Introduction
For several years following the September 11, 2001 terrorist attacks on the World Trade Center and the Pentagon, public and government need for a greater sense of security conferred nearly unbridled spending on public safety. EMS systems enjoyed expanded budgets and little resistance to requests for resources aimed at homeland security preparation and response. Today anxieties about domestic safety are being overshadowed by concerns about a weak job market, an uncertain economy, and the as yet unknown effects of the Affordable Care Act. Cities as large as Detroit, Michigan, have declared bankruptcy and more are facing financial insolvency due, at least in part, to large public safety budgets and pension obligations. Myriad factors are putting pressure on public safety agencies and their leaders to be more accountable for their budgets and more cost-effective in their service delivery.
A comprehensive discussion of managerial accounting, health care economics, and business decision making is beyond the scope of this chapter. An understanding of some basic principles, however, will help medical directors articulate their needs and justify the cost of care in their EMS systems. Medical directors who are able to advocate for clinically effective, fiscally responsible care through use of evidence-based medicine and best practices will establish themselves as an invaluable resource for their system and their community. This chapter will serve as an introduction to EMS finance, its common terminology, the assessment of productivity, and its effect on clinical and operational realities in a modern EMS system.
To understand EMS system finance, it is fundamental to distinguish between costs, charges, efficiency, and quality. These concepts are often misunderstood or used interchangeably.
- Do patient charges for an EMS response reimburse actual costs in providing that EMS response? The charge, price, or fee of a service does not equal the cost of delivery. When describing the “cost” of EMS, the fee to the consumer is often used interchangeably as the “cost” of providing the service. For example, the price of treatment and transport to the hospital may be set at $1750. To a patient (consumer) or the payer, the $1750 charge is their “cost” of the service utilized. However, that $1750 bill received by the patient is not the same as what it costs EMS to provide the service. That fee or charge may be determined by other factors independent of the real cost to provide the service. Where commercial payers (marketplace health insurance) or government (e.g. Medicare, Medicaid) have negotiated or legislated allowable reimbursements, the revenue received for providing EMS services may be substantially below the cost to provide the service. In 2013, for example, most Medicare reimbursements for EMS services in urban environments represented levels 6% less than actual costs to the EMS system for providing those services [1]. Understanding the difference in these terms is critical when making decisions about altering response capabilities, talking with media or politicians, or negotiating with payers or hospitals.
- Do “direct costs” equal full costs of providing service? Direct costs such as labor, fuel, equipment, and medical supplies are easily identified as costs of providing service but do not represent the total cost. To fully understand the costs of an EMS system, all costs must be identified. For example, if an ambulance costs $550,000 in equipment and labor per year it is assumed that the cost of that ambulance running 1000 calls is $550 per call. What is overlooked is that legal support, continuing education, medical oversight, quality improvement, and billing services contribute to the total (full) cost. Failure to account for all additional expenses results in an understated assessment of the true cost of service delivery.
- Does operational productivity or efficiency mean clinical quality? Operational efficiency refers to meeting service expectations while minimizing the expense of delivery. It may be defined as achieving the local response time standard while operating at lower cost or higher unit utilization (productivity). These metrics do not describe quality of care but where clinical measures are not available, they often become the de facto measure of quality. Unfortunately, the pursuit of these goals can promote behaviors that may negatively affect clinical care. Myers et al. offered several evidence-based clinical performance measures to describe clinical quality [2]. These provide a foundation for shifting quality measures to evidence-based clinical practice. It is paramount that medical directors champion clinical quality measures and that EMS leaders do not equate operational efficiency with quality.
Understanding the “costs” of EMS
Unlike manufacturing, which can risk falling short of production in favor of maximum efficiency, EMS systems cannot afford to run out of resources. EMS systems must maintain “production” capacity that exceeds demand despite the inherent inefficiency this creates. This is exacerbated by response time expectations that have been promoted independent of any proven clinical need [3,4]. Response time expectations require additional units based on drive times rather than demand or capacity. The cost of deploying these resources, personnel, and apparatus, in excess of the demand, is the “cost of readiness” and is much of the cost of EMS [5].
The medical director’s primary responsibility is to advocate for the clinical aspects of an EMS system, not its profitability. Therefore some medical directors may feel that the analysis of the “business” of EMS is beyond their scope of responsibility. In reality, the contribution of healthy finances to the clinical success of a system prevents their separation. Through better use of resources, a fiscally savvy medical director creates opportunities to finance the clinical initiatives that ultimately determine the clinical success of a system. Medical directors should be able to conduct a basic financial impact assessment of a therapy and communicate their analysis and clinical need in terms familiar to those responsible for the finances of a system. To better illustrate and discuss the economics of an EMS system, the following are some of the commonly used terms and concepts.
- Full cost (total cost): the total cost is the sum of the direct, indirect, and shared costs of a particular service or product. Specific assignment of costs to direct, indirect, or shared is less essential than accounting for all costs incurred. Understanding and identifying all elements of the full cost is critical to budget requests, informed negotiations with payors or governing boards, and in utilization and expansion decisions.
- Direct cost: is a cost that can be traced to actual delivery of a particular service or product. Assignment of direct cost can vary between organizations but generally includes costs such as provider labor, vehicle purchase, operating costs such as fuel and fleet maintenance, medical supplies to include durable medical equipment and single patient use devices, and medical communications equipment. Direct costs can be fixed or variable.
- Indirect cost: is a cost that cannot be traced directly to a particular service or product. Like direct costs, assignment into one category or type may vary by tracking preferences of the organization. Indirect costs typically include administrative labor, building and facilities, taxes, debt interest, and support functions such as accounting, legal, human resources, marketing, and public education. Medical direction may be considered an indirect cost in EMS systems that do not account for the cost of physician oversight per response.
- Shared cost: is a cost that is shared among one or more operating divisions or departments within or between organizations. Shared direct costs include items or services such as loaned vehicles, loaned medical equipment, shared fleet maintenance services, and shared medical communications services. Shared indirect costs include items or services such as shared facilities, shared management functions, and shared administrative support functions.
- Marginal cost: is the cost of producing one additional unit of a particular service or product [6]. Marginal cost is used to assess the cost of adding an additional unit of service or production. In many industries, including EMS, marginal cost is a non-linear function and depends on capacity [7]. For example, if an ambulance has unused response capacity, then the marginal cost of it responding to one additional call is minimal. If that unit is operating at available capacity, the cost of an additional response includes the addition of another ambulance and all associated costs.
- Fixed cost: a cost that does not change with increased production or business activity over a defined period of time, typically a budget year. They may be direct or indirect costs. For example, the medical director’s salary, insurance, rent, and utilities are costs incurred by an agency whether they respond to one call or 100 calls. While fixed costs do not change, fixed cost contribution to the cost of each transport will decrease with increased unit production.
- Step costs (or step fixed costs): a means of capturing cost changes where production capacity has discrete limits. When the maximum production capacity has been reached, any additional demand results in the need to purchase additional capacity. The result is a non-linear cost curve with “steps” that result from abrupt changes in production costs. If an ambulance can respond to 4,000 calls per year, the fixed cost of that unit remains the same for 1 call through the 4,000th call. In order to respond to call 4001, the service must add an additional unit and incur the associated fixed costs.
- Variable cost: is a cost that changes with each unit of production or activity. Examples of variable costs include fuel, maintenance, and disposable medical supplies. Contribution of variable costs to total costs increases with utilization or increased production. All costs become variable if analyzed over a long enough timeline.
- Depreciation cost (amortized cost): is an accounting technique used to track the loss of value in a tangible asset over time by subtracting residual value from the original purchase cost spread over the useful life of the asset. Amortized cost is often used interchangeably with depreciation but more often refers to intangible assets. In accounting, these terms are used to describe loss of value over time for tax or income reporting purposes. However, in managerial decision making this same concept is useful when accounting for cost contributions over the functional life of an item.
- Economies of scale: a reduction in per unit cost that results from increasing size or scale of operation where the cost of producing the next unit of service is less than the average cost of previous units. For example, if a communications specialist can reliably manage up to 10 units, consolidating a five-unit EMS system and a neighboring four-unit system will result in reduced per unit costs of dispatch. However, economies of scale are not limitless. If the consolidation process created the need for a more complex logistics process to maintain field supervision and manage supplies, it may increase the cost of operation. If these costs increase faster than the communications savings, there is a diseconomy of scale.
- Opportunity cost: is a tool to assist in managerial decision making. Where there are finite resources there is a lost “opportunity” in choosing option A versus option B or C. Opportunity cost does not have to be in monetary terms, but can instead be in any term that reflects the foregone choice. To illustrate, assume a cost of $15,000 per hour to train providers in CPR (option A). The same amount of money would provide 240 unit hours of ambulance coverage (option B). If the best choice for the system is additional unit coverage (option B), it is at the expense of the providers knowing the latest CPR techniques (the value of A). Opportunity cost does not denote the relative value of the choice nor all the factors that went into selecting B over A. It merely acknowledges that even the best choice has a cost of foregoing the second or third best choices.
- Sunk cost:
