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. IRR yr5 = 29% If 1 extra encounter per week, but physician/psychologist sees extra 100 patients  never make a profit. IRR yr5 = -1% If 1 extra encounter per week + 1 less no- show per week, make a profit in year #4. IRR yr5 = 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