost and combine thisamount with the device’s total cost, which is thesummation of direct and indirect costs. By ignor-ing the opportunity cost, the true cost of the deviceis unknown, potentially leading to an incorrectcost-effectiveness analysis.

Our model provides surgeons with a frameworkfor assessing opportunity cost based on their spe-cialty. Although there is variability of opportunitycosts among surgical specialties, its contribution toa product’s true cost cannot be ignored. Forexample, in otolaryngology, having a high oppor-tunity cost per minute implies that a device thatreduces surgical operating time is highly desirableeven if its fixed, direct costs (such as operatinginstrumentation costs) are high. This is because anotolaryngology device that leads to shorter operat-ing times incurs less opportunity cost, which wouldoffset the high fixed, direct cost of the device . Ingeneral surgery, however, the lower opportunitycost per minute may not equivalently offset aproduct’s high fixed, direct cost, potentially limit-ing the benefits achieved by the efficiency associ-ated with a new technology.

We recognize that our model has several limita-tions. First, our illustrative case does not considerrelative effectiveness of new technology, but in-stead assumes equivalent effectiveness. In reality,

most changes in practice are accompanied bychanges in effectiveness as well as cost. Formalcost-effectiveness analysis is a technique commonlyused to assess the relative value of new practices.Such analyses take into account a very broad rangeof costs and benefits to determine overall value.Although it is important to understand opportu-nity cost in the context of overall cost-effectiveness,the intent of our study is not to create a compre-hensive analysis, but to provide a simplified modelto highlight opportunity cost as an important andoften overlooked component of true costs thatshould be part of any comprehensive evaluation ofmedical practice.

The analytic perspective of our analysis is lim-ited to the financial interests of the healthcareprovider, and its application is limited to decision-making at the hospital level. Cost-effectivenessanalyses for public policy decision-making moreappropriately adopt a broader perspective reflect-ing the interests of society. The societal perspectivewould necessarily consider such important issuesas the effect of the new intervention on overallhealthcare costs (which might favor doing fewerprocedures), the long-term outcomes of the newtechnology, and the downstream costs associatedwith these outcomes. Analyses based on the soci-etal perspective are inevitably very complex. Ourintention in this study was to introduce the notionof opportunity cost to the surgical literature withrespect to competing devices used during a partic-ular type of surgery. We recognize the limitationsof narrowing the perspective of the analysis, andhave adopted the more narrow perspective only inthe interest of simplicity and clarity.

Whereas our hypothetical scenario stated thatthe new device provided a shorter operating timecompared to the older device, it should be notedthat new technologies in surgery may create longeroperating times and thus incur an opportunitycost. An example of this is found with laparoscopiccolectomies compared to open colectomies; thelaparoscopic approach may take more than 30

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Chatterjee et al 21

Table II. No. of hypothetical cases using Device B required to perform 1 additional specialty procedure

ProcedureAverage

surgical time, minNo, hypothetical cases

using Device B*

Urology Laparoscopic prostatectomy 228 8Otolaryngology Myringotomy with insertion of tube 36 2General surgery Laparoscopic inguinal hernia repair 102 4Plastic surgery Bilateral reduction mammoplasty 180 6Orthopedic surgery Knee arthroscopy 54 2

*Calculated by dividing average surgical time by 30 minutes saved using Device B.

minutes longer compared to the open ap-proach.11,12 However, the calculation of such acost in opportunity is made more complex by thedownstream benefits of laparoscopic colectomy,namely, shorter duration of hospital stay and de-creased wound complication rates.13 Whereas thelaparoscopic approach would incur a higher op-portunity cost, the benefits of decreased woundcomplications and a shorter hospital stay may re-duce overall total costs; in addition, shorterdurations of stay may provide opportunity formore admissions to the hospital.

The generalizability of the specific examples inthis study is limited by having drawn profit marginand operating time data from 1 institutional reviewin a university hospital. Other medical centers maypotentially choose to use other surgical proceduresfor calculating opportunity costs based on theirrespective profit margins and operating times. Itwas our intention to provide a model to calculateopportunity costs that could be readily used byother hospitals rather than to determine a univer-sal opportunity cost value. The concept of a uni-versal opportunity cost may be something that aleading surgical organization chooses to designatein the future, so that potential cost comparisonshave a constant opportunity cost value to use whendetermining true costs.

