Although neurosurgeons are popularly known as “brain” surgeons, anecdotal evidence and some studies suggest that at least a small number of neurosurgeons are relinquishing cranial surgery privileges. A result of taking such action is that the neurosurgeon involved no longer can cover emergency call. While cranial surgery and emergency call long have been accepted tenets of the neurosurgical profession, relinquishing cranial surgery privileges is commonly thought to limit liability and help control rising medical liability insurance costs, as well as ease the surgeon’s demanding schedule.
However, the underlying reason why a neurosurgeon might relinquish cranial surgery privileges may be because the microeconomics of neurosurgical practice has changed. Diminished reimbursement, particularly in the face of escalating overhead affected by high medical liability insurance premiums, means that cranial procedures now may consume more practice dollars than they generate. To illuminate the issues underlying the contentious topic of dropping cranial surgery privileges, a business perspective and analysis can be applied.
Devaluation and Decline of Neurosurgical Reimbursement
Reimbursement for neurosurgical procedures has experienced an overall decline in recent years. After reimbursement values reached their maximum in 1997, cranial surgery values fell about 25 percent and spinal surgery values, about 30 percent. The reimbursement reductions primarily were due to Medicare’s transition to the resource-based relative value scale between 1999 and 2002.
Since 1992, reimbursement for spinal procedures fell more than for cranial procedures in most cases. An example of the reimbursement decline for spinal procedures is the 30 percent reduction for code 63047 (lumbar laminectomy) from $1,408 in 1992 to $1,010 in 2003. (Code 22612 for posterolateral fusion is an exception. Reimbursement for this code increased from $1,255 in 1992 to $1,372 in 2004.) Cranial surgery reimbursement remained unchanged or even increased slightly from 1992 to 2004, but there was a significant reduction in the real dollar value. This is due to lack of any adjustment for inflation, cost of living or practice overhead increase. Several examples of reimbursement for cranial procedures per Current Procedural Terminology Code are: code 61313 (craniotomy for intracranial hemorrhage) — $1,600 in 1992, and $1,662 in 2003; code 61312 (craniotomy for subdural hematoma) — $1,605 in 1992, and $1,654 in 2004; and code 61512 (craniotomy for meningioma) — $1,913 in 1992, and $2,315 in 2003.
The Cost of Lost Opportunity
In addition to the rate of reimbursement, the time and expense involved in performing each surgical procedure must be assessed. The time and expense spent in the total provision of cranial surgery exceeds that spent in spinal surgery. Therefore, when neurosurgeons forego the revenues generated from spinal surgeries to perform cranial surgeries, they are experiencing the phenomenon of “opportunity cost.” This particularly is the experience when emergency cranial surgeries cause cancellation of elective spinal surgeries.
A neurosurgical practice that primarily focuses on spinal surgery not only is efficient, but there also is very little adverse impact on the profitability of a practice that does not include brain surgery and emergency coverage. An analysis of the opportunity cost and microeconomics of neurosurgical practice illustrates the contrast in profitability between cranial and spinal surgery.
Marginal Revenue, Marginal Cost, and Profit Maximization
When businesses have a product with diminishing profitability and other products with greater profitability, the decision often is made to drop the less profitable product. The decision hinges on the marginal revenue of the product, whether the business is running at capacity, and the supply and demand for products. If the business is not running at capacity and the devalued product helps to cover fixed expenses, then good business practice supports continuing with that product line. However, if the business is running at capacity and there is strong demand for the products, then good business practice supports dropping the less profitable product.
As the business increases its level of output, each additional unit adds to the total revenue of the business. The additional revenue attributable to producing one more unit of output is called marginal revenue. As the business increases its level of output, each unit increase in output increases the business’s total cost. The additional cost of producing one more unit of output is called marginal cost. In the special case in which the price of the commodity is given to the business by the market, marginal revenue equals price. For example, if the business produces plywood, and the market price of plywood is $300 per 1,000 square feet, the marginal revenue from each additional thousand square feet is $300. The business would increase plywood production — and maximize profit — as long as the marginal cost of each additional thousand square feet is less than $300. The business would not increase production if cost of each additional thousand square feet is more than $300 to produce.
The principle of profit maximization is germane to a neurosurgical practice. The reasoning used by businesses that choose output to maximize profit, described by Maurice and Thomas in their 1995 book Managerial Economics, can be applied to neurosurgical practice thusly: If neurosurgeons consider surgery as their product, the means to maximizing profit is to choose the level of the activity, or surgery, at which the additional revenue just equals the additional cost.
If a neurosurgical practice produces craniotomies and the market price of craniotomies is $1,500, the marginal revenue from each additional craniotomy is $1,500. The neurosurgeon would increase craniotomy production as long as the marginal cost of each additional craniotomy is less than $1,500. The neurosurgeon would not increase production if the cost of each additional craniotomy is more than $1,500 to produce.
The marginal cost of producing craniotomies has steadily increased due to escalating practice overhead, including the cost of medical liability insurance. The marginal revenue has steadily decreased due to diminishing insurance reimbursements. In addition, there is the previously discussed phenomenon of opportunity cost wherein neurosurgeons forego the revenues generated from additional spinal surgeries by performing craniotomies, particularly in emergency cases.
Purely from an economic perspective, a neurosurgeon would decrease the output of craniotomies when marginal cost is greater than marginal revenue. A neurosurgeon would increase the number of craniotomies when the added revenue from the expansion (marginal revenue) is greater than the added cost of the expansion (marginal cost). In order to maximize profit, the neurosurgeon would choose to produce the level of output for which marginal revenue equals marginal cost.
Neurosurgery, of course, is not solely an economic enterprise. Some services are offered which, while less profitable, are considered part of the full array of neurosurgical services, and these services are subsidized by other more profitable services. However, when margins run thin and subsidies disappear, the less profitable services such as cranial surgery may be dropped.
The Benefit of Economic Insight
The phenomenon of decreasing the output of craniotomies, that is, giving up cranial surgery privileges, may actually be an attempt by neurosurgeons, with or without formal economic analysis, to establish at least a short-term microeconomic competitive equilibrium. Whether this will become a more prevalent long-term strategy for neurosurgeons, for whatever reason, is yet to be determined.
When deciding on the value of neurosurgical services offered, neurosurgeons might heed the wisdom of Jim Collins, author of business books Built to Last and Good to Great:
Our study clearly shows that a company does not need to be in a great industry to become a great company. Each good-to-great company built a fabulous economic engine, regardless of the industry. They were able to do this because they attained profound insights into their economics.
Neurosurgical practices are, at least in part, economic enterprises, and neurosurgeons undoubtedly can benefit from the insights that economic analysis can yield.
Richard N.W. Wohns, MD, MBA, is chair of the AANS Professional Liability Committee and chair of the CSNS Northwest Quadrant. He is president and founder of South Sound Neurosurgery, PLLC, in the Puget Sound region of Washington.