In 2000 Intuitive Surgical released the first surgical robot, extending minimally invasive surgery into a new realm. Since its inception the company has sold over 1400 da Vinci surgical systems, and continues to grow the business through system redesigns and procedure expansions. Currently the larger volumes of procedures being done are prostatectomy, hysterectomy, and heart valves.
The benefits of minimally invasive surgery are many; improved patient outcomes, decreased length of stay, and reduced blood utilization; and some feel the addition of a surgical robot further benefits the patient. While the clinical benefits may be debatable there exists a level of demand by both physicians and patients. Physician’s market their robotic skills in an effort to build their business by attracting those patients who feel robotic surgeons are more desirable. Hospitals must have a robot to recruit the surgeons performing these state of the art procedures, which in turn brings higher surgical volumes.
For most hospitals the $2 million investment is a sunk cost, there is no guarantee the robot will attract increased surgical volume. Surgeons can be on staff at multiple hospitals as an effort to expand their own patient base. Without a contractual agreement in place a surgeon can easily move his or her surgical volume to a new hospital, for example East Hospital purchases a robot in 2005 to attract Dr. A’s business, in 2008 West Hospital purchases the newer generation robot and Dr. A moves his entire robotic business to West Hospital, now East hospital as to begin to rebuild that lost volume.
Therefore the debate begins regarding the opportunity costs of the $2 million investment, such as investing in needed Information Technology, updating existing medical equipment, or even expanding bed capacity. Financing alone can be a challenge for some hospitals, if not a member of a larger network, or beneficiary of a trust or donation a capital expenditure of this size may need to be financed. As you will later the opportunity cost of capital must be considered in this decision as well.
It is also important to consider other fixed costs such as the service contract which starts year two and is about $150,000 per year, a hospital doing 150 robotic cases a year will automatically incur an additional $1000 cost per case. Specially trained labor is also required for the surgical team. In this situation administration may have the ability to convert this from a fixed cost to a variable cost if the main operating room functions on a different budget, and staff cross coverage is expected during periods of low robotic volume. One last budgeting consideration is marketing, as discussed if the main driver for purchase is to attract market share it will be important that patients are educated you the hospital’s offerings.
Other variable operating expenses include the robotic instruments, specialty drapes and other accessories that bring the total robot specific variable cost to about $1500 per case, which is above and beyond the standard laparoscopic surgery requirements. It is important to note that at this time there is no additional reimbursement from insurance payers to cover this cost. Therefore there is an estimated $2500 in additional cost to perform robotic surgery (not including the capital investment) to consider, for most hospitals this additional cost will not be covered resulting in a negative contribution margin. When evaluating the opportunity cost of capital it is important to note these procedures will not generate a profit for the hospital, therefore this project will have a negative net present value.
In conclusion the decision to invest in a surgical robot is based primarily on the predicted future need to recruit quality surgeons and the desire to retain or reclaim experienced robotic surgeons who will not only bring robotic cases but non-robotic cases as well. It is these non-robotic cases that some institutions predict will offset the negative investment. By partnering with surgeons in both the decision making process and program design hospitals can hope to retain existing volume as well as grow into the future.