Differences in how services are remuneratedmay also influence the calculation of opportunitycost. To determine opportunity cost in our study,we chose replacement procedures for calculatingopportunity cost multipliers using DRG-based in-surance claims. Thus, procedures that are typicallypaid as fee-for-service (eg, breast augmentation)were not considered; however, these proceduresmight have higher profit margins, leading to evenhigher opportunity cost multipliers. We also as-sumed that the substitute procedures used tocalculate the opportunity cost multipliers wouldbe prevalent enough to take advantage of the timesaved when using the more efficient technology.When we selected the substitute procedure, we didso by using a procedure that was frequently

performed at our institution (n > 100 for 2007)to control for this limitation.

A surgeon calculating his or her own opportu-nity cost multiplier should do so with the intent ofusing a substitute procedure that is prevalent (andprofitable) enough to take advantage of the timesaved by not using the less efficient technology. Inreality, if such prevalent procedures are not avail-able, then the saved time may, in fact, be utilized byperforming less profitable procedures, thus reduc-ing the opportunity cost value.

The ability to capture opportunity costs alsodepends on the frequency with which the newdevice can be used. If the device is used for rarelyperformed cases, it might be difficult to accumu-late a sufficient number of cases to accrue the timenecessary to perform an additional profitable pro-cedure. For purposes of demonstrating opportu-nity cost, we assumed that the new devicetechnologies being compared were for cases thatwere relatively common. For simplicity, we also didnot take into account some of the many challengesof converting time saved into additional caseswithin the context of operating room (OR)workflow.

First, our model assumes average surgical timeas the start/stop time for the procedure. Turnovertime was not included in this model because itvaries significantly between institutions. We alsoassumed that surgeons reading this article canfactor in what they consider to be a reasonableturnover time in their own calculations of oppor-tunity cost. The overall effect of adding turnovertime would be a reduction in opportunity cost.

Second, the procedures chosen to calculate theopportunity cost multipliers had a surgical timerange of 36 minutes to 228 minutes (Table II). Giventhat a typical OR day starts and ends at specific timesof day and so limits the number of long cases that canbe performed, it might be difficult to take advantageof the opportunity cost using cases with longer surgi-cal times. Therefore, shorter procedure duration isan important criterion for selecting proceduresused to calculate opportunity cost multipliers.

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22 Chatterjee et al

Third, whereas the benefits of decreased oper-ating time by using a more efficient device includereduced total costs and opportunity costs, theyhypothetically could also include decreased laborcosts related to improved OR workflow.14

Finally, our calculations assume the upperbound of timetable efficiency in that every minutesaved by not using the less efficient technology canbe utilized. Although this assumption is inherentin the definition of opportunity cost, it is reason-able to state that OR time management withregard to case bookings can be inefficient andthat not every minute saved will be utilized forgain. In our example of opportunity cost calcula-tions, we did not take into account these additionalpractical complexities because our focus was tosimply and clearly describe the concept of oppor-tunity cost and its potential implications in costanalysis.

In today’s healthcare system, there is an increas-ing focus on improving medical efficiency andreducing overall costs in the process. New andadvanced technologies can improve surgical effi-ciency, but their true cost---the sum of direct, indi-rect, and opportunity costs---has to be considered.Our model demonstrates that the opportunity costcan be significant compared to common surgicalvariable, direct costs. For example, operating time(an example of a variable, direct cost) has beenvalued in cost comparison studies to range from$15/min to $30/min.15,16 Given that the range ofopportunity cost in our model is between $9/minin general surgery to $38/min in otolaryngology,we can postulate that the opportunity cost has acomparable impact to that of operating time onoverall true costs. This observation underlines theimportance in using opportunity cost in surgicalcost studies.

In conclusion, acknowledging opportunity cost,a surgeon can more accurately compare the costefficiency of competing surgical devices. Calculat-ing opportunity cost is done by estimating a dollaramount to the potential utility of time created bythe use of the less efficient device. Whereas oppor-tunity costs vary among surgical specialties,each specialty can benefit by understanding theopportunity costs incurred when evaluating theirrespective surgical devices.

